Edward Lampert’s ESL Investments enjoyed a strong first quarter of 2015, with our weighted returns methodology predicting 6% returns based on its five qualifying long positions at the end of 2014. The top three in particular are the most noteworthy, as they make up more than 80% of Lampert’s equity portfolio, and thus contributed largely to his solid returns during a quarter in which the S&P 500 returned just 0.9%. Those three positions have also been the standard bearers of his portfolio dating back to the middle of 2014, and are Sears Holdings Corp (NASDAQ:SHLD), AutoNation, Inc. (NYSE:AN), and Lands’ End, Inc. (NASDAQ:LE).
Lampert’s top picks are notable to us given the fact that two of the three are in small-cap stocks. It’s investors like him who add great value to our small-cap strategy system, as they are heavily invested in the success of their small-cap picks and have poured considerable resources into identifying undervalued or under-the-radar companies to invest in. We have found that collectively, hedge funds’ top small-cap picks provide a great investment opportunity, with our strategy having returned over 134% since it was launched at the end of August, 2012 (see the details).
Lampert is undoubtedly most well-known for his investment and involvement in the running of his top pick, Sears Holdings Corp (NASDAQ:SHLD). Lampert now runs the fabled but long-suffering retailer as its chairman and CEO, and is the second-largest shareholder with 26.44 million shares valued at $871.93 million at the end of 2014 according to his latest 13F filing, the position accounting for nearly 40% of his equity portfolio. Sears’ shares had a massive first quarter, increasing by 25.47%, which also greatly benefited Bruce Berkowitz of Fairholme Capital Management, the largest shareholder among funds we track with 26.55 million shares. Berkowitz is obviously a believer in what Lampert is doing, as he has increased his stake in Sears slightly in each of the past four quarters.
In addition to slashing corporate jobs and closing stores in an effort to help reduce costs and streamline operations, Lampert also loaned $400 million from his fund to three Sears Holdings Corp (NASDAQ:SHLD) subsidiaries last year, in an effort to provide the retailer with some much-needed liquidity to make moves. Lampert also fashioned the spinoff of Lands’ End, Inc. (NASDAQ:LE) from Sears into a separate public company (and now his third-largest investment) last year, completing the move in the second quarter of 2014.
AutoNation, Inc. (NYSE:AN) is Lampert’s second pick, the position of 8.74 million shares being valued at $527.69 million at the end of 2014, 23.86% of the total value of his equity portfolio. Lampert has been the largest shareholder of the auto retailer among the funds in our database dating all the way back to the beginning of our records in late 2010. He owned 62.23 million shares at that time, which have since been trimmed significantly to current levels. Despite that, it occupies a larger position in his portfolio than it did more than four years ago, as AutoNation, Inc. (NYSE:AN)’s shares have spiked more than 125%, and the overall value of Lampert’s equity portfolio has greatly decreased to just over $2.2 billion now from over $9 billion then. AutoNation has continued its strong, steady run into 2015, gaining 6.49% during the first quarter, benefiting another of its long-time shareholders, Murray Stahl’s Horizon Asset Management, which has been the second-largest shareholder of the company in our database from the beginning until today.
With Sears returning more than 25% and AutoNation 6.5%, and those two stocks accounting for more than 70% of Lampert’s portfolio, the fact that his portfolio was only up by 6% overall tells the story of the returns his final top pick (hint: they weren’t good). Shares of Lands’ End, Inc. (NASDAQ:LE) were squashed during the first quarter, tumbling by 33.51%. The bulk of that dive came after the clothing retailer scaled back its guidance for the fourth quarter of 2014 in January, announcing revenue and earnings that would fall well short of Wall Street’s expectations. The shuttering of its outlets inside of Sears’ stores as part of the separation between the two was a large part of the company’s sales woes, which were expected to decline by 16% to 18% at brick-and-mortar retail locations. Murray Stahl was also an unfortunate shareholder of Lands’ End, Inc. (NASDAQ:LE), and also the second-largest after Lampert, though with a far less significant stake than Lampert, who owns 7.95 million shares which were valued at $429.12 million at the end of 2014; ‘were’ being the optimal word.
Disclosure: None
