The Bottom Line

Blue Light Special

Second, he brought in the team from the Gap that had created and sourced clothing at rock-bottom prices, and told them to reinvent Kmart as a youthful store. Last week’s deal to furnish WB’s teen lineup stars with clothes was the first sign of the change.

Third, he took stock of Kmart’s only good inventory, its real estate, and began the process of selling off the properties for big gains—sheltered, of course, by some of the largest net operating losses ever racked up by one company.

Finally, he decided to run the business for Main Street, not Wall Street, selling much less but always selling at a profit.

The result? Eddie’s Kmart is making money, big money, even in quarters when it almost always lost a fortune, like the first quarter that just got announced (net income: $93 million). Maybe it was ex-hedge-fund-manager jealousy, but I didn’t believe in Eddie’s Kmart turnaround at first. I said on my television show, Kudlow & Cramer that the turn wasn’t sustainable, that Eddie would cut and run like a good hedge-fund manager now that he’d managed to get some liquidity in the form of a common stock he could dump.

But then Eddie took to hounding me for not doing enough homework, and once I looked deeper, I saw what I see now.

I know what you’re thinking. Hasn’t Kmart already moved too much (it’s up more than 250 percent, from about $15 to about $51, in the past year)? Isn’t this Cramer just helping an old pal or, worse, talking his book? To which I say two things: (1) I have so many trading restrictions, courtesy of the jihad against guys who put their money where their mouth is, that I will have to own Kmart for years, and (2) I intend to buy enough Kmart going forward that my current stake will seem like a pittance. Still skeptical? Keep in mind that Kmart holdings has practically no debt and $22 in cash per share plus real estate conservatively valued north of $30 a share by independent retail analyst Gary Balter from UBS, another ex-Goldman alumnus who sees what I see.

Warren Buffett took a dowdy textile company and used the cash flow from it to buy other businesses outright and shares in publicly traded companies he thought were undervalued. He ended up with a wildly successful portfolio of stakes in both public and private companies. Given Kmart’s huge net operating losses and the gigantic gains that can be had by selling and leasing Kmart’s real estate, Lampert has stumbled onto his own Berkshire Hathaway holding company that he can use to house a similar portfolio, and I believe that’s exactly what he’s going to do. You are not buying shares in a third-rate discounter. You are buying the future holding company of a future Warren Buffett. Still laughing?

James J. Cramer is co-founder of TheStreet.com. At the time of publication, he owned stock in Kmart. He often buys and sells securities that are the subject of his columns and articles, both before and after they are published, and the positions he takes may change at any time.