Friday, February 26, 2010

Roberto Mignone's Bridger Management Bullish On Healthcare: 13F Filing

(This post is part of our series on tracking hedge fund portfolios. If you're unfamiliar with tracking investments they disclose via SEC filings, check out our series preface on hedge fund 13F filings.)

Next up is Roberto Mignone's hedge fund Bridger Management. They focus on both long/short and event driven strategies which you'll see evidence of in their portfolio below. Bridger has $2.8 billion in assets under management and is closed to new investors. Mignone likes to focus on investing rather than running a large organization. Not to mention, he argues that once you get 'too big' in AUM, you can't have a complementary short portfolio of necessary size. After all, Mignone is known for his sleuthing abilities on the short side of the book. Previously, we had detailed some of his investment thoughts for 2010 from a hedge fund panel.

Before Bridger, Mignone co-founded Blue Ridge Capital with John Griffin in 1996. And before that, Mignone (like Griffin) worked at Julian Robertson's Tiger Management, joining the ranks of other prominent 'Tiger Cub' hedge funds. Mignone received his degree from Harvard and his MBA from Harvard Business School.

The positions listed below were Bridger's long equity, note, and options holdings as of December 31st, 2009 as filed with the SEC. All holdings are common stock unless otherwise denoted.

Brand New Positions
Medtronic (MDT)
Pfizer (PFE)
Hyatt Hotels (H)
Amerigroup (AGP)
State Street (STT)
Rino (RINO)
Aetna (AET)
Boyd Gaming (BYD)
Teekay (TK)
Synovus Financial (SNV)
China Real Estate Information (CRIC)
Talecris Biotherapeutics (TLCR)
Mannkind (MNKD)
Regions Financial (RF)
The rest of their new positions were each less than 0.25% of reported holdings, so much smaller stakes:
Casella Waste Systems (CWST) ~ a new position we'd already detailed, Amylin Pharmaceuticals (AMLN) Puts, Crucell (CRXL), Enhealth (EHTH), Given Imaging (GIVN) & Sanderson Farms (SAFM)

Increased Positions
Cardinal Health (CAH): Increased by 150%
Warner Chilcott (WCRX): Increased by 120%
Las Vegas Sands (LVS): Increased by 111.5%
Amgen (AMGN): Increased by 109.7%
Pall (PLL): Increased by 92.3%
Electronic Arts (ERTS): Increased by 75%
Onyx Pharmaceuticals (ONXX): Increased by 66.4%
Cardiome Pharma (CRME): Increased by 51.9%
OSI Pharma (OSIP): Increased by 48.8%
Waste Connections (WCN): Increased by 41.7%
Gilead Sciences (GILD): Increased by 40%
Ebay (EBAY): Increased by 31.1%
Unitedhealth (UNH): Increased by 28.9%
Royal Carribean (RCL): Increased by 18.9%

Reduced Positions
Davita (DVA): Reduced by 84.6%
Expedia (EXPE): Reduced by 78.2%
Ritchie Bros (RBA): Reduced by 70.3%
Eclipsys (ECLP): Reduced by 58.8%
Allergan (AGN): Reduced by 14%

Removed Positions (Sold out completely):
Ameriprise Financial (AMP)
Wyeth (WYE)
International Game Technology (IGT)
Invesco (IVZ) Copart (CPRT)
Continental Airlines (CAL)
Watson Pharma (WPI)
MGM Mirage (MGM)
Schering Plough (SGP)
Cablevision (CVC)
Monsanto (MON)
Allegiant Travel (ALGT)
Cigna (CI)
Schering Plough (SGP-PB)
Amylin Pharma (AMLN) Calls
Airtran Holdings (AAI)
Illumina (ILMN)
American Express (AXP)
Brunswick (BC)
Trimeris (TRMS)

Top 15 Holdings by percentage of assets reported on 13F filing

  1. Covidien (COV): 3.76%
  2. Medtronic (MDT): 3.41%
  3. Amgen (AMGN): 3.35%
  4. Pall Corp (PLL): 3.30%
  5. Millipore (MIL): 3.30%
  6. Waste Connections (WCN): 3.21%
  7. Cardinal Health (CAH): 3.03%
  8. Dr Pepper Snapple (DPS): 2.77%
  9. Unitedhealth (UNH): 2.32%
  10. Carmax (KMX): 2.21%
  11. Pfizer (PFE): 2.2%
  12. Royal Caribbean (RCL): 2.18%
  13. Berkshire Hathaway (BRK.A): 2.17%
  14. Apple (AAPL): 2.16%
  15. First American (FAF): 2.11%

Hedge fund Bridger Management doesn't have any overwhelmingly massive positions as you can see. Overall, they boosted exposure to healthcare and reduced exposure to services and technology. This falls in line with Goldman Sachs' research that showed hedge funds reducing tech holdings. Mignone likes health plays as he says there is a huge margin of safety.

Mignone's hedge fund started a massive new stake in Medtronic (MDT) as it is their 2nd largest US equity long now. They also bought a new position in Pfizer (PFE), something we've seen many hedge funds do as of late. In terms of positions they already owned but added to, Bridger doubled down on their Amgen stake and almost doubled their position in Pall too. Both those positions are in their top five reported holdings as well. We also want to highlight that Bridger could be set for a big payday on shares of Millipore (MIL). The company has been exploring strategic takeover maneuvers and there were rumors they had received a bid from Thermo Fisher Scientific that sent shares soaring earlier this week. Hedge fund Blue Ridge Capital also has a sizable MIL stake.

The event driven portion of their portfolio is evident in their 'sales' of Wyeth and Schering Plough. They no longer show those positions because they completed their respective mergers. While they didn't do much selling with their core holdings, they did completely sell out of previously sizable positions in Ameriprise Financial, International Game Technology and Invesco. That wraps up all the major moves. For investment insight from Bridger's manager Roberto Mignone, check out his thoughts at a recent hedge fund panel.

Data used for this article comes from Alphaclone, our source for backtesting strategies and sorting through all the hedge fund portfolio maneuvers with ease. Assets reported on the 13F filing were $2.19 billion this quarter compared to $2.10 billion last quarter. Remember that these filings are not representative of the hedge fund's entire base of AUM.

We'll be tracking 40+ prominent funds in our fourth quarter 2009 hedge fund portfolio tracking series. We've already covered Seth Klarman's Baupost Group, Mohnish Pabrai's Investment Fund, Carl Icahn's hedge fund Icahn Partners, David Einhorn's Greenlight Capital, Stephen Mandel's Lone Pine Capital, John Griffin's Blue Ridge Capital, David Tepper's Appaloosa Management, Warren Buffett's portfolio, John Paulson's hedge fund Paulson & Co, Lee Ainslie's Maverick Capital, Dan Loeb's Third Point, Eddie Lampert's RBS Partners, David Ott's Viking Global, and Chris Shumway's hedge fund Shumway Capital Partners, Chase Coleman's Tiger Global, and Philip Falcone's Harbinger Capital Partners. Check back daily for our new updates.

Event Driven Is Most Sought After Hedge Fund Strategy (Monthly Industry Report)

Below you will find Credit Suisse's latest monthly report on the hedge fund industry. This report is a bit different than other documents we post here at Market Folly because it is more-so focused on the industry in general as it details sections on the investor's perspective, risk management, and various marketing strategies hedge funds are using. This report is unique in that it also has an operational look at things and should be useful for those in the alternative investment space.

An interesting fact: event-driven is now the most sought after hedge fund strategy by investors, displacing global macro. In terms of long/short funds, Credit Suisse found that for every $100 of equity, various l/s hedgies have long exposure of $125 and short exposure of $87. This falls in line with what we've seen previously regarding hedge fund exposure levels.

Embedded below is Credit Suisse's monthly hedge fund industry report:

You can directly download the .pdf here.

For more great research on the hedge fund industry, we highly recommend checking out Goldman Sachs' look at the top hedge fund long & short positions. Additionally, head to our post on how hedgies have their shortest position ever against the euro.

What We're Reading ~ 2/26/10

An analysis of Pepsi's acquisition of its bottlers (a popular hedge fund trade) from a new blog we recommend checking out [Merger Arbitrage Investing]

The many myths of Warren Buffett [Pragmatic Capitalist]

Explaining the secular shift towards bonds [Trader's Narrative]

Yield curve steepest in history: is the meaning different this time? [Mish's Global Economic Analysis]

How a Texas hedge fund manager made millions betting against Europe [WSJ ~ this article is behind a paywall unfortunately and if you don't have access here's a WSJ discount]

A primer on Credit Default Swaps (CDS) [Pragmatic Capitalist]

Ex-SAC Manager's new hedge fund soars: Ping [FINalternatives]

How to ride Seth Klarman's coattails [Mebane Faber for Forbes]

Hedge funds try career trade against the euro [WSJ] & we previously posted how hedgies have the shortest position ever against the euro

Ten Wall Street blogs you need to bookmark now [David Weidner]

Battered RAB Capital to auction prized funds [FT]

Shia LaBeouf talks about prepping for filming Wall Street 2 and how he traded [Youtube]

For the newbies: A beginner's trading terminology webinar [MarketClub]

Thursday, February 25, 2010

Phil Falcone's Harbinger Capital Bets Big on Sprint Nextel (S): 13F Filing

(This post is part of our series on tracking hedge fund portfolios. If you're unfamiliar with tracking investments they disclose via SEC filings, check out our series preface on hedge fund 13F filings.)

