Sometimes it’s never too late to sell a stock
One of the great axioms about investing is that all companies have problems occasionally: but that represents a time to buy its stock. As Chance the Gardner said in Being There-
“As long as the roots are not severed, all is well. And all will be well in the garden.”
What occasioned this memo is the sad state of Sears, which announced that it might not be a going concern. The chart below shows Sears price over the last ten years.
Almost any time would have been a good time to sell or even sell short if you had a longer-term time horizon. It takes a long time for a big company to go bankrupt and it takes even longer these days since there are more sources of money to prop up zombie companies.
Sears’ roots were severed. If you looked solely at return on equity you would have been all over this thing like a blanket. If, however you dug a bit you would see debt steadily rising and return on invested capital plunging. The roots of business success are allocating capital effectively and maintaining a healthy return on invested capital. Sears was the Amazon of its time and it might be that Amazon will be the Sears of its time.
Sears was largely killed by two factors, the change in the middle class and legacy. The middle class consumed for decades and that was okay because the lower classes were saving and moving to the middle class where they could consume more. Then the lower classes stopped saving. Deferred gratification was passé. The availability of debt borrowed consumption from the future and when the middle class began to shrink Sears was in trouble.
They could have changed but for legacy. They owned the market. They had the muscle and the reach to redefine retailing. Why didn’t they? Sears went from zero stores in 1910 to over 5000. Those stores required systems, people, buildings and logistics and they cost money. Legacy infrastructure makes management believe they are in a castle and their walls will stop the barbarians. So, management gets lazy.
When the roots are severed, all is not well in the garden and it won’t get better.