Kmart filed Chapter 11 in January 2002 and emerged in May 2003. It was a retail chain that could not compete against Walmart and Target and lost ground steadily. Since May 2003, the stock price has quadrupled and we have James Cramer calling Kmart the next Berkshire Hathaway. Where is all the value coming from? Jim Cramer :You are going to laugh at what I am about to say. You might even laugh out loud and think that I have lost my mind. But by the time you finish reading this, you will stop laughing, and you will buy a stock that you thought of only as a laughingstock, so to speak. You will thank me when you see me and marvel that some story in New York Magazine got you in on the ground floor—as you always hoped could happen—of the next Berkshire Hathaway.But let's get the laughter out of the way first, because I am not about to bury the punch line: This is a story about how I want you to buy Kmart—yes, the worst retailer extant in America. I don't ask that you shop there first, although a little spadework of that sort might open your eyes to the possibilities. I don't ask that you suspend all judgment: Yes, Wal-Mart's a predatory competitor and Target's a lot more fun to shop at than Kmart, and might always be. All I ask is that you consider that Kmart, the reconstituted stock of the once-bankrupt retailer, the third largest discounter in America, might be something bigger than a retailer.It seems that Edward Lampert the manager of a multi-hundred million dollar hedge fund bought Kmart bonds when Kmart declared bankruptcy. He took control and engineered the turnaround. He cut a lot of the management and employees and brought in the same team that had created the Gap look with trendy competitive priced clothing. They were to give Kmart a more youthful aura. He was also responsible for selling off properties for big gains. Kmart has stores in good locations all over the US. These are worth a lot of money and are most likely the biggest asset. Kmart owns The result is that Kmart has $2.2 billion in cash. Does that mean they are a successful chain or is someone cashing in on all that property carried on the books as undervalued assets and now it is worth a small fortune?At a time when Kmart's rivals are growing and opening new stores, Kmart is shrinking. Sales at stores open one year(same store sales--an important metric in retail) dropped 13% during the first fiscal quarter. Kmart closed 600 stores between January 2002 and May 2003. It doesn't seem that Kmart's remarkable resurgence is due to any brilliant reorganization or vision or even better sales of Martha Stewart's stuff--its pure asset appreciation due to property that can now be liquidated at a profit .The gains offset nicely by net operating losses. The price is now over $60 a share quadruple the price at emergence from bankruptcy. If anyone had suspected that the real estate was going to be so valuable, then $15 per share would have been a heck of an investment. Lampert knew. He cashed in. We have stock price that is not the result of a well-run retail business, but is the reult of good real estate deals. When the company runs out of real estate--watch out.Back to Cramer:The result? Eddie's Kmart is making money, big money, even in quarters when it almost always lost a fortune, like the first quarter that just got announced (net income: $93 million). Maybe it was ex-hedge-fund-manager jealousy, but I didn't believe in Eddie's Kmart turnaround at first. I said on my television show, Kudlow & Cramer that the turn wasn't sustainable, that Eddie would cut and run like a good hedge-fund manager now that he'd managed to get some liquidity in the form of a common stock he could dump. But then Eddie took to hounding me for not doing enough homework, and once I looked deeper, I saw what I see now. I know what you're thinking. Hasn't Kmart already moved too much (it's up more than 250 percent, from about $15 to about $51, in the past year)? Isn't this Cramer just helping an old pal or, worse, talking his book? To which I say two things: (1) I have so many trading restrictions, courtesy of the jihad against guys who put their money where their mouth is, that I will have to own Kmart for years, and (2) I intend to buy enough Kmart going forward that my current stake will seem like a pittance. Still skeptical? Keep in mind that Kmart holdings has practically no debt and $22 in cash per share plus real estate conservatively valued north of $30 a share by independent retail analyst Gary Balter from UBS, another ex-Goldman alumnus who sees what I see.Warren Buffett took a dowdy textile company and used the cash flow from it to buy other businesses outright and shares in publicly