Next up is Philip Falcone's hedge fund Harbinger Capital Partners. Falcone runs his $6 billion hedge fund with a focus both on distressed and equity plays and often takes concentrated positions in companies. And, that last reason is exactly why we track them. Even though we can't see their distressed plays (they aren't required to disclose them), we can track their equity plays that they have high conviction in. You aren't going to devote large portions of your portfolio to one company unless you truly believe in your thesis. After having a dismal 2008, Harbinger had a solid showing last year as they finished up 46.5% as we noted in our 2009 hedge fund performance numbers post.

The positions listed below were Harbinger's long equity, note, and options holdings as of December 31st, 2009 as filed with the SEC. All holdings are common stock unless otherwise denoted.

Brand New Positions
Sprint (S)
Exco Resources (XCO)
Take Two Interactive (TTWO)
SPDR Gold Trust (GLD)
Corn Products (CPO)
US Airways (LCC)
Superior Well Services (SWSI)
Cloud Peak Energy (CLD)
Alpha Natural Resources (ANR)
iStar Financial (SFI)
Delta Petroleum Bond
The rest of the new stakes were each less than 0.25% of reported holdings: ICO Global (ICOG), MGIC Investment (MTG), & Strategic Hotels (BEE)

Increased Positions
Harry Winston Diamond (HWD): Increased by 587%
Walter Energy (WLT): Increased by 128.5%
Complete Production (CPX): Increased by 44.5%
Mercer International (MERC): Increased by 11.7% (we detailed their convertible bond exposure)

Reduced Positions
Interpublic Group (IPG): Reduced by 46.5%
Freeport McMoran (FCX): Reduced by 38.2%
Calpine (CPN): Reduced by 28.1%
Media Gen (MEG): Reduced by 18.1%

Removed Positions (Sold out completely):
McDermott (MDR)
Solutia (SOA) ~ we saw this coming with their previous repetitive sales
Zapata (ZAP)
Gentek (GETI)
USEC Bond International Coal (ICO)

Top 15 Holdings by percentage of assets reported on 13F filing

  1. Calpine (CPN): 18.47%
  2. Sprint Nextel (S): 15.35%
  3. New York Times (NYT): 12.71%
  4. Walter Energy (WLT): 10.42%
  5. Complete Production Services (CPX): 5.31%
  6. Interpublic Group (IPG): 4.81%
  7. Exco Resources (XCO): 4.75%
  8. Freeport McMoran (FCX): 3.82%
  9. Take Two Interactive (TTWO): 3.26%
  10. SPDR Gold Trust (GLD): 3%
  11. Corn Products (CPO): 2.35%
  12. US Airways (LCC): 2.17%
  13. Terrestar (TSTR): 1.66%
  14. Harry Winston Diamond (HWD): 1.57%
  15. Superior Well Services (SWSI): 1.37%

Harbinger runs quite a concentrated equity portfolio and remember that a lot of their holdings are also in distressed assets, Falcone's specialty. They turned over their portfolio quite significantly in the fourth quarter as a large portion of their top holdings are brand new positions. Most notable will be their stake in Sprint (S) which takes up over 15% of their reported assets. But also take not of their Exco Resources stake (XCO). We did, on the other hand, already know about their new Superior Wells position. This just goes to show that you have to track all SEC filings, not just the 13F's, as hedge funds will often give you glimpses into their portfolio on a much more real-time basis.

Most people will take notice of Harbinger's new stake in the gold ETF: GLD. So many hedge funds have some exposure to gold these days it's not even funny. We found two of Harbinger's new stakes intriguing. Firstly, Falcone has joined Carl Icahn in buying TTWO shares. Additionally, like David Tepper's Appaloosa Management, Falcone bought shares of airline LCC.

We saw some notable sales as Harbinger sold completely out of Solutia, something we saw coming as we detailed their seemingly constant sales of SOA. We had also seen Falcone's previous sales in CPN as well, so that wasn't surprising to see. It was interesting to see the hedge fund shed a good portion of their FCX position as they hadn't held it very long. Overall, Harbinger increased exposure to basic materials and sharply decreased exposure to Utilities.

All data used for this article comes from Alphaclone, our source for backtesting strategies and sorting through all the hedge fund portfolio maneuvers with ease. Assets reported on the 13F filing were $1.78 billion this quarter compared to $1.48 billion last quarter, a 20% increase. Remember that these filings are not representative of the hedge fund's entire base of AUM.

We'll be tracking 40+ prominent funds in our fourth quarter 2009 hedge fund portfolio tracking series. We've already covered Seth Klarman's Baupost Group, Mohnish Pabrai's Investment Fund, Carl Icahn's hedge fund Icahn Partners, David Einhorn's Greenlight Capital, Stephen Mandel's Lone Pine Capital, John Griffin's Blue Ridge Capital, David Tepper's Appaloosa Management, Warren Buffett's portfolio, John Paulson's hedge fund Paulson & Co, Lee Ainslie's Maverick Capital, Dan Loeb's Third Point, Eddie Lampert's RBS Partners, David Ott's Viking Global, Chris Shumway's hedge fund Shumway Capital Partners, and Chase Coleman's Tiger Global. Check back daily for our new updates.

Chase Coleman's Tiger Global Shows Large DirecTV & Apollo Group Stakes: 13F Filing

(This post is part of our series on tracking hedge fund portfolios. If you're unfamiliar with tracking investments they disclose via SEC filings, check out our series preface on hedge fund 13F filings.)

Next up is Chase Coleman's hedge fund Tiger Global. Chase Coleman is a 'Tiger Cub' because he previously plied his trade under mentor Julian Robertson at Tiger Management. Coleman is also considered a 'Tiger Seed' because he is one of the few managers that Robertson actually seeded himself in an effort to recognize talented up and coming managers. Coleman is one of the many managers selected to be in the Tiger Cub Portfolio created with Alphaclone where you can piggyback the investment portfolios of some of the top investors out there.

The positions listed below were Tiger Global's long equity, note, and options holdings as of December 31st, 2009 as filed with the SEC. All holdings are common stock unless otherwise denoted.

Brand New Positions
DirecTV (DTV)
Apollo Group (APOL) ~ this position was disclosed back in January
Lockheed Martin (LMT)
Liberty Global (LBTYA)
Harbin Electric (HRBN)
Ebix (EBIX)
Hewlett Packard (HPQ)

Increased Positions
IAC Interactive (IACI): Increased by 212%
McDonald's (MCD): Increased by 100%
Qualcomm (QCOM): Increased by 63.5%
Monsanto (MON): Increased by 62%
E*Trade Financial (ETFC): Increased by 52%
Pepsico (PEP): Increased by 43.5%
Apple (AAPL): Increased by 36%
Western Union (WU): Increased by 32%
Yahoo (YHOO): Increased by 15%

Reduced Positions
Teradata (TDC): Reduced by 66.3%
Discovery Communications (DISCA): Reduced by 49%
Gushan Environmental (GU): Reduced by 42.7%
Google (GOOG): Reduced by 39.5% (PCLN): Reduced by 35%
Lorillard (LO): Reduced by 33.5%
IMS Health (RX): Reduced by 32.8%
Visa (V): Reduced by 27.7%
Longtop Financial (LFT): Reduced by 21.5%
Cablevision (CVC): Reduced by 19.6%
Mastercard (MA): Reduced by 17%

Removed Positions (Sold out completely):
American Tower (AMT)
Electronic Arts (ERTS)
Advisory Board (ABCO)
Airvana (AIRV)

Top 15 Holdings by percentage of assets reported on 13F filing

  1. DirecTV (DTV): 11.14%
  2. Apollo Group (APOL): 9.28%
  3. Mastercard (MA): 7.63%
  4. Pepsico (PEP): 7.19%
  5. Monsanto (MON): 6.16%
  6. Google (GOOG): 5.33%
  7. Mercadolibre (MELI): 5.16%
  8. Transdigm Group (TDG): 4.43%
  9. Lorillard (LO): 4.07%
  10. Qualcomm (QCOM): 3.87%
  11. Visa (V): 3.81%
  12. IAC Interactive (IACI): 3.58%
  13. (PCLN): 3.28%
  14. Lockheed Martin (LMT): 3.23%
  15. Yahoo (YHOO): 3.09%

Keep in mind many of these portfolio moves we had covered in our previous Tiger portfolio update. Their brand new position in Apollo Group is notable as fellow hedgie Stephen Mandel's Lone Pine Capital is also bullish on education plays. They also started a huge new stake in DirecTV (DTV). Tiger apparently believes that DTV will increase leverage to buyback shares and then their cashflow will cover current debt.

