Barron\'s - 09.03.2020

M2 BARRON’S March9,2020

both times. “A round trip after witnessing

two of the biggest advances in a decade is

bearish,” writes Frank Cappelleri of No-

mura Instinet. “There’s no way around it.”

The data back him up. Since 1929, there

have been 121 one-day moves of 4.2% or

more, according to John Kolovos, chief

technical market strategist at Macro Risk

Advisors—and in those instances, the

chances of a positive return over the fol-

lowing 65 trading days were no better than

a coin flip. Half of the time, the S&P 500

fell with an average drop of 14.5%. The

other half, the S&P 500 gained an average

of 18.1%.

“When viewed within the context of a

postmarket crash or panic, the snapback

rally we’ve seen is par for the course and

unfortunately has yet to sound the all-

clear,” Kolovos writes.

It’s tempting to see a comeback in the

works. The economic data released this

past week were stellar. February’s Institute

for Supply Management services index hit

57.3, the highest in a year, while Friday’s

payrolls report showed 273,000 jobs being

added last month. Unfortunately, neither

reflects the damage, if any, done since coro-

navirus fears ratcheted up. “There’s no use

spending much time paying attention to

the economic data this week,” explains

Hank Smith, co-chief investment officer at

Haverford Trust. “It’s useless.”

In fact, we suspect that the coronavirus

isn’t done with the market. The Seattle

school system has shut down because of

the virus—and plans to have 23,000 stu-

dents learn from home—while companies

likeJPMorgan Chase(ticker: JPM) have

been testing to see what happens if employ-

ees work from home as they prepare for

the disease to spread.

As more tests are conducted, there is

likely to be a spike in the number of corona-

virus cases in the U.S. That’s apt to cause

another selloff, says Christopher Harvey,

head of equity strategy at Wells Fargo Secu-

rities, but also a buying opportunity. “The

headline reaction will be negative,” he

explains. “But you’ll ultimately be able to

take on more risk.”

Just not yet.

Seritage Looks Overvalued

Real estate was the ace in the hole in Ed-

die Lampert’s investment strategy for

Sears Holdings.So in 2015—a decade

after the hedge fund manager’s ESL In-

vestments took over the struggling retail

chain—Sears spun off its interests in

some 260 shopping mall properties into a

real estate investment trust calledSeri-

tage Growth Properties.

Before that year was out,Berkshire

HathawayCEO Warren Buffett used his

own money to buy a 7% stake in Seritage

(SRG) for about $35 a share. The stock hit

$57 the next year amid enthusiasm that

Seritage would replace the bargain rents

paid by Sears with market-rate tenants.

The real estate play looked like a winner to

Barron’sin early 2017.

But Sears was still Seritage’s main ten-

ant. When Sears Holdings (SHLDQ) filed

for bankruptcy protection in 2018, the

retailer still filled 70% of Seritage’s space.

Seritage stock now goes for about $31 a

share. That prices the enterprise at $3 bil-

lion and, by most measures, values Seritage

on a par with the better mall REITs. Look-

ing closely at Seritage’s recent results, it is

hard to understand why its stock deserves

that generosity. Seritage and Lampert de-

clined our requests for comment, while

Buffett didn’t respond to our query.

After Sears’ bankruptcy, the chain va-

cated over 200 Seritage properties. Its con-

tribution to the REIT’s rental income has

dropped to 5% of the total. Revenue at Ser-

itage in 2019 was $169 million, down

sharply from the 2016 level of $250 mil-

lion. Its net loss in 2019 was $64 million,

or 1.77 cents a share. REITs use an operat-

ing cash-flow measure called funds from

Vital Signs

Friday's Week's Week's Close Change %Chg.