traded companies he thought were undervalued. He ended up with a wildly successful portfolio of stakes in both public and private companies. Given Kmart's huge net operating losses and the gigantic gains that can be had by selling and leasing Kmart's real estate, Lampert has stumbled onto his own Berkshire Hathaway holding company that he can use to house a similar portfolio, and I believe that's exactly what he's going to do. You are not buying shares in a third-rate discounter. You are buying the future holding company of a future Warren Buffett. Still laughing? At present, Home Depot has said it will spend as much as $365 million to buy for 24 stores from Kmart. Big box retailers are finding it increasingly difficult to find prime real estate in good locations at square footage that fills their needs. To repeat: Kmart is sitting on a gold mine. In a recent news release, Kmart CEO Julian Day deflected criticism that the company is really only interested in mining this asset and is not interested in the retail business at all. "We're taking action on many different fronts simultaneously, all with the goal of making Kmart a great retail company once again."At the same time , Mr. Day said Kmart will looking for opportunities to sell existing stores or to acquire new stores or businesses. I do believe the sell side of the story.There was a discussion here not to long ago about whether these undervalued assets were really worth anything when deciding what price to pay per share for an equity. I think this is the best real lif example of just how much that affects stock price. Here is an essentially worthless retailer sitting on prime real estate with a stock price that has quadrupled since emenrging from bankruptcy.I am going to disagree with the excitable Mr. Cramer and stop short of calling this Berkshire Hathaway.>^..^<
Hi kitkat !We have stock price that is not the result of a well-run retail business, but is the reult of good real estate deals. When the company runs out of real estate--watch out. To repeat: Kmart is sitting on a gold mine.At the same time , Mr. Day said Kmart will looking for opportunities to sell existing stores or to acquire new stores or businesses. I do believe the sell side of the story.I am going to disagree with the excitable Mr. Cramer and stop short of calling this Berkshire Hathaway.OK ... you're not gonna buy Kmart, but a lot of others are, and this helps drive the price.I'm inclined to go with what we learn here at the FC and buy companies that are profitable and growing...this one ain't profitable (yet).But, what if it DOES become lean, mean, and profitable? Are they gonna run W*Mart out of market share?Why can this all be simple? Then it wouldn't be near as much fun ! :-)Good report...thanx,Rich
That's the really interesting thing about Kmarts price. It is not the result of stunning same store sales and dynamic expansion and growth. It is the result of all those hidden assets on the balance sheet. I have questioned the worth of appreciating assets positive effect on share price when evaluating a company to invest in. What good is it to the shareholder if a company finds something valuable on their balance sheet that can be sold? If Kmart has $2.2 billion and does not use it to expand and grow, then it doesn't do much for the shareholder. Stock prices go up when companies improve earnings(generally although biotech defies this notion). In this case the stock price is going up because Kmart has valuable real estate they are selling at a profit. When they run out of real estate and if Kmart is the same losing retailer they have been, then the shareholder would be wise to escape before the real estate runs out.The fascinating thing about this is it demonstrates the power of undervalued assts on the balance sheet. Something I had thought was not a big driving force behind stock price.I wish I had seen beyond the retail joke that is Kmart when they emerged from bankruptcy.>^..^<
I wish I had seen beyond the retail joke that is Kmart when they emerged from bankruptcyKMart totally screwed their shareholders. They ran a great business into bankruptcy through lousy business practices, then, in bankruptcy, they totally wiped out the shareholders interest in the emerging corporation.I may miss out on something with the following attitude, but I don't care. "I will never own a share of KMart because, if they did it once, they'll do it again!" I put it in quotes so you can quote me on it.Berkshire is a business that's run well and ethically. KMart being even compared to them shows the hypsterism of whoever makes the comparison.PosFCF(I didn't own it before, and will never own it now)Is that cognitive bias?
