Eddie Lampert

You may have heard of Eddie Lampert if you shop at Kmart or Sears. Actually, he has been around for a while and is considered one of the most successful value investors around. He founded his private investment fund, ESL Investments Inc., in 1998 with $28 million of seed money from another legendary investor, Richard Rainwater. ESL now has $9 billion under management and Lampert’s net worth is believed to be around $2 billion. Since 1988, ESL has earned 29% a year – compare that to Berkshire’s 25% a year return since 1965.

Lampert has successfully invested in undervalued companies and, unlike Buffett, is not afraid of to consider companies run by sub par management teams. His rational is that those situations offer an even larger potential reward.

Most recently, Lampert was in the news for emerging as one of Kmart’s largest shareholders following that company’s bankruptcy proceedings. Kmart’s stock has rocketed from $15 in 2003 to a high of $160 back in July. It is now sitting at around $120 post-Katrina.

A few important things to note about Lampert’s Kmart foray. Not long after emerging as a controlling shareholder, he made a bid for Sears and merged the two companies into Sears Holdings Corporation (NYSE: SHLD). The company has in excess of $3 billion in cash and is cash flow positive. More importantly, the Board of Directors has given him free rein on the use of cash. This is pretty much what Buffet did with Berkshire. He milked the textile mill for cash and turned Berkshire into an investment vehicle. A la Buffett, Lampert is not giving guidance to the street and instead opting to update matters through his shareholder letters available on Sears’ corporate web site.

For now, Lampert is intent on turning Sears and Kmart around and in August announced that he will be taking a more hands on role in the marketing department. Regardless, his focus is on transforming the culture at Sears, profitability and cash flow generation. He has made it clear that top line growth does not interest him.

Estimates vary as to the Sears’ intrinsic value. I have seen estimates as high as $190 a share just on the basis of the company’s real estate assets. You could also argue that the shares are overvalued and that you are paying a Lampert premium at these levels. The fact is that the shares have come off their peak and have been under more pressure, going as low as $115 recently, as Katrina and Rita have wreaked havoc in the South, hammering many retailers’ operations. I was too slow to pull the trigger when the shares were at $100. This time, my brother and I agreed to get in at $130 before the hurricanes hit.

Let’s call it the Lampert experiment. He has the track record and manages money for a number of well-known wealthy individuals including Michael Dell. It is also comforting to know that successful value investors such as Legg Mason’s Bill Miller and Third Avenue Fund’s legendary value investor Martin Whitman own Sears in their portfolios. In fact, Whitman partnered with Lampert during the Kmart bankruptcy proceedings. Whitman is quoted as saying. “There is no question he will turn Kmart into an investment vehicle like Buffett’s. That is what I am valuing into the stock.”