They completely sold out of American Tower which diverges from what we've seen from hedgies as of late. The vast majority of hedge funds we track have been bullish on tower stocks. Tiger Global also sold off some Google shares and this falls directly in line with previous research that showed many hedge funds slowly turning sour on GOOG. Lastly, we saw Tiger dump shares of Electronic Arts and this also fits the meme of hedgies shorting video game makers that are losing out to online games. Tiger also sold shares of, something we saw fellow hedgie Stephen Mandel do when his Lone Pine Capital dumped PCLN as well.

Data used for this article comes from Alphaclone, our source for backtesting strategies and sorting through all the hedge fund portfolio maneuvers with just a few clicks. Assets reported on the 13F filing were $3.3 billion this quarter compared to $2.3 billion last quarter, a 40% increase. Remember that these filings are not representative of the hedge fund's entire base of AUM.

We'll be tracking 40+ prominent funds in our fourth quarter 2009 hedge fund portfolio tracking series. We've already covered Seth Klarman's Baupost Group, Mohnish Pabrai's Investment Fund, Carl Icahn's hedge fund Icahn Partners, David Einhorn's Greenlight Capital, Stephen Mandel's Lone Pine Capital, John Griffin's Blue Ridge Capital, David Tepper's Appaloosa Management, Warren Buffett's portfolio, John Paulson's hedge fund Paulson & Co, Lee Ainslie's Maverick Capital, Dan Loeb's Third Point, Eddie Lampert's RBS Partners, David Ott's Viking Global, and Chris Shumway's hedge fund Shumway Capital Partners. Check back daily for our new updates.

Japan: Past the Point of No Return By Vitaliy Katsenelson

Vitaliy Katsenelson of Investment Management Associates is back with another compelling presentation on a foreign country. Last time around, he examined how China was the mother of all black swans. Katsenelson provides his thoughts at and this time around he's focused on Japan and how it is past the point of no return.

Embedded below is the entire slide-deck on Japan:

You can directly download a .pdf of the presentation here.

His presentation focuses on one fact that's been known for a while: the Japanese savings rate is declining as their population ages. But, the main thing to take away from that is that the Japanese will become net sellers of bonds and this has consequences. In order to fight off the yen's depreciation against the dollar, Japan will have to sell some of their dollar reserves. That's a much bigger deal than it sounds when you consider that Japan is the largest holder of US treasuries. While the US isn't in great shape right now, we're in better shape than Japan comparatively speaking. Conclusively, Katsenelson argues that the US economy should work things out naturally rather than relying on continuous stimulus spending so we don't end up like Japan.

Now that you've taken a look at Japan, make sure to check out Vitaliy's other presentation, China: The Mother of All Black Swans. Additionally, we've also detailed global macro hedge fund Woodbine Capital's focus on the dispersion between the industrialized and emerging worlds, a piece well worth the read as well.

Wednesday, February 24, 2010

Shumway Capital Partners Bets Big On Wells Fargo (WFC): 13F Filing

(This post is part of our series on tracking hedge fund portfolios. If you're unfamiliar with tracking investments they disclose via SEC filings, check out our series preface on hedge fund 13F filings.)

Next up is Chris Shumway's hedge fund Shumway Capital Partners. Shumway uses intensive fundamental research to create long/short equity portfolios from the bottom-up. Chris Shumway was previously Julian Robertson's right-hand man at Tiger Management before launching his own fund. He received his B.S. from the University of Virginia and his MBA from Harvard Business School.

Shumway's returns are outstanding as they have a rolling 3-year annualized return of 28% according to Barron's top 100 hedge funds for 2009. We've long been an admirer of Shumway's intense due diligence. They are included in our Market Folly portfolio where we have combined various hedge fund portfolios to generate a unique replication strategy that has backtested over 25% annualized returns with the help of Alphaclone.

The positions listed below were Shumway's long equity, note, and options holdings as of December 31st, 2009 as filed with the SEC. All holdings are common stock unless otherwise denoted.

Brand New Positions
Bank of America preferreds (BAC-S)
Johnson & Johnson (JNJ)
Pfizer (PFE)
Freeport McMoran (FCX)
Brocade Communications (BRCD)
Gap (GPS)
Salesforce (CRM)
Amazon (AMZN)
CVS Caremark (CVS)
Radioshack (RHS)
MEMC Electronics (WFR)
Fifth Third Bancorp (FITB)
Dollar General (DG)
Research in Motion (RIMM)
Biomarin Pharma (Notes 1.875%)
Kinross Gold (Notes 1.750%)

Increased Positions
Wells Fargo (WFC): Increased by 305%
Time Warner (TWX): Increased by 180%
Quest Diagnostics (DGX): Increased by 179%
JPMorgan Chase (JPM): Increased by 78.5%
Ingersoll Rand (IR): Increased by 69%
Pepsico (PEP): Increased by 54%
Qualcomm (QCOM): Increased by 50.5%
Universal Health (UHS): Increased by 48.7%
Las Vegas Sands (LVS): Increased by 43%
Laboratory Corp (LH): Increased by 40%
Walt Disney (DIS): Increased by 33.5%
Apple (AAPL): Increased by 32%

Reduced Positions
Monsanto (MON): Reduced by 77.8%
Allstate (ALL): Reduced by 75%
Baidu (BIDU): Reduced by 57.5%
Union Pacific (UNP): Reduced by 49%
Community Health (CYH): Reduced by 39.4%
Goldman Sachs (GS): Reduced by 39%
Colgate Palmolive (CL): Reduced by 37.6%
Urban Outfitters (URBN): Reduced by 34.2%
Visa (V): Reduced by 33.6%
Cisco Systems (CSCO): Reduced by 30%
Yum Brands (YUM): Reduced by 27.3%
Mastercard (MA): Reduced by 25.2%
Juniper Networks (JNPR): Reduced by 24.8%
EMC (EMC): Reduced by 21%

Removed Positions (Sold out completely):
Bank of America (BAC)
Procter & Gamble (PG)
Walgreen (WAG)
Zimmer Holdings (ZMH)
Google (GOOG)
Cemex (CX)
Bard (BCR)
Waters (WAT)
Charles Schwab (SCHW)
Weatherford International (WFT)
Nordstrom (JWN)
Wyeth (inactive ~ merger completed)
American Tower (AMT)
SBA Communications (SBAC)
Williams (WMB)
Federal Realty (FRT)
XL Cap (XL)
Unilever (UL)
Lazard (LAZ)
Genworth Financial (GNW)
Washington Fed (WFSL)
Melco Crown (MPEL)

Top 15 Holdings by percentage of assets reported on 13F filing

  1. Bank of America preferreds (BAC-S): 5.97%
  2. Apple (AAPL): 5.4%
  3. Wells Fargo (WFC): 5.3%
  4. Johnson & Johnson (JNJ): 4.7%
  5. Teva Pharmaceutical (TEVA): 4.7%
  6. Equinix (EQIX): 4.6%
  7. Pepsico (PEP): 4.3%
  8. Pfizer (PFE): 4.1%
  9. Walt Disney (DIS): 3.8%
  10. Time Warner (TWX): 3.8%
  11. Qualcomm (QCOM): 3.8%
  12. JPMorgan Chase (JPM): 3.7%
  13. Mastercard (MA): 3.7%
  14. EMC (EMC): 3.2%
  15. Freeport McMoran (FCX): 3.2%

Of Shumway's top holdings, four of them were brand new stakes: Bank of America preferreds, Johnson & Johnson, Pfizer, and Freeport McMoran. Take note that they completely dumped their BAC common stock and bought the Bank of America preferred on the offering, a trend we've seen many hedge funds take advantage of.

Looking over their portfolio though, it has a multinational blue-chip feel to it. What's interesting is that in the quarter prior they had purchased blue-chip stocks as well. This time around though, they were largely selling off those blue-chips and buying new blue-chip names. Shares of JNJ, PEP, and PFE find a place in Shumway's portfolio and are the definition of these 'safer' plays that are seemingly undervalued on a relative basis. We've seen this mantra out of numerous other hedge funds as they note 'junk' high beta stocks rallied the most during 2009, leaving solid blue-chip companies behind. As such, many hedgies have rotated into these multinational stocks for 2010, a year in which many think we'll see tepid growth.

It's also interesting to see hedge funds return to old favorite Freeport McMoran. Hedgies loved this play pre-crisis but dumped shares in a hurry once the global economy started heading south. It looks like some funds are starting to dip their toe back in the water with this name. Turning to financials, we also saw Shumway massively boost their holdings in Wells Fargo (WFC), something we've started to see more and more hedge funds do as of late as well.

Shumway dumped stakes in SBA Communications and American Tower, a move we found intriguing solely because tower stocks have been some of the most popular stocks amongst Tiger Cub hedge funds. Additionally, Shumway's sale of Google made us take notice as shares of the internet giant slowly seem to have fallen out of favor with many hedgies.

Data used for this article comes from Alphaclone. Using their hedge fund replicators, you can backtest strategies and sort through all the hedge fund portfolio maneuvers with ease, we highly recommend it. Assets reported on Shumway's 13F filing were $8.6 billion this quarter compared to $7.4 billion last quarter, so quite a noticeable uptick in assets. Remember that these filings are not representative of the hedge fund's entire base of AUM.