The fascinating thing about this is it demonstrates the power of undervalued assts on the balance sheetthat is your basic 50c on the dollar asset play that made Ben Graham rich. Sooner or later those assets reach their full valuation. Personally, I'd rather find wildly undervalued assets than a growing business. It's very hard to screw up mid-city real estate in San Francisco... but businesses blow up all the time.The problem with K-Mart is this... I would bet dollars to doughnuts that the insiders/ownership will be sure that none of the undervalued real estate's value will make its way into the hands of marginal shareholders.In every aspect of life we run into an interesting item. We are often required to measure something to measure somethng else. What? For instance, in medicine, we are often interested in how much oxygen is available to the cells of the body... but that can't be measured in any reasonable way so we do the next best thing... we measure the oxygen in the blood of arteries and assume it will be available for the cells... it probabally will, but not always. If you forget that the arterial oxygen is only a proxy for the thing you really want to know... you will forget to consider those conditions that would cause the connection to break down.In investing I am interested in the amount of money that will be returned to me. Capital appreciation is only a proxy for future dividends. Present earnings and cash flow are only a proxy for the thing we can't immediately measure... future dividends. Oxygen in an artery of the body is totally useless, it does nothing to sustain life unless it is delivered to the cell... likewise cash flow and earnings are worthless to the marginal investor unless they make their way to dividends at some point. I think many investors have forgotten that... in just the same way that I see many doctors forget that arterial oxygen is only useful when it finally makes it's way to the cells of the body. For me then... I have amended Peter Lynch's two minute drill with one other item. With every stock I own, I want to be able to explain how the cash flow will ultimately make it's way into my pocket. The first requirement is that the management/insiders will allow that to occur.With K-Mart I rate that possibility remote just like Cisco. If I were going to value CSCO's future cash flow... I'd do the usual DCF and at then end I'd ask myself how much of CSCO's cash flow will ultimately be made available to the shareholders if present management remains intact. I'd say about 25%... so the final value for CSCO should be divided by 4... it's prob a buy in the 3-4 dollar range.With Berk, that does not pay a dividend, what would be the chance, under present management, that cash flow will ultimately make its way back to the shareholders? I'd say it's about a 99%+ chance that IN THE END... Mr Buffett will be sure the money ends up where it is supposed to end up. I think we too often have lost sight of the real vaue of assets, cash flow, and the like... its value is in direct proportion to the likehood it will finally rest in the hand of a shareholder.whew, I feel better nowe
Berkshire is a business that's run well and ethically. KMart being even compared to them shows the hypsterism of whoever makes the comparison.PosFCF(I didn't own it before, and will never own it now)Is that cognitive bias? Hi Pos,If anyone can state their bias freely, it shall be you :o)One of the greatest lessons Warren Buffett learned, was a lousy business is a lousy business at any price. What Warren Buffett did with the original textile company was to allow it to run until it ran itself into the ground, reinvesting the dividends into other ventures. I don't think I'd compare K-mart to Berkshire; just one thing missing -- WEB. Chin
The problem with K-Mart is this... I would bet dollars to doughnuts that the insiders/ownership will be sure that none of the undervalued real estate's value will make its way into the hands of marginal shareholders.Hi e,Speaking of doughnuts, what about Krispie Kreme (KKD)? Will the Atkins diet be their demise?Sorry, the thought just keeps coming to mind. Chin
Chinhere's how I have the Adkin's diet figured... if it was the answer, Inuit eskimo women would be svelte willows ready for the runway... all they ate was whale blubber, seals, and salmon. Between a piece of fried bacon and an unglazed doughnut... I'm a doughnut man.buy that KKD :)
