Sears Holdings and First PacTrust Bancorp

Dear Mr. Berko:

In June 2010, a good friend of ours went to work for Sears Holdings Corp. It was trading at $62 at the time, and he told us he had bought 300 shares. He had an important position in the company's home office and encouraged us to buy the stock, saying we couldn't lose. We watched the stock for about five months as the price ran up and up, and we finally bought about $5,000 worth (53 shares at $91). It's now fallen all the way down to $50. We don't talk to this ex-friend anymore, but we would like to know whether we should hold our stock or we should sell it. The other stock we own is First PacTrust Bancorp. I got 150 shares when my father died two years ago. It pays us a little bit of money in dividends every year. My wife, who believes Sears will come back, wants me to sell this stock to purchase more Sears stock at $44. Would that be good to do?

TR, Moline, Ill.

Dear TR:

If you take your wife's advice, two things are likely to happen. Your father may turn over in his grave, and your current wife could end up being your ex-wife. How close is she to your ex-friend?

Sears Holdings (SHLD-$44) - which includes about 794 Sears stores in the U.S., some 1,200 Kmart stores, 54 specialty stores and 475 Sears stores in Canada - has been a struggling retailer for years. Frankly, I think Edward "Big Eddie" Lampert and his compadres must have been drunk to the rafters when they merged Sears, Roebuck & Co. with Kmart Holding Corp. in early 2005. And I suspect that the guys at Morgan Stanley who made millions in fees putting two losers together chuckled all the way to the bank.

Revenues have declined each year since the merger ($53 billion to $36 billion this year). The book value has imploded by 70 percent, and the number of retail units has been reduced from 3,700 to less than 2,000. Management has been trying to shrink its way to profitability; however, most analysts doubt that SHLD has the moxie to turn itself around. Lands' End, Kenmore, Craftsman, DieHard and Sears Canada could be attractive acquisitions if Big Eddie decides to raise some cash. Still, Sears and Kmart are your grandfather's stores and lack the character, the feel, the vibrations and the spirit that attract today's generation of shoppers.

SHLD's management can't compete with Home Depot, Target, Wal-Mart, Best Buy, Lowe's, H.H. Gregg, Gap, T.J. Maxx, Dick's Sporting Goods, Men's Wearhouse or the big online retailers. SHLD is "Leave It to Beaver," the rotary telephone, the sock hop and drive-in movies. It has lost billions in the past few years, and the consensus is that it will continue losing money for the foreseeable future. And as an acquaintance of mine in Arkansas likes to say, "it don't do no good to put perfume on a hog."

Don't sell First PacTrust Bancorp (BANC-$13.21) to buy more shares of SHLD. Rather, I suggest that you sell SHLD and buy additional shares of BANC. BANC is a small, nifty and profitable $88 million-revenue bank with 19 branches in Southern California and 24 single-family loan production offices in Arizona, Oregon and Washington. Two acquisitions last year increased revenues from $35 million to $88 million in 2012 and produced earnings of 45 cents a share. This year, BANC should earn 90 cents a share, and with another acquisition expected late this year, management reckons 2014 revenues can grow to $105 million and post earnings between $1.40 and $1.50. And BANC's 48-cent dividend, which yields 3.8 percent, is quite likely to be increased to 52 cents this year. There are just 12 million shares outstanding. And I was not surprised to learn that Vanguard, BlackRock, Northern Trust, Lord Abbett and Munder own sizable positions. Each acquired its position at less than BANC's $13.21 book value. There are seven analysts who follow the stock, and one of them with whom I spoke believes the shares will trade in the high teens during the coming dozen months. This makes a lot more sense than SHLD.


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Published: Wed, Jul 10, 2013