We'll be tracking 40+ prominent funds in our fourth quarter 2009 hedge fund portfolio tracking series. We've already covered Seth Klarman's Baupost Group, Mohnish Pabrai's Investment Fund, Carl Icahn's hedge fund Icahn Partners, David Einhorn's Greenlight Capital, Stephen Mandel's Lone Pine Capital, John Griffin's Blue Ridge Capital, David Tepper's Appaloosa Management, Warren Buffett's portfolio, John Paulson's hedge fund Paulson & Co, Lee Ainslie's Maverick Capital, Dan Loeb's Third Point, Eddie Lampert's RBS Partners, and David Ott's Viking Global. Check back daily for our new updates.

David Ott's Viking Global: Long Visa, Invesco, Mastercard & Express Scripts: 13F Filing

(This post is part of our series on tracking hedge fund portfolios. If you're unfamiliar with tracking investments they disclose via SEC filings, check out our series preface on hedge fund 13F filings.)

Next up is hedge fund Viking Global Investors. Previously, we've only referenced Andreas Halvorsen with the fund, but that's not been fair since it was co-founded by Brian Olson and David Ott (pictured left) in 1999. All three had considered starting their own hedge funds when Halvorsen suggested they try a team approach. However, Olson left in 2005 while Ott and Halvorsen still remain.

Prior to Viking, Ott was a Managing Director at Tiger Management where he was focused on consumer companies. Ott received his MBA from Harvard Business School (a Baker Scholar) and previously graduated from the Wharton School at the University of Pennsylvania. Doesn't sound like a hedge fund guy at all, does he? Halvorsen attended Williams College and then received his MBA from Stanford.

Viking employs bottom-up fundamental stockpicking, like most all other 'Tiger Cub' hedge funds. They can analyze businesses with the best of them and that's why we track them. In Alpha's 2008 hedge fund rankings, Viking was ranked #70 in the world. We haven't seen many of their letters as of late, but when we did, we learned in Viking's commentary that they (like many other hedge funds) had trouble on the short side of the portfolio in 2009. Viking is part of the Tiger Cub Portfolio created with Alphaclone where you can replicate the portfolios of some of the top hedge funds around.

The positions listed below were Viking Global's long equity, note, and options holdings as of December 31st, 2009 as filed with the SEC. All holdings are common stock unless otherwise denoted.

Brand New Positions
Wellpoint (WLP)
Danaher (DHR)
Capital One (COF)
Aetna (AET)
News Corp (NWSA)
Oracle (ORCL)
Hess (HES)
CME Group (CME)
Lincare (LNCR)
Wells Fargo (WFC)
Manulife (MFC)
Rockwell Collins (COL)
Devon Energy (DVN)
Dollar General (DG)
Host Hotels (HST)
Banco Santander (BSBR)
Health Management (HMA)
Biovail (BVF)
The rest of their brand new stakes were all less than 0.5% of the portfolio each: Pall (PLL), Illumina (ILMN), Brocade (BRCD), Qwest Communications (Q), Pfizer (PFE), Manitowoc (MTW), Metlife (MET), & Pharmaceutical Prod (PPDI)

Increased Positions
Universal Health (UHS): Increased by 227%
Autodesk (ADSK): Increased by 183.3%
Hewlett Packard (HPQ): Increased by 153%
Atlas Energy (ATLS): Increased by 99.5%
Tyco (TYC): Increased by 59%
CVS Caremark (CVS): Increased by 55.9%
Qualcomm (QCOM): Increased by 53.4%
Mastercard (MA): Increased by 50.2%
Beckman Coulter (BEC): Increased by 48%
Halliburton (HAL): Increased by 47.8%
Ace (ACE): Increased by 26.6%
Citigroup (C): Increased by 20.8%
Flowserve (FLS): Increased by 17%

Reduced Positions
Apollo Group (APOL): Reduced by 84%
Franklin Resources (BEN): Reduced by 77.5%
Owens Illinois (OI): Reduced by 74%
DirecTV (DTV): Reduced by 51.6%
Google (GOOG): Reduced by 48.7%
Allegheny Energy (AYE): Reduced by 40.5%
Davita (DVA): Reduced by 37%
Visa (V): Reduced by 36.6%
Virgin Media (VMED): Reduced by 36.3%
Ingersoll Rand (IR): Reduced by 35.8%
JPMorgan Chase (JPM): Reduced by 21.9%

Removed Positions (Sold out completely):
Bank of America (BAC)
Goldman Sachs (GS)
Marsh & Mclennan (MMC)
AmerisourceBergen (ABC)
XTO Energy (XTO)
Pepsico (PEP)
Owens & Minor (OMI)
Priceline (PCLN)
RenaissanceRe (RNR)
Medco Health (MHS)
Rovi (ROVI)
Ralcorp (RAH)
Terex (TEX)
Lender Processing (LPS)
St Jude Medical (STJ)
Hospitality Properties (HPT)
Thoratec (THOR)

Top 15 Holdings by percentage of assets reported on 13F filing

  1. Visa (V): 8.3%
  2. Invesco (IVZ): 7.6%
  3. Mastercard (MA): 6.3%
  4. Express Scripts (ESRX): 4.2%
  5. JPMorgan Chase (JPM): 4.0%
  6. CSX (CSX): 3.9%
  7. Goodrich (GR): 3.3%
  8. Wellpoint (WLP): 3.3%
  9. Beckman Coulter (BEC): 2.7%
  10. Hewlett Packard (HPQ): 2.7%
  11. Autodesk (ADSK): 2.7%
  12. Danaher (DHR): 2.6%
  13. Cigna (CI): 2.6%
  14. Capital One (COF): 2.4%
  15. CVS Caremark (CVS): 2.4%

Of their top holdings, three of them were brand new stakes in Wellpoint, Danaher, and Capital One. Viking Global also added significantly to their pre-existing stakes in Autodesk and Hewlett Packard. Visa, JPMorgan Chase, Invesco, CSX and Express Scripts have been towards the top of their portfolio for a few quarters now. They ramped up their Mastercard stake to bring it to the top tier of holdings and Viking owns sizable chunks of both payment processors now (MA & Visa). These are by far some of the most widely held stocks amongst hedge funds.

Their JPMorgan position sticks with the long 'too big to fail' banks and short regional banks meme that we've seen so many hedgies employ. Their CSX stake is intriguing because as you know, Warren Buffett's Berkshire Hathaway acquired rail competitor Burlington Northern. CSX had previously been owned by tons of hedge funds, but not as many as of late. We'll have to see if other hedge funds start to pile into other rail names now.

Probably one of the most notable portfolio changes was Viking's massive reduction in their Apollo Group (APOL) stake. This had previously been a very large position for the hedge fund and it seems that they agree with Conatus Capital, who also sold out of education plays. More hedge funds seem to be concerned about regulatory risk, etc. In the quarter prior, Franklin Resources was Viking's fourth largest US equity long, and this time around they sold off a ton of shares. It was also interesting to see Ott's hedge fund sell completely out of financial stakes in Bank of America and Goldman Sachs. Additionally, they dumped high-flyer (PCLN), a company we've seen many Tiger Cub hedge funds own previously.

All data used for this article comes from Alphaclone. We use it for backtesting strategies and sorting through hedge fund portfolio maneuvers. Assets reported on the 13F filing were $8.7 billion this quarter compared to $7.6 billion last quarter, so $1 billion added in long US equity exposure. Remember that these filings are not representative of the hedge fund's entire base of AUM.

We'll be tracking 40+ prominent funds in our fourth quarter 2009 hedge fund portfolio tracking series. We've already covered Seth Klarman's Baupost Group, Mohnish Pabrai's Investment Fund, Carl Icahn's hedge fund Icahn Partners, David Einhorn's Greenlight Capital, Stephen Mandel's Lone Pine Capital, John Griffin's Blue Ridge Capital, David Tepper's Appaloosa Management, Warren Buffett's portfolio, John Paulson's hedge fund Paulson & Co, Lee Ainslie's Maverick Capital, Dan Loeb's Third Point and Eddie Lampert's RBS Partners. Check back daily for our new updates.

Top Hedge Fund Long & Short Positions: Goldman Sachs Report

Goldman Sachs is out with their latest hedge fund trend monitor report and they've highlighted some key takeaways from the slew of fourth quarter SEC filings and portfolio disclosures. Focusing on hedge fund exposure to equities, they note a broad trend of rotation into industrials and out of information technology. Goldman interestingly notes that this is the first time since 2005 that hedge funds are underweight IT.

Now, let's dive into the good stuff.