kitkat,I liked your look at Kmart. I've been following the Big K since it emerged from bankruptcy last year and have written a handful of Takes in recent months that may be of interest to you:Kmart Rising - March 22http://www.fool.com/News/mft/2004/mft04032219.htmKmart, Martha Kiss and Make Up - April 27http://www.fool.com/News/mft/2004/mft04042714.htmKmart a Contender Wannabe - May 18http://www.fool.com/News/mft/2004/mft04051810.htmKmart, Land Baron - June 7http://www.fool.com/News/mft/2004/mft04060709.htmI've been fairly impressed with their turnaround, though it is not one that has been predicated on increasing sales to be sure. Yet I don't know that Julian Day isn't taking the right course: when you're hemorraghing money, you've got to stem the flow first before moving on. He's been cutting costs and most recently selling old stores (not including the 600 they jettisoned in bankruptcy). So I don't know that I'd characterize Kmart's resurgence as simply "pure asset appreciation." It has some good lines to merchandise: Martha Stewart Everyday, Joe Boxer, Thalia Soldi, and WB TV lines. The company doesn't rely upon a "sale" to generate revenues; it's gone to the high/low pricing strategy to generate profitable sales. Margins have been steadily improving, SG&A continues to fall, and cash continues to accumulate in the bank. The sale of underperforming stores is a smart move so that Kmart can concentrate on making money in only those stores that make money.I don't believe Kmart is the same company that went in to bankruptcy. Yet they will have a hard time overcoming a lot of the bad feelings they generated by that act, as evidenced by PosFCF's comments. Laying off 57,000, closing more than 600 stores, and leaving prior shareholders with lots of bird-cage liners doesn't generate warm, fuzzy feelings for a company.Still, for the employees that remain with the company, it was a better solution than simply folding too. If they can find their niche and begin generating growing sales again, the company and the employees will undoubtedly be better off. There's more to Kmart than its property and more to its resurgence than just its balance sheet assets. I think there's a place for a thriving Kmart and when they finally post a quarter with increased sales (which I think they will soon), I believe their stock price will reflect that trend.Rich
emiller8988 states:""here's how I have the Adkin's diet figured... if it was the answer, Inuit eskimo women would be svelte willows ready for the runway...""....I have been looking at another company affected by the Atkin's diet, Weight Watchers, (WTW). As a retired physician I know a little about nutrition,calories, etc; probably very little, as I practiced hematology/oncology. For emphasis, emiller illustrates his point with an extreme example, the eskimo. I have been caught up with thinking about the east Asian population, e.g. the Chinese, where rice is a diet staple. What I have been able to find out about rice is that a cup contains about 45 grams of carbohydrate. I cannot for the life of me picture an obese person from China. The ones I've met fulfill the svelt picture emiller paints. Is rice permitted or prohibited on the Atkin's diet?.......another anecdote about WTW; I read recently that some of the managed care companies(Aetna comes to mind)are rewarding their members with "perks" if they are obese and involved with some type of weight loss program.....if anyone knows about this please chime in.............thanks for reading this far; missash, who is intrigued somewhat by KKD and WTW.
No matter how compelling KMart is, or even apppears, I do believe that I will pass on this one.It's hard to know how compelling an investment this is. Not very IMHO.Any retailer that has SSS down 13% net/25% revenue is usually rewarded by rapidly falling per share prices. This didn't happen to Kmart and you have to think the retail end of things is not driving the price at this point.As a retail investment it is less than attractive right now. As a company hoarding a huge amount of cash per share with the promise of more to come from sales of buildings to chains like HD, it is an investment idea. At the current price of $65 per share it is not difficult to decide to pass.Can they find a retailing niche somewhere between Walmart and Aeropostale? Unlikely.>^..^<
Hi E,Congratulatons on being awarded Post of the Day!I think you are right that we as investors, including myself, forget that true value boils down to how much cash flow will eventually end up in our pockets.tom
What I have been able to find out about rice is that a cup contains about 45 grams of carbohydrate. I cannot for the life of me picture an obese person from China. The ones I've met fulfill the svelt picture emiller paints. Is rice permitted or prohibited on the Atkin's diet?.......If you're a doctor then you should just go read Atkins' book-- it doesn't take that long. Be sure to get the current edition-- he takes on a lot of criticism he got over earlier editions, where he claims that what he wrote was misinterpreted.But in brief: white rice is among the worst things you can eat, brown rice not so bad... the question is, how much do they affect blood sugar when digested. Blood sugar spikes, then drops, then you get a carb craving, you eat another cookie, the cycle starts again... Whole grains good in moderation because they're metabolized much more slowly; refined grains and processed sugars bad because they burn off fast and leave you wanting more. Donuts very very bad.Atkins' focus during weight loss is on getting the body to draw down stored fat rather than storing fat or metabolising muscle. During maintenance, it seems (from what I've read of his book, rather more than half, still working on it) the