Eddie Lampert founded ESL Investments in 1988 and has become a billionaire due to the fund’s strong performance; he has also become the chairman of Sears’s Board of Directors thanks to ESL’s large stake in the company. We have gone through the fund’s 13F for the quarter that ended in September and searched for major changes from last quarter that either show that Lampert and his team like or dislike a specific stock, or reflect more general changes in their investment thinking. Read on for our analysis of the investment activity disclosed on the 13F and compare Lampert’s positions to previous filings.
Netflix. Lampert took a dive into Netflix, Inc. (NASDAQ:NFLX), initiating a position of about 700,000 shares. Fellow billionaire Carl Icahn recently purchased a combination of shares and call options in Netflix that gives him the potential to control about 10% of the company (read more about Icahn's purchase); so far he hasn’t said much more than that he considers the stock undervalued. Others see the company as a potential takeover target. While Netflix continues to do well on the top line, expenses are up as it tries to expand internationally and as content providers begin to squeeze it on fees. Its market capitalization of $4.5 billion represents a very high multiple on trailing earnings, and analyst consensus is that earnings will actually decline at least in the near future. We don’t know what to think about the company and so we’d avoid the stock entirely.
Rebalancing retail. The fund made significant moves in three retailers: it sold some shares of The Gap Inc. (NYSE:GPS) and AutoZone, Inc. (NYSE:AZO) while more than doubling its stake in Big Lots, Inc. (NYSE:BIG). Gap, the apparel giant which also owns Old Navy and Banana Republic among other brands, has rocketed up 79% this year so it’s possible that Lampert wants to take some profits. The rise in the stock price has left Gap with a trailing P/E of 20, which means that the company has to see strong growth in the future to justify the stock price. Given how large Gap already is, we doubt that we could be convinced to go long. Autozone has been experiencing moderate growth, carries a trailing P/E of 16, and has a low beta of 0.3; we’re not sure why ESL sold shares here, as the company doesn’t look particularly overvalued. It might even be good to look at as a value opportunity. Big Lots is a smaller retailer, with a market cap of only $1.6 billion. Its multiples look good- 10 times trailing earnings and 9 times forward earnings estimates- though net income has been down recently and there’s considerably short interest. We’d like to see if the business can stabilize in coming quarters; if so, then it would clearly be a value stock.
Selling Capital One. ESL sold about a third of the shares of Capital One Financial Corp. (NYSE:COF) that it had owned at the end of June over the course of the third quarter. The credit card issuer is up 32% in the last year, as the industry in general has seen strong interest from investors. Capital One has been performing quite well- its earnings growth has actually gotten ahead of the stock, with net income 45% higher in the third quarter than a year earlier. It now trades at 10 times trailing earnings. John Paulson had reduced his own position during the second quarter of 2012 but had still owned over 4 million shares at the end of June. We think that it is a good value opportunity in the credit card industry.
We don’t get ESL’s moves on Netflix and Capital One. The credit card issuer looks like a buy, and Netflix just seems too unpredictable to have any position in. Its retail rebalancing, on the other hand, generally seems to us like it could be a better move: Big Lots has good potential as long as its earnings don’t continue declining, and Gap carries pretty heavy multiples. Autozone is a trickier question, as its pricing doesn’t look that bad, and we don’t think holders of the stock should necessarily be following Lampert in selling.