Here's a list of Ten Stocks That Most Frequently Appear In Hedge Funds' Top Holdings:

1. Apple (AAPL)
2. Pfizer (PFE)
3. Bank of America (BAC)
4. Google (GOOG)
5. JPMorgan Chase (JPM)
6. Microsoft (MSFT)
7. Mastercard (MA)
8. DirecTV (DTV)
9. Wells Fargo (WFC)
10. CVS Caremark (CVS)

Also, we wanted to highlight the Top 10 Stocks Added Most By Hedge Funds In Q4:

1. Mead Johnson Nutrition (MJN)
2. Wells Fargo (WFC)
3. Citigroup (C)
4. Amazon (AMZN)
5. 3Com (COMS)
6. Hewlett Packard (HPQ)
7. Wellpoint (WLP)
8. Black & Decker (BDK)
9. CVS Caremark (CVS)
10. Jefferies (JEF)

This is pretty much right in line with what we've seen when we've detailed hedge fund portfolios as we've noticed prominent managers picking up shares of MJN, WFC, and CVS in particular.

Based on various short disclosures, Goldman has also estimated what short positions a 'typical' hedge fund would employ. This hypothetical portfolio would be short the likes of Haverty Furniture (HVT), Lifeway Foods (LWAY), Great Southern Bancorp (GSBC), Travelzoo (TZOO) and many other names.

In their trend monitor report, Goldman concludes the same thing we've detailed previously: that hedge funds have recently de-risked, having spent the vast majority of 2009 re-risking before that. Some other research we've looked at has even indicated that hedge funds have their lowest net long equities position since May 2009. Also, an interesting tidbit from Goldman's research: they conclude that hedge funds use exchange traded funds (ETFs) as a hedging tool, rather than for directional bets.

Probably the most intriguing thing to note from Goldman's research is their conclusion regarding the impact of timelag in these position disclosures. Goldman writes, "Importantly, we believe our analysis of December 31 hedge fund holdings based on filings made in mid-February is probably more reflective of actual current holdings than many market participants are inclined to believe. Hedge fund holdings turnover is lower than most expect, as highlighted previously. Most securities (68%) that were in hedge fund portfolios on September 30, 2009 also appeared in portfolios on December 31, 2009. Because the overall holdings picture was surprisingly constant, it is reasonable for us to believe the most recent holdings data is not so 'out-of-date' as some might suggest."

They also draw attention to an obvious fact: hedge fund returns are largely reliant on the performance of a few stocks, usually their top holdings. This is why we like to track concentrated funds on the site even more, as their holdings are typically higher conviction plays. There are many investors out there in hedge fund land, and when it comes to equities, you have to know who to track. This is something we strive for on a daily basis as we've compiled a great list of hedge funds to track.

Below you will find Goldman Sachs' entire hedge fund trend monitor report as an embedded document. RSS & Email readers will need to come to the site in order to read it:

Overall, an impressive set of in-depth research well worth the read. And, importantly, their conclusions and findings fall directly in line with what we've discovered in our constant hedge fund coverage. The essential non-issue of the timelag between the portfolio disclosure date (12/31/09) and the date when the filings are released to the public (2/15/10) is very notable. When following hedge fund movements, you have to focus on their core positions and ideally you want to trail equity funds that have long-term time frames, typically employ value strategies, and run concentrated portfolios. To see what specific positions prominent hedge funds are buying, head to our hedge fund portfolio tracking series and our coverage of hedge fund investor letters.

Carl Icahn: Activism Update & Investor Letter

Recently we've seen some updates in regards to Carl Icahn's portfolio. The hedge fund manager and activist investor is seeking four seats on Genzyme's (GENZ) board (one for himself and three for associates). Icahn is up to his usual rabblerousing ways and is seeking to institute change at the company. It seems likely he would pressure the company to sell itself entirely or part of its businesses. After all, shares are the lowest they've been over the last half decade. Genzyme was his fourth largest disclosed holding when we looked at Icahn's investments. This news shouldn't really be startling by any means. In typical Icahn fashion, he is assembling a platform to institute change and generate shareholder return.

Additionally, we saw a few weeks ago that Icahn said he wanted to raise his stake in Lions Gate Entertainment (LGF) to nearly 30% of the company. He has put forth the offer and would need over 13 million more shares in order to do so.

All of this recent activity comes after good news regarding his Motorola (MOT) position. The company plans to split itself up and, as Icahn detailed in his recent investor letter, he thinks MOT shares have much further upside as value becomes unlocked.

Courtesy of the fine folks at Dealbreaker who originally posted this up, you'll find below Icahn Partners' annual investor letter:

You can directly download the .pdf here.

We'll have to watch the developments with GENZ and LGF as Icahn positions himself for his next big moves. For more insight from prominent hedge fund managers, we highly recommend checking out the following resources we've posted up: Paolo Pellegrini's PSQR Capital annual letter, the latest letter from Perry Partners, hedge fund Conatus Capital's letter, global macro fund Woodbine Capital's commentary, plus many more.

Tuesday, February 23, 2010

Eddie Lampert's Annual Letter 2010

Eddie Lampert has released his annual letter for Sears Holdings (SHLD). It's quite a lengthy piece, but well worth the read as it gives you insight to both the economy and his business execution. Earlier today we posted up Lampert's RBS Partners hedge fund portfolio, so check that to see what maneuvers he made in the fourth quarter. Many prominent hedge funds and investors own large stakes of SHLD, but we've also seen many value players shun shares at current levels. How does Lampert's letter affect your view of SHLD, if at all?

Below you will find Eddie Lampert's 2010 annual letter:

"February 23, 2010

To Our Shareholders:

Today we announced our financial results for our 2009 fiscal year. I am pleased to report that we delivered both stability and progress, resulting in roughly $1.8 billion of Adjusted EBITDA, an improvement of more than $200 million over 2008. While this may be surprising to some, it isn’t to me. The dedication of our associates and leadership team led by Bruce Johnson and the diversity of the Sears Holdings business portfolio—Sears Full Line stores, Kmart stores, our Home Services business, Sears Auto Centers, Outlet Stores, Hometown Stores, the Kenmore, Craftsman, DieHard and Lands’ End brands, our majority interest in Sears Canada, and our online business properties including—have allowed us to successfully manage through the economic and financial crisis of the past two years.

Today, the United States stands with an unemployment rate close to 10%, a housing market that appears to be stabilizing at depressed levels, and uncertainty over government policy and geopolitical events. Despite this, Sears Holdings continues to make progress against our strategic initiatives and our long-term financial goals. I recognize that our financial results, while substantially improved from 2008, remain well below where we would like them to be. At the same time, we have seen significant improvements in our focus on customers and the transformation of our culture.

I would like to do several things in this letter. First, review 2009 at Sears Holdings. Second, look ahead to 2010 and beyond. Third, discuss some policy issues generally including job creation, and finally, address some consequences of ecommerce tax practices.

2009 in Review

In 2009, we kept expenses under control and stayed focused on our vision and strategic, operational, and financial goals. We were both prudent and opportunistic in spending money and in allocating capital at a time when many others had to make major adjustments.

Early in the year we amended and extended our revolving credit facility through June 2012. In one of the most difficult financing markets in recent memory, we found significant support from numerous financial partners led by Bank of America, Wells Fargo and General Electric, and we executed one of the largest revolving credit facilities in the past couple of years. Our substantial asset base and our strong cash flow management were important factors in this successful deal. When people take a close and objective look at our company, our strengths are not difficult to see.

Our customer satisfaction scores have continued to rise in both Kmart and Sears stores. While we know we still have room to improve, we are pleased that we are making progress against the five key pillars of our strategy that I outlined in last year’s letter.

Creating lasting relationships with customers by empowering them to manage their lives: In 2009, we executed a number of initiatives to improve our relationships with customers. These initiatives focused on increasing the breadth and depth of our product offerings, improving our multichannel capabilities, creating platforms that engage with customers, and improving our ability to deliver customer services and solutions. Specific initiatives for 2009 included the introduction of Marketplace on, which dramatically increased our assortment by giving customers access to millions of products, and the launch of online shipping capability to 90 countries. We also introduced, expanding our site into an online destination that supplements by providing information that helps people get things done by themselves or with the help of others. We created or expanded marketing programs including ShopYourWay, “Life. Well spent.”, Sears Blue Appliance Crew, Sears Blue Electronics Crew, Sears Blue Tools Crew and “there’s smart, and there’s kmart smart.” We grew our online engagement platforms, and, allowing our customers to interact with each other and us and get advice before they buy. We launched the ShopYourWay Rewards program at Kmart and Sears that will provide even more value and opportunities for our customers. We also re-launched a Christmas Club program at Sears and Blue Light Specials at Kmart to offer more convenience, value, and excitement for our customers.

Attaining best in class productivity and efficiency: In 2009, we focused throughout the year on delivering quality products and services to our customers in a more productive and efficient manner. We delivered better results by focusing on product sourcing, supply chain efficiencies, franchising, labor model optimization, and consolidation of functions. Year over year, our gross margin rate was up 60 basis points and we reduced our selling and administrative expenses by over $400 million.

Building our brands: In 2009, we continued to improve and expand our brands. We are in the process of completely redesigning our entire Kenmore product line and introducing more innovation to Craftsman products. We created and launched the Lands’ End Canvas brand to target a new customer segment. We also launched or expanded new footwear brands, including Protégé, and introduced a complete product line for the home with the Cannon, Jaclyn Smith and Country Living brands. We also continue to look for ways to give more Americans more opportunities to purchase our brands, as evidenced by the recent announcement of the trademark license agreement with Schumacher Electric Corporation, which will enable DieHard branded power accessories to be sold to retailers in the United States, Puerto Rico and Mexico, as well as our agreement with Ace Hardware that will introduce a selected assortment of Craftsman products to customers who prefer to purchase in a smaller and different type of retail channel.

