Kmart Becomes Synonymous With Irrational Exuberance

Discussion
Sep 17, 2004
George Anderson

By George Anderson


As Yogi Berra said, “This is like déjà vu all over again.”


In the nineties, Alan Greenspan issued his famous warning about “irrational exuberance” in the marketplace and those following the rise of Kmart’s stock can’t help but wonder if the Fed chairman needs to issue another caution.


If you listen to some analysts, shares of Kmart are undervalued at yesterday’s closing price of $88.27. The reason for this, some say, is the retailer’s real estate holdings are of much greater value than reflected in the stock’s price. Others say the price should go higher because the retailer has so much cash on hand from cutting costs and selling off properties.


Earlier in the week, UBS analyst Gary Balter issued a new price target of $101 for Kmart’s stock. Mr. Balter did concede to the Detroit Free Press, however, “Kmart is the riskiest stock that we are currently recommending.”


David Sowerby, vice president and portfolio manager for Loomis Sayles & Co., believes Kmart’s current price is justified. “It’s not about whether this is a retail or real estate play, rather it is a cash flow story at a time when the market this year really is rewarding companies who generate strong cash flow.”


Howard Davidowitz, chairman of Davidowitz and Associates Inc., said investors should be clear on what Kmart is doing with its real estate sales, “You sell the good stuff, the easy stuff first. You don’t think Home Depot picked bad stores. That seals the fate of Kmart,” he said. “The company is liquidating, but very craftily with a brilliant investor … that’s all good. Here’s the problem: The bad stuff is still to come. There are too many moving pieces. I think this is very tricky. Investor beware.”


Moderator’s Comment: Do you see reason to be concerned about the rise if Kmart’s stock price? What is the chain’s future?


In his book, Irrational Exuberance, Robert J. Shiller wrote, “The ability to focus attention on important things is a defining characteristic of
intelligence.”


From our vantage point, there is precious little intelligence being demonstrated at the moment when it comes to Kmart.


You would think that Wal-Mart, the largest retailer in the world with real estate holdings of considerably more value than Kmart and with significantly
more economic clout, would sell at a premium to the Troy, Mich.-based chain.


You might think that, but if you did you’d be wrong. Wal-Mart’s closing price at the end of trading yesterday was $52.77, a full $35.50 less than Kmart.

George Anderson – Moderator

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