DJ Industrials 25864.78 +455.42 +1.79

DJ Transportation 8956.06 -432.13 -4.60

DJ Utilities 901.70 +61.74 +7.35

DJ 65 Stocks 8503.09 +108.46 +1.29

DJ US Market 735.71 +2.68 +0.37

NYSE Comp. 12352.03 -28.93 -0.23

NYSE Amer Comp. 2149.77 -63.93 -2.89

S&P 500 2972.37 +18.15 +0.61

S&P MidCap 1797.79 -16.21 -0.89

S&P SmallCap 867.20 -17.58 -1.99

Nasdaq 8575.62 +8.25 +0.10

Value Line (arith.) 5615.30 -188.67 -3.25

Russell 2000 1449.22 -27.21 -1.84

DJ US TSM Float 30275.44 +71.72 +0.24

LastWeek WeekEarlier

NYSEAdvances 1,479 111

Declines 1,570 2,967

Unchanged 28 10

New Highs 99 160

New Lows 809 1,139

Av Daily Vol (mil) 6,019.7 6,372.8

Dollar(Finex spot index) 96.09 98.13

T-Bond(CBT nearby futures) 179-220 171-120

CrudeOil(NYM light sweet crude) 41.28 44.76

Inflation KR-CRB(Futures Price Index) 155.85 159.45

Gold(CMX nearby futures) 1670.80 1640.00

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March9,2020 BARRON’S M3

operations, or FFO, and that number sank

at Seritage from a positive $16 million in

2018 to a negative $34 million in 2019, or

minus 61 cents a share. It pays no divi-

dends on its common stock.

The red ink will be about as deep this

year, Wall Street says. One has to look to

2021 to find a positive forecast for Seritage

funds from operations. The sole analyst

polled by FactSet projects about $20 mil-

lion in FFO for next year, or 38 cents a

share, on revenue of $260 million. That

means today’s stock price for Seritage is 80

times next year’s forecast for FFO.

By way of comparison, the classiest of

the class-A mall operators,Simon Prop-

erty Group(SPG)—at its current stock

price of $119—trades for just nine times the

consensus forecast for 2021 funds from

operations.Macerich(MAC) trades for six

times. A well-regarded shopping center

REIT, such asRegency Centers(REG),

trades for 15 times next year’s FFO.

Malls are a forlorn sector these days,

but even in its unhappy class, Seritage

stands out for how many of its properties

stand vacant. The company’s annual re-

port makes painful reading, with a six-

page list of wholly owned properties stud-

ded with empty malls in towns like

Burnsville, Minn., and Lebanon, Pa. In all,

only 43% of Seritage’s 29 million square

feet of space was leased at the end of De-

cember. At Simon Property, 95% of retail

space was occupied.

A main theme in the Seritage strategy

has been the re-leasing of Sears locations to

new tenants, at rents several-fold higher.

But many retail tenants are struggling,

these days. In addition to the 6% of its rent

roll still paid by Sears and Kmart at year

end, Seritage’s top tenants included the

arcade chainDave & Buster’s Entertain-

ment(PLAY), theAt Home Group

(HOME) furnishings chain, and the cloth-

ing discounterBurlington Stores

(BURL)—totaling 18% of the REIT’s annual

rent and all causing angst in their own in-

vestors lately, amid faltering revenue.

Seritage’s other strategy is to redevelop

its retail space and parking lots as fitness

centers, restaurants, medical offices, or

multifamily dwellings. In recent visits with

investors, Seritage executives called atten-

tion to mixed-use projects near Seattle,

Dallas, and Chicago that will together cost

over $325 million in just the initial phase.

The REIT has good reason for staying

in touch with institutional investors. Seri-

tage has some remaining credit facilities,

but without operating cash flow, it will

have to fund its billions of dollars worth of

redevelopment ambitions by selling off

property and by selling stock. So share-

holders should brace for dilution.

Meanwhile, if you’ve got a clever use

for an empty Sears store, give Seritage a

call.—Bill Alpert

The Long and the Short

Here’s what else caught our attention this

past week:

Kroger(KR) gained 13% after reporting

better-than-expected earnings, but the

stock’s rise had as much to do with corona-

virus. After a rally like that, the stock may

have gotten ahead of itself.

Biden starred on Super Tuesday, but

health-insurer stocks were the real win-

ners.Humana(HUM), up 15%, was the

fourth-best stock in the S&P 500, while

UnitedHealth Group(UNH) gained 11%.

Don’t be surprised if the gains continue.

Carnival(CCL) tumbled 19% after one of

the cruise line’s ships was quarantined. The

stock is down 47% in 2020, but it might still

not be a buy. Analysts have started fretting

about its dividends, and we worry that

health concerns could keep customers away

long after the headlines fade.—B.L.

Industry Action

Performance of the Dow Jones U.S. Industrials, ranked by weekly percent change.*

Utilities 7.90%

Health Care 4.54

Telecommunications 4.53

Consumer Goods 3.23

Basic Materials 0.22

–0.22 Consumer Services

–0.58 Technology

–1.02 Industrials

–1.59 Financials

–7.79 Oil & Gas

For breakdown see page M36. Source: S&P Dow Jones Indices

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