Reinventing the company continuously through technology and innovation: We continued to improve convenience for our customers by investing in technology. We also focused on being more innovative across all business units. We improved our point of sale systems for faster check-outs, improved the customer experience on our websites, launched new mobile applications, including Sears2Go and Personal Shopper, and offered our customers multiple forms of payment both in-store and online, including express checkout, PayPal, eBillme, check electronification, and an expanded version of our successful Layaway program.

Reinforcing “The SHC Way” by living our values every day: In 2009, we also strove to improve our work environment and our impact in the communities in which we live. We harnessed technology solutions to increase real-time feedback from our associates and customers, which has had a transformative impact on our culture and customer focus. We also made progress towards our commitment to environmental responsibility by launching a corporate environmental sustainability program and announcing a new sustainable paper procurement policy. Our community programs, such as Heroes at Home, the March of Dimes, and St. Jude’s Research Hospital, continue to grow.

We are striving for more consistency, better customer service, increased transparency, and tighter integration of our stores, our service businesses, and our online experiences. Our early efforts in these areas are bearing fruit. Stay tuned for more ahead.

On a less positive note, we regret the closing of roughly 60 stores in 2009. Most of those stores have underperformed for some time and, despite focused efforts to improve them, we felt that we could no longer afford to wait for those stores to turn around. With expiring leases, we have been able to reduce our money-losing stores while at the same time generating cash from the liquidation of inventory and the monetization of some of the stores that we closed. We continue to evaluate our store portfolio, over 2,200 Kmart and Sears Full Line stores combined, and experiment with new and different ways to serve our customers and avoid additional store closings. Like any retailer, we would expect that our store portfolio will require continuous evaluation and transformation as we strive to have every store contribute to the creation of future value.

In the middle of last year, I responded to an errant published story that repeated unfounded claims from a Wall Street analyst regarding the cash impact of our store closings. As I explained, in most cases, when we close stores we generate cash, net of any cash required for severance and other store closing expenses. The GAAP accounting losses arise from the markdown of inventory, write-off of fixed asset balances, associate severance and any remaining payments on leases that expire in the future. Our ability to close stores is in no way hampered by any cash requirements. Instead, our preference is to operate stores profitably and to transform unprofitable or marginally profitable stores into money makers by evolving our formats to better meet the needs of the communities in which we operate. We know that when we operate our stores well, we have the ability to serve our customers well and to make money.

The pace of expansion in retail generally and in big-box retail more specifically has slowed dramatically in the past year. I have written previously about what I believed was the reckless expansion of retail space leading to lower profitability for many retailers and to low or negative returns on the investment required to expand space. In other industries, consolidation rather than expansion has led to a more sensible competitive environment and better returns for shareholders. If you examine the level of capital expenditures over the past decade at many large retailers and compare that expenditure to value created, it would not paint a pretty picture. Additionally, the dramatic declines in capital expenditures over the past couple of years at most large retailers are strong evidence that the level of maintenance capital expenditures for a big box retailer is materially below what many analysts and experts previously believed. Most of the capital spent over the past decade has been largely for store expansion, with some lesser amount required for maintaining existing stores. For a company like Sears Holdings, with over 2,200 stores in the Kmart and Sears Full Line store formats, our need to expand our physical store footprint is much less than many of our competitors. At the same time, our need to improve the productivity of our space is much greater than many of our competitors. We are pursuing a number of alternative solutions in parallel to address this challenge.

We have chosen to invest primarily in areas of our business that we believe will yield long-term growth and attractive returns. These areas include our online businesses, our service businesses, our Kenmore, Craftsman and Lands’ End brands, and some of our alternative formats like Hometown Stores and Outlet Stores. We will continue to experiment and explore ways to materially improve our Kmart and Sears Full Line store experience and competitiveness. To this end, we have made substantial investments in our online platform and in the in-store and mobile technology that enables multichannel experiences under our ShopYourWay banner. We believe that we are on the right track, with an acute customer focus internally, which should yield improved results for our customers and our shareholders externally.

Despite perceptions, we have not hesitated to open new stores when the economics make sense, including opening new Sears Outlet and Sears Hometown stores in 2009. With roughly 100 Outlet stores and almost 1,000 Hometown stores, these alternative formats represent both sources of profit and sources of growth for Sears Holdings. While both are small relative to the Kmart and Sears Full Line store formats, they serve their customers well and provide a Sears presence in smaller spaces and less populated communities.

While a number of our major competitors saw their EBITDA decline in the past year, we were pleased to report a meaningful improvement in Adjusted EBITDA from 2008 to 2009 and we aspire to repeat this improvement again in 2010. With unemployment near 10%, many of our current and potential customers have had to tighten their belts and have had their access to credit reduced and the associated costs increased, leading to a cut back in their spending, especially for big ticket items. This has impacted the Sears Full Line stores format to a greater extent than some of our other businesses. This change in customer behavior is not unique to Sears. You can see it reflected in our major mall-based competitors as well as Home Depot and Lowe’s in the home improvement categories.

2009 Awards and Recognition

Let’s look at some of the awards and recognition Sears Holdings businesses and associates received during 2009:

  • Sears Holdings was named one of the Top Customer Experience Web Sites for 2009 by e-Tailing Group's Annual e-Commerce Customer Experience Index.
  • Sears Holdings was recognized by Retail Touchpoints as the winner of the 2009 Channel Integration Award in the Mass Merchant/Department category. The Channel Integration Award honors retailers who have achieved cross-channel integration and improved the shopping experience for their customers.
  • Sears placed third in Mobile Commerce Daily’s ranking of the 2009 Mobile Retailer of the Year.
  • Sears Holdings was named the Overall Best-in-Class Company and Best-in-Industry for the Department Stores/Mass Merchandise category for adaptation of mobile e-commerce initiatives by Acquity Group, a leading services firm focusing on digital solutions, in its mobile study of the 2008 Internet Retailer 500 list.
  • Three of Sears Holdings e-commerce Web sites ranked in the Top 25 on STORES Magazine’s list of 50 Favorite Online Retailers of 2009. ranked number 10, was number 15 and was number 23.
  • Sears Holdings online community was ranked the top retail-branded community site in North America and ranked number four out of the top five-branded communities in a study sponsored by the Word of Mouth Marketing Association.
  • Sears was listed in the The Vitrue 100: Top Social Brands of 2009. The Vitrue Social Media Index assigns brands and products a score based on overall buzz from status updates, videos, photos and blog posts. Sears moved up four places to 96 this year and was the number seven retailer.
  • Sears received Special Recognition in 2009 for Retail Commitment from the U. S. Environmental Protection Agency. Organizations recognized have achieved major energy savings and/or help consumers save money while also increasing energy efficiency and reducing carbon emissions by offering high-performance products, educating consumers or offering incentives for better ways to use energy.
  • Craftsman was voted the favorite hand tool brand by over 7,000 Popular Mechanics’ readers.
  • Lands' End ranked number eight in the National Retail Foundation/American Express Customer's Choice Survey for 2009. This is the fourth consecutive year that Lands’ End has been named in the top ten.
  • Sears Holdings was honored with the Stars of Madison Avenue Award presented by the ADVERTISING Club. Sears Holdings was recognized for our efforts with Heroes at Home and Rebuilding Together.
  • Sears Holdings was ranked by BusinessWeek as one of the Top 100 best places to launch a career in 2009.
  • Crain’s Chicago Business named Michelle Pearlman, SVP and President, Jewelry, one of their “40 under 40” to Watch in 2009. Crain’s “40 Under 40” highlights Chicago-area leaders under the age of forty who are considered to be among the best and the brightest in the Chicago business community.
  • US Banker magazine named Susan Ehrlich, SVP and President, Financial Services, to its annual list of The Top 25 Non-bank Women in Finance.
  • Sears Holdings was ranked by G.I. Jobs Magazine as number 25 on their Top 100 Military Friendly Employers list for 2009.
  • Sears Holdings Corporation was named by Black Engineering, Hispanic Engineering and Women of Color magazines, which are part of Career Communications Group, as one of the Most Admired Employers for minority professionals based on a survey regarding their impressions of diversity initiatives at top organizations.
  • Sears Holdings was listed as one of the Best Places to Work for GLBT Equality by the Human Rights Campaign and received a 100 percent score in the Corporate Equality Index (CEI) for a sixth consecutive year.
  • Sears Holdings won the Volunteer Leadership award from the March of Dimes for our on-going support in raising public awareness of maternal and baby health issues.
  • Sears Holdings was ranked as the number-two retailer and number 48 out of 100 by The Dave Thomas Foundation for Adoption in 2009.
  • Sears Holdings was ranked in the Top 100 for the Reputation Institute’s Most Reputable and Recommended U.S. Companies for 2009.

