With hundreds of investment firms employing thousands of equity research analysts, you would think Wall Street would be paying a little more attention to Kmart (KMRT). How many analysts do you think cover the company? I bet very few people would say only one, but they’d be right. What sets UBS retail analyst Gary Balter apart, even moreso than his lack of fellow Kmart followers, is his track record.
Balter initiated coverage of Kmart with a “buy” rating on April 4, 2004. Back then, investors thought he was crazy. After emerging from bankruptcy, KMRT shares rose from $15 to $41 before Balter recommended them to investors. Baffled by such a move, given Kmart’s horrible track record as a money-losing retailer, people ignored Balter’s advice and many shorted the stock. That was a decision many would live to regret.
Balter was one of the few who realized that not only did Kmart rid itself of its massive debt load after its reorganization, but that its real estate was a hidden crown jewel. As the company began to sell off some valuable stores to the likes of Home Depot and Sears, investors began to realize that Kmart had potential for a monumental turnaround. Short sellers were forced to cover their positions, and investors who listened to Gary Balter and bought the stock in the low 40’s saw it soar to $109 per share by November of last year.
At that point, Balter pulled his buy rating on Kmart, reducing shares to “neutral” after the stock had jumped more than 150% since his initial recommendation and announced plans to acquire Sears. Concerns over merger integration and short selling by arbitrageurs proved the UBS downgrade to be very timely. The stock, after hitting nearly $120 when the merger was announced, fell to as low as $86 within several weeks.
In early January, I wrote a piece alerting readers that KMRT (then at $92 per share) was a smart buy amid the merger-related concerns. Once the deal closed in late March, shorts would be forced to cover and more value in the Kmart/Sears combination could be realized. Since then, the stock has risen to $112, with the deal expected to close within weeks. Tonight, sensing the deal will prove to be a success, Gary Balter is once again slapping a “buy” rating on Kmart stock, raising his price target to $160 per share. The stock is trading up $7 in after-hours trading as a result.
Investors can choose to continue to voice skepticism about the Kmart/Sears combination, but betting against Balter at this point seems risky. Eddie Lampert, the chairman and majority shareholder of the combined company, has a great track record in retail and should be able to improve operations and sell off more real estate to unlock value for all KMRT shareholders, himself included.
Below is a 1-year chart of KMRT stock. Balter’s initial recommendation, subsequent downgrade, and latest upgrade are labeled A, B, and C.