Anticipation

Recent Lampert Article Gives Insight Into Activity

May-19-2008

A recent article by Sears Holdings (SHLD) Chairman Eddie Lampert gives some insight into recent buying activity. The article, entitled "The Best Advice I Ever Got" said:

"Almost every weekend when I was 7, 8, 9, 10 years old, my father and I would toss a football in the yard or play basketball in the driveway. When we played football, he'd say, "Go out ten steps. Turn to your right." The ball would reach me just before I turned, and it would hit me right in the chest. Why would my dad do this? He told me, "If I waited for you to turn, you and the defensive player would have an equal chance to get the ball. Your opportunity is gone."

This idea of anticipation is key to investing and to business generally. You can't wait for an opportunity to become obvious. You have to think, "Here's what other people and companies have done under certain circumstances. Now, under these new circumstances, how is this management likely to behave?" The plays my father designed for me helped me learn to think ahead. Lots of days I asked him, "Why can't we just invite kids over and play a game?" In order to do something well, he explained, you have to keep practicing and preparing."

My guess is that when one looks at Lampert's recent buying spree in shares of AutoNation (AN), the above statements are the genesis. For instance, Lampert has held shares in the company since the turn of the century and is extremely familiar with it and its machinations.

That being said, while other investors are fleeing the retail auto sector Lampert has been buying about a million shares every other week for the past few months. Why?

Perhaps he sees that CEO Mike Jackson has expanded the retailer's dealership pipeline with Mercedes and BMW (BMW) dealerships, more resistant to economic downturns and much more profitable in good times than your run of the mill Ford (F) or GM (GM) one.

Perhaps he sees, that looking ahead leases on vehicles still expire requiring the leasee to either lease or buy another one and that the current stock price reflects the poor environment now, but now the upcoming surge in activity down the road?

Perhaps he knows that while credit is tight now, all that does is to suppress demand, not eliminate it. He knows the demand (desire) for a new vehicle does not "go away". The desire to get rid of an old car for a new one stays and when credit does loosen a bit, the spigot will open and the pent-up demand becomes a flood of buyers.

Also, he knows CEO Jackson manages the business for the long term. During the sluggish auto environment in 2001, many dealers responded to deteriorating demand by offering 0% loans which after even small credit losses meant the loan portfolios eventually lost money. Jackson said at the time he did not see the reasoning for "losing money on loans just to move metal". Shares tripled from then levels.

It is clear that Warren Buffett from Berkshire (BRK.a) sees it as he has purchased shares of CarMax (KMX) another auto retailer. The boys over at Leucadia (LUK) also see it with their 30% investment in auto finance company AmeriCredit (ACF) along with Bruce Berkowitz and Bill Miller who have also taken stakes in ACF.

Disclosure ("none" means no position): Long SHLD