We are proud of these accomplishments, in addition to the progress made on our financial and strategic priorities, and hope that those who may have doubted us in the past are willing to keep an open mind. For example, critics have cited our investment choices for our declining sales, while the economy has been cited for our competitors’ declining sales. Likewise, our reduction in debt is ignored while our competitors’ expansion in debt is not taken into account. While we continued to repurchase shares during the economic crisis because the value was attractive and because we had significantly lower leverage than others in our industry, many of our competitors suspended their repurchase programs to appease credit rating agencies only to resume them again after their share prices recovered significantly.

We can understand rating agency caution surrounding economic events, the retail environment, and the potential for things to get worse. In our case, it turns out that our performance far exceeded many observers’ expectations and we hope to receive credit for this performance in the form of higher credit ratings and more balanced analysis.

Rating agencies play an important role in how investors allocate capital by “qualifying” debt for certain investors. By overrating companies and securities, rating agencies can lead to systemic issues and investor losses. Similarly, by underrating companies they can lead to lower growth, less risk taking, and less job creation. Simplistic analyses, which automatically prefer capital investment to share repurchases as a use of cash that “benefits“ bondholders, ignore the fact that negative or below market returns on invested capital are as harmful to creditors as to shareholders.

When we inquire why our ratings are not higher than some competitors with credit metrics that are weaker than ours, one factor cited is that some analysts prefer their business models. Meanwhile, we have a higher market capitalization and less debt than many of these competitors. We increased our earnings, while many others have seen their earnings decline. We have a diversified business portfolio and a significant revenue base and scale. Obviously, we don’t agree with all of the critical qualitative conclusions and the quantitative metrics speak for themselves.

We do some things differently than others, and we have certain beliefs that differ from theirs. Our culture is owner-oriented, because we have owners who serve on the board that governs the company. We believe that ownership makes a difference, especially when owners have significant financial interests in the company and a long-term perspective. Instead of this raising concern, rating agencies should welcome and value owners with a demonstrated track record of long-term value creation and conservative capital policies, even when some of the capital allocation preferences differ from those that others believe lead to higher long-term credit performance.

Looking Forward

I expect us to continue our journey in 2010 to deliver improved customer experiences, new ideas, and better financial performance. It would be great to see a slight tailwind in our economy this year, though we will stay focused on the five pillars of our strategy and driving improved financial results regardless. We recently announced new and innovative products in our Kenmore laundry business as a result of our work towards a complete brand redesign that I mentioned earlier. We have an exciting Kenmore product line being delivered throughout 2010. In laundry, in refrigeration, and in cooking, we will demonstrate renewed innovation and reinvigorated leadership with heavy marketing and customer experience support. It has taken us some time, but we feel confident that we are on the right track, as the leader in the appliance business, to differentiate and extend our leadership and financial results in this important business.

At Lands’ End, we expanded our business on three dimensions in 2009 and will continue building on these in 2010. First, we added Lands’ End shops to an additional 68 Sears stores. Second, we expanded internationally for the first time in over a decade, into France and Austria. Third, we introduced Lands’ End Canvas, an updated version of the classic Lands’ End styling, which has been very well received and which extends Lands’ End’s relevance to a new demographic. And, all of this comes with the exceptional and widely recognized customer service excellence that has always been, and which we expect will continue to be, a hallmark of the Lands’ End brand.

Our Home and Auto Services businesses have identified new growth opportunities that we began to execute in 2009. As we progress through 2010, we expect to continue to innovate and update our service businesses, which extend our reach to our customers outside our stores and help them not only purchase products but install, maintain, and repair those products as well. Sears has a long tradition of building lifetime relationships with our customers, and the focus that we have on updating and improving our service businesses continues that tradition. Expect us to reinforce our services capabilities and presence in the pursuit of helping our customers manage and improve their lives.

In 2010, we also plan to continue to expand our online and multichannel capabilities as well as our ShopYourWay Rewards program in order to help us build digital and personalized customer relationships. We aim to give our customers vastly more convenience and choice in terms of 1) what they buy (through our online Marketplace and expanded assortments), 2) where they shop (online, in stores or on their mobile devices), 3) when they receive what they want (including the popular option of same-day buy online, pick up in store which is “ready in 5 minutes--guaranteed”), and 4) how they choose what to buy (through improved access to content and feedback from our product and service experts as well as other customers). We think online social networking and social media have only just begun to have an impact on shopping, and it is a revolution we intend to harness going forward.

Finally, we continue to develop our associates and leaders. We expect that Sears Holdings will become more widely recognized as a great place to begin one’s career as well as a company that develops great talent by providing them with a variety of challenges and opportunities. Opportunities to lead are widespread and numerous at Sears Holdings. The business unit structure that we put in place two years ago has created many more general management positions, and we will continue to break down our business units to create even more opportunities for our associates to demonstrate their leadership capabilities. At the same time, we expect our leaders to perform and deliver results. With the increased opportunities for responsibility comes more clearly defined accountability. Strong leaders will welcome this challenge, and it helps us identify better performers earlier in their careers.


Making Sense of Business and Policy

I just finished Thomas Sowell’s most recent book, Intellectuals and Society. For those not familiar with his writings, Thomas Sowell is one of the clearest and most insightful writers of our era. I look forward to every book and column he publishes. In this book, he discusses the “vision of the anointed” and how their views shape society regardless of their merit. He describes how often these views conflict with reality without altering these views and, paradoxically, sometimes strengthening them. I couldn’t help noticing the parallels between his comments and the “vision of the anointed” in the financial and business world over the past few years.

Business leaders, regulators, public officials, and journalists have become an echo chamber of self-support and self-congratulation, whether on TV, in print or at numerous conferences. Their words and their actions are often self-serving (whether right or wrong), and they are typically regarded and reported on as if they were obvious and selfless. They get repeated as if there were no alternative views or possibility of error in their thinking. Dominant narratives develop and get defended primarily by repetition and secondarily by attacks on those who disagree with those narratives. When these favored people and views become endorsed in laws and regulations, some may benefit, but many get harmed.

There are several examples of issues that have been smothered by dominant narratives. Accepting these narratives without critical evaluation can be a contributing factor to some of the negative unexpected consequences they produce. Did the seizure of Fannie Mae and Freddie Mac (the largest nationalization in our country and likely in history) calm or ignite fear in the financial markets and did those urging or supporting the seizure profit from it? Has raising minimum wage rates helped or harmed the individuals that those advocating such policy intended to help? Is there any link between a higher minimum wage and high unemployment? Has the consolidation in financial services helped or hurt depositors and borrowers? Why were some institutions saved and others seized, merged or left to fail? How does regulatory and policy uncertainty impact investment and risk-taking in society?

I fear that Americans have been provided a false choice between a little more and a lot more regulation and taxes. We keep hearing more ideas to create jobs and generate growth that almost exclusively require more government spending. Jobs can come from government, but those jobs get paid for by taking money from the private sector, reducing the private sector’s ability to provide jobs. On the other hand, there are many who believe that less regulation, less government interference, less arbitrary regulation when it does exist, and lower government spending will generate more growth and more jobs. I agree with those views.

As one of the largest private sector employers in the United States, Sears Holdings recognizes the challenges of finding good talent, developing good talent and keeping good talent. We have created not just new jobs, but new job categories and job descriptions as our industry changes and as new technology provides both new opportunities and new challenges.

Some contend that there is an inherent conflict between labor and capital, yet they fail to appreciate that without investment there will be no growth and no jobs. For there to be investment there needs to be an expectation of profit, and, for there to be an expectation of profit, there needs to be hope and belief in the future and confidence in the rules of the game.

The straw man frequently used to justify more regulation and to criticize free markets is to assert that the proponents of free markets blindly believe that they always work and that they always produce good results. Most free market advocates don’t actually make this claim, and they know that it is not true. Free markets respect individual rights and freedom, preserve choice and accountability, and produce superior results compared with non-free markets. When free markets experience problems and produce poor results, critics are fast to proclaim that things would have been better if only there was more, but better regulation. However, in most industries and societies where there is more regulation, there is typically lower growth, lower employment, and less innovation.

Self-regulation is a better idea and it is a better choice, whether for an individual or a corporation. Any corporation can choose to limit or make investments, increase or decrease compensation, and manage risk at different levels. Companies can compete by promoting their “safety and soundness” or by their “willingness to take risks.” Investors, customers, and workers can choose which companies and their associated behaviors and philosophies appeal to them. Let the media and politicians explain, compare, criticize, and contrast the various policies, so there will be little doubt that success or failure is determined by choice and not by ignorance. Then, make sure that government doesn’t reward failure and punish success by interfering with outcomes based upon political contributions, undue influence, or the personal beliefs of the policymakers.

Putting Americans to Work

I have written in the past about the need for pension funding relief. The simple and appropriate relief that I mentioned in my letter to shareholders last year has not been enacted. It has gotten bogged down in Washington. We have closed several stores and may choose to close more in the future, in part so that we can liquidate inventory and reduce losses to invest capital in our pension plan. There is nothing about the relief we are advocating that makes it less likely that we can meet our pension obligations. Rather, the ability to spread our payments into the plan over an additional two years would have allowed us to keep some of those marginally performing stores open and retain the jobs that they require.