goal is just to avoid things that makes blood sugar fluctuate, so as to avoid getting into carb cravings.I'm not a doctor-- just a guy who eats every day. :-) But I will say that I've found that, eliminating refined starches (bread, pasta), white rice and baked goods like breand and cookies, I can lose about a pound a week, while still eating a lot of lean meat, sometimes not-so-lean meat, veggies, and lots of fish. I dropped about 15 pounds between Jan. 15 and April 15, making it to the gym perhaps twice during that period for a half-hour swim. That's convinced me that Atkins has figured out something... I'm planning to make a more concerted effort at it starting in a couple of weeks, to see where that takes me. Some of his advice-- sauteeing bacon in butter? to lose weight?-- seems insane, and I won't do it-- I'll eat fatty fish like mackerel and salmon every morning instead. But the picture as a whole makes a kind of sense...The other thing is, total caloric intake does ultimately matter-- I think that's what keeps the Chinese thin. They don't eat all that much, on the whole, compared to westerners. certainly very little meat and even by our standards moderate quantities of rice, lots of veggies.But to come back to the main thread: It's really interesting to think about this problem, of companies that are undervalued because they're dragging around some asset that people are missing. On a possibly somewhat related note, I think of Novell-- I'm not that well versed on their finances (and I know people here don't love tech stocks) but they have a rather sleepy mainline business, a growing Linux business with a future, and a surprisingly large cash hoard, from what I understand. I've had the impulse to invest in them for some time on this basis-- they won't run out of money, they have some loyal customers and new, compelling products to sell, so it seems like they can only grow. Has anyone here given Novell any thought?-A
Hey A,I am glad that you are finding some good ideas in Atkins' books. I have a BS in Nutrition Science and I wanted to point out a couple things in your post that could be misinterpreted.You speak of the insulin cycle. You are technically correct to a point. If a person sat down and only had white bread and water for lunch, then you are correct, the insulin spike would be quick and high..ie. a spike. The insulin levels rise to take care of all the glucose hitting the blood stream. What happens in this specific case is that because the glucose spiked so fast, the insulin is actually over secreted. This causes too much glucose to be pulled out of the blood to create a hypo-glycemic state. This could then lead to the cravings you mentioned for the next doughnut. (Of course there is whole group of people that argue against the cravings thing, but that is another story.)Ok, now in the real world, people rarely eat a straight starch meal. When people add fats (creams, milk, oils, etc) to the meal, the absorption of the nutrients is slowed way down. That way the body can produce the correct amount of insulin for what ever glucose ends up in the blood stream.From what I have seen in the world, the problem really is that we eat too much carbs (starches). There are so many Americans that look at the 400lb person and think, "I'm not eating that much so I must be eating normal." The problem is that the whole country is very skewed so what we have cultured ourselves to believe is 'normal' (only one double whopper meal - not king sized) is really way out of whack for what the human body has been used to for the last two thousand years. Also, how many people do you know that eat on a schedual? Also, how many people truly know that hunger pangs will go away?So, by eliminating some of the carbs from your diet you are helping your overall health. And, Atkins does use actual science to back up his ideas. But, there really is no need to go into a carb free diet. I actually like the Weight Watchers and Deal a Meal ideas since it teaches people to plan and manage what they eat.One last thing. The complete carb avoidance thing can be a big mistake for some people. Our bodies are made to deal with starches. The enegy pathways like to use starches instead of ketones (fat energy). This gets to the point where people can binge. The binging(?) is what leads to other unhealthy side effects - ie. upper body fat deposits.So, basically all I really wanted to say with this ramble was that everyone has to take things with a grain of salt. Don't become religiously involved with your short term Diet, since it is your life long diet that determines how healthy you are.Buffy (who thinks that got a little long, and a lot OT...)
here's how I have the Adkin's diet figured... if it was the answer, Inuit eskimo women would be svelte willows ready for the runway... all they ate was whale blubber, seals, and salmon. Between a piece of fried bacon and an unglazed doughnut... I'm a doughnut man.Hi emiller,Guess the Italians haven't learned either. (actually just an excuse to drink more wine:o))Chin
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