As the world's third-richest person and most celebrated investor, Warren Buffett attracts a lot of attention. Thousands try to glean what they can from his thinking processes and track his investments.
We can't know for sure whether Buffett is about to buy Sears Holdings (NAS: SHLD) -- he hasn't specifically mentioned anything about it to me -- but we can discover whether it's the sort of stock that might interest him. Answering that question could also reveal whether it's a stock that should interest us. In this series, we do just that.
Writing in a recent 10-K, Buffett lays out the qualities he looks for in an investment. In addition to adequate size, proven management, and a reasonable valuation, he demands:
- Consistent earnings power
- Good returns on equity with limited or no debt
- Management in place
- Simple, non-techno-mumbo-jumbo businesses
Does Sears meet Buffett's standards?
1. Earnings power
Buffett is famous for betting on a sure thing. For that reason, he likes to see companies with demonstrated earnings stability.
Let's examine Sears' earnings and free cash flow history:
Source: S&P Capital IQ.
Sears' earnings have fallen off a cliff in the last couple of years. Although much of that is just the result of various accounting and restructuring charges, Sears' same-store-sales growth -- a key retail growth metric -- has been negative for many years.
2. Return on equity and debt
Return on equity is a great metric for measuring both management's effectiveness and the strength of a company's competitive advantage -- a classic Buffett consideration. When considering return on equity, it's important to make sure a company doesn't have an enormous debt burden, because that will skew your calculations and make the company look much more efficient than it is.
Sears' has generated negative returns on equity -- -42% over the past year, -7% on average over the past five years -- while employing a debt-to-equity ratio of 71%.
CEO Louis D'Ambrosio has only been at the job since 2011. Before that, he ran sales and marketing for Avaya and came to Avaya after a long career at IBM.
Home goods and specialty retail isn't especially susceptible to technological disruption, though Amazon is doing its best to change that.
The Foolish conclusion
So is Sears a Buffett Stock? No. Although it operates in a reasonably straightforward industry, it doesn't particularly exhibit the quintessential characteristics of a Buffett investment: consistent earnings, high returns on equity with limited debt, and tenured management. However, you can stay up to speed on Sears' progress by simply adding it to your stock watchlist. If you don't have one yet, you can create a watchlist of your favorite stocks by clicking here.
At the time this article was published Ilan Moscovitz doesn't own shares of any company mentioned. You can follow him on Twitter @TMFDada. Motley Fool newsletter services have recommended buying shares of Amazon.com. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.
Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.