Compare our situation to major financial firms and the deferrals they were granted practically overnight and with great subsidy to those firms. By allowing financial firms to issue FDIC guaranteed debt, the repayment of their short-term debt was effectively extended by up to three years. Despite this support, there was a significant reduction in jobs in the financial services industry and a significant reduction in lending and risk taking as well.

At Sears Holdings, amending and extending our short term debt in 2009 required significant fees and more onerous terms than our previous facility. Providing an extension in funding our pension plan for two years costs the government nothing (in fact Congressional Budget Office scoring shows it to be a significant revenue generator), requires no subsidy, and will not reduce the benefits paid to pension recipients. Furthermore, it allows companies to invest and increase - or at least maintain - employment rather than reduce investment in order to meet accelerated pension contributions brought about by both the reduction in asset values and the reduction in interest rates that has accompanied many of the liquidity policies that have benefited the very same financial institutions.

You would think that pension relief would have been quickly forthcoming and would have been completed a year ago. We are hopeful that reason will prevail and such relief will be forthcoming shortly. This is not about skirting responsibility for our pension plan (we have contributed more than $1 billion over the past 4 years). It is not about getting a single penny of subsidy from the government, and it is not about reducing a single penny of pension benefits that associates will receive. It is about creating the ability for us and others to focus on improving operations rather than closing operations.

Sears Holdings shares the stated goal of many public officials of creating jobs. But, we don’t believe that we need large government programs to generate these jobs. Public officials often fail to recognize the obstacles they place in the way of job creation. For example, over the past year proposal after proposal has been put forward to reform health care, reform the financial system, increase taxes, and add regulations, all with the intention of making the United States a better and stronger country. Yet, as a business, trying to understand which of these proposals might become law, what their impact might be on business prospects and competition, and what additional costs they might impose creates a great deal of uncertainty. It has led our management team and board (and I am sure those managements and boards of other companies) to spend inordinate time trying to determine which investments we should make, defer, or cancel and which jobs to create, maintain, or eliminate. The removal of this uncertainty and the constant drumbeat of new threats against various businesses would go a long way to allowing American entrepreneurial energy to be unleashed.

Our budget deficit has left many searching for ways to raise revenues through new taxes, rather than reducing spending and generating new revenues through growth and through the removal of the impediments to growth from existing regulations and threats of new regulations. Here are a few ideas, none original, that can contribute to reducing unemployment over the near term without additional government spending: reduce U.S. corporate tax rates (amongst the highest in the world), extend individual tax programs that are scheduled to expire or that are subject to debate (freeing up individual time and attention devoted to tax planning and strategies), deal with entitlements and don’t create additional ones (we can’t afford the ones we currently have), and stop providing selective benefits to individual companies or industries (it creates an uneven playing field).

Capital can quickly reorganize and provide financing for businesses and projects that create value for our society, without the heavy hand of government planning and policy. I disagree with most people calling for a gigantic overhaul of our financial system led by new and “improved” regulations. Instead, begin the process of allowing more competition in financial services and begin the removal of implicit and explicit government guarantees that provide the perception that some are “too big to fail.” While there are those that claim that their institutions are not too big to fail, they surely recognize the significant competitive advantages that come from this perception. Of course they will accept regulations as long as these regulations do not permit additional competition from entities and institutions that do not take insured deposits, do not have access to Federal Reserve funding, and do not have government guarantees associated with their debt offerings. Regulatory capture comes when there is little competition allowed outside regulated entities and a “freezing” of competitors and innovation in an industry.

We need innovation in our society, including financial innovation. Large institutions believe that they can innovate, create value, and create growth. But history has shown that regulations that provide a sense of certainty and stability by limiting risk, also lead to lower innovation, lower growth, and fewer jobs. Innovation is a messy process. Some efforts succeed, others fail. Those who desire to compete based upon limiting competition usually protest and criticize innovation (regardless of industry) and the companies and leaders leading that innovation. The intervention of regulators and politicians to slow down or prohibit new ideas and innovation, however well-intended it may be, inhibits growth, value, and job creation. and the E-Commerce Competitive Environment

Sears has a long legacy in serving customers beyond physical stores. In many respects, The Sears Catalog was the 20th century model for selling products through the mail. To be successful, Sears had to earn the trust of its customers who purchased products sight unseen and who had to feel confident that they would receive what they purchased and, if they were not satisfied, they would be able to get their money back. “Satisfaction Guaranteed or Your Money Back.”

The merger of Sears and Kmart in 2005 expanded the reach of each company, both in terms of physical stores and in terms of categories and customers served. With this increased reach comes the ability to serve more customers, more frequently -- in our stores and in their homes and businesses. In order to do so effectively, we have invested significantly in building our technology and customer experience capabilities, with the goal of making it easy for customers to do business with Sears Holdings anywhere, anytime, and in many ways.

We united our initiatives under the banner ShopYourWay and launched ShopYourWay Rewards in 2009 to further emphasize the value and capabilities we bring to our customers. We have been working intently to make it easy for customers to engage with us online through the numerous websites that we operate including,,,,,,, and It should be easy for a customer to access any of the myriad products, services, and information we make available online, regardless of which website they choose to begin their particular shopping mission.

The two leaders in online commerce are and eBay. Despite operating no physical stores of their own, these two companies have built tremendous businesses over the last decade serving millions of customers every day in a broad number of categories. They have taken significant market share from traditional retailers by providing convenience, service, and competitive prices. One has to give each of these companies tremendous credit for their foresight, persistence, and execution through the collapse of the internet bubble, early skepticism, and competition against larger and more established retailers.

There remains, however, one advantage that the major online retailers retain that is both unfair and problematic, for competition and for communities and jobs as well. For customers in many states, Amazon and other online retailers are not required to collect sales taxes on purchases made by their customers. Since the 1992 Quill Supreme Court decision, businesses without a local “nexus” have sold goods through the mail or online without being required to charge and collect the related sales or use tax. Amazon, in particular, has argued that when it doesn’t have a physical presence in a state or local jurisdiction, it is not benefiting from police, fire protection, and other local services and therefore shouldn’t be forced to pay for them. Analyses by others suggest that the real issue is competitive advantage, more than other explanations put forward in the past.1

The real story here is that it is not the payment of taxes or the charging of taxes that is at issue. It is the collection of taxes on behalf of local governments from purchasers of goods and services from stores in a locality or for use in such locality. It is the latter fact that is often ignored. A person who buys products from is required by law to pay sales or use tax to their local jurisdiction. In practice, almost nobody does so. The cost and unpopularity of enforcing such laws has allowed customers to avoid paying sales or use taxes, even though they are required in many states and localities. If you buy a work of art or piece of jewelry in NYC, for example, and have it shipped to New Jersey or California, the seller does not collect sales tax on that purchase but the buyer would be required to pay sales or use tax on the purchase where they receive the merchandise and use the merchandise. So, a piece of jewelry shipped to California would require the buyer to pay California sales or use tax.

Amazon’s domestic business has grown to $12.8 billion in revenues for the year just ended. If you were to apply a 6% sales tax to this revenue (reflecting a rough average of sales taxes across multiple jurisdictions), that would amount to almost $800 million in sales and use taxes owed to state and local governments that is likely not being paid. The good news is that it is $800 million that remains in the hands of the purchasers of products from Amazon, but at the cost of jobs and new fees and taxes required to make up for lost revenue. Having delayed a level playing field for as long as they have already, Amazon has been able to build relationships with many customers that give it an advantage, even playing under the same rules as those it competes against.

I would propose that there be a leveling of the playing field for e-commerce merchants. Either we all collect taxes or nobody collects taxes. If state and local governments are going to require retailers like Sears and Kmart to collect sales taxes and not retailers like, they should recognize that over time their sales tax base will erode significantly and that they place companies who have chosen to locate stores locally at a competitive disadvantage. This will lead to a loss of revenues, the closing of local businesses, the loss of tax revenue, and ultimately to the increase in other types of taxes to compensate for the lost jobs and revenues. Alaska, Delaware, Montana, New Hampshire, and Oregon are states that currently charge no sales tax at all. Let me be clear, we have no issue with continuing our current practice of collecting tax on behalf of state and local governments. We just don’t believe that the current set of rules is sustainable without severe competitive and community damage over time.


I look forward to seeing many of you on May 4, 2010, when we hold our annual shareholder meeting in Hoffman Estates. I hope to have updates on our progress and the numerous initiatives and opportunities that we are pursuing.

As always, I want to thank all of our associates and leaders for staying focused and dedicated through difficult times and pursuing excellence in their jobs and in delivering outstanding customer experiences. I want to thank our customers for their tremendous feedback, both good and bad, that helps us to get better every day and to serve you better in the future. And, finally, I want to thank all of our shareholders for continuing to support us with your investment in the company. I know you appreciate what we are trying to do to create long-term value in a deliberate and logical fashion, while remaining cognizant of the risks and challenges that we face.


Edward S. Lampert"

Source: Sears