Post-Holiday Sale on Kmart Shares

What a difference a few months can make. The morning Kmart announced its $10+ billion dollar acquisition of Sears, its stock soared to nearly $120 per share. Since then, sellers have come in and arbitrageurs have opened short positions. In fact, more than 11 million KMRT shares were sold short in December, up from 8.9 million in November. The stock is down 7 points this year, to its current $92 price tag.

Investors who missed out on Kmart’s run from $15 to $120 are being given a second chance. Naysayers have been very vocal in dismissing the merger’s touted efficiencies and warning about integration risk as the retailers seek to transform their businesses as one cohesive unit, Sears Holdings.

Buyers of the stock in the low 90’s should be rewarded. Many of the shares sold short (21% of the float as of 12/8/04) will be bought back when the merger closes sometime around March of this year. Despite the claim that the combination will be little more than a larger version of a poorly run retailer, Chairman Eddie Lampert and Company will be able to improve operations meaningfully, just like they have done in the past with other retailers.

Also, don’t think real estate sales are over. There continues to be hundreds of millions of dollars in value embedded in Kmart/Sears land that will be harnessed. Post-holiday sales have brought shoppers many deals in recent days, and KMRT at $92 is a prime example of how investors can grab a great deal as well.

December Retail Sales Show Mixed Holiday Results

Today’s market was largely influenced by December same-store sales results released by America’s top retailers. While the holiday shopping season started off slowly, it appears that business overall wasn’t as bad as some thought earlier on. Thursday’s stock market action showed a clear divide between those that did well, and those that did not. Most retailers reported sales growth above consensus, but the stocks reacted violently in both directions.

As is always the case, Wall Street’s obsession with short-term results presented investors with many opportunities today, as retailers were among the day’s most active stocks. Ann Taylor (ANN) shares rallied after getting decimated late last year. Urban Outfitters (URBN) got hit after warning that 15 percent comp store sales gains could not be sustained (did anyone really think they could be?). Aeropostale (ARO) was one of the only teen retailers that did not do well, and a pair of analysts downgraded the shares based on a single lackluster month.

Most investors will sit tight, but they should really be stepping up to the plate. ARO trades at 13.5 times 2005 earnings with growth expected to be 20 percent. Makes no sense. URBN stock is reacting to less-than-expected momentum at existing stores, but their nationwide expansion plans are the reason to own the stock. I added to my position in the latter and initiated one in the former. Volatility like we saw today should make opportunistic investors salivate.