Blue Light Special

You are going to laugh at what I am about to say. You might even laugh out loud and think that I have lost my mind. But by the time you finish reading this, you will stop laughing, and you will buy a stock that you thought of only as a laughingstock, so to speak. You will thank me when you see me and marvel that some story in New York Magazine got you in on the ground floor—as you always hoped could happen—of the next Berkshire Hathaway.

But let’s get the laughter out of the way first, because I am not about to bury the punch line: This is a story about how I want you to buy Kmart—yes, the worst retailer extant in America. I don’t ask that you shop there first, although a little spadework of that sort might open your eyes to the possibilities. I don’t ask that you suspend all judgment: Yes, Wal-Mart’s a predatory competitor and Target’s a lot more fun to shop at than Kmart, and might always be. All I ask is that you consider that Kmart, the reconstituted stock of the once-bankrupt retailer, the third largest discounter in America, might be something bigger than a retailer.

For that I need you to think about Berkshire Hathaway. Did you ever wear a Berkshire Hathaway shirt? I did. Or I thought I did. Back in 1983, when I was starting out as a summer associate at Goldman Sachs, I bought Hathaway shirts at Marshalls, and thought I was buying a Berkshire Hathaway product (it turns out that the Hathaway shirt company is actually a separate concern from the Hathaway textile company that’s part of Berkshire Hathaway). Anyway, I owed so much money to college and law school that Hathaway’s blue button-downs with the no-iron cotton-poly combo were about all I could afford. Which is why it was so confusing to me that Leon Cooperman, then the chief strategist at Goldman, was trying to get everyone to buy the stock of Berkshire Hathaway, because some Nebraskan by the name of Warren Buffett was using the company’s stock to create a publicly traded empire that you could piggyback on. If I could afford this guy’s shirts (ahem), they had to be crummy, no?

I would joke about Buffett to my colleagues in the Swamp, the hot-as-hades dungeon where the interns toiled. Most of us had no idea what we wanted, save to get out of work early enough to get drunk and maybe get laid after picking up someone at an Upper East Side bar. But one of us—the youngest in our number, a guy fresh out of high school from the Island, some slick kid named Eddie—knew exactly what he wanted. He wanted to be the next Warren Buffett. He didn’t hit the bars with us; he worked all night. Perhaps it was because he wasn’t yet old enough to drink. Or perhaps he was on a mission.

“Kmart is making money, big money, even in quarters when it almost always lost a fortune.”

Sure enough, about a half-decade later, Eddie and I would leave Goldman Sachs and become competitors in the money-management game. I lost track of him only to see his picture next to mine in a 1989 cover story in Fortune: ARE THESE THE NEW WARREN BUFFETTS? By that point, he was Edward S. Lampert, no longer Eddie, and he had built a multi-hundred-million-dollar hedge fund based on the long-term principles of the Oracle of Omaha. He bought stakes in big, dumb, lumbering companies and hoped to reform them. (Me? My goal was to trade my way to $100 million instantly—a decidedly anti-Buffett prescription for the cure of wealth.)

Lampert’s tortoise strategy worked, big-time. By 2002, he was worth an estimated $800 million, although unless you read the Forbes 400 list, you probably wouldn’t have known about him. In fact, if it weren’t for some stupid kidnappers—Lampert was abducted in 2003 from a Greenwich parking garage, but he persuaded his captors to release him, agreeing to leave $40,000 in a Wendy’s garbage can (he never paid it)—you’d be even less likely to know about him.

If you want to be Warren Buffett, though, you can’t do it at a hedge fund. You need a publicly traded vehicle. Lampert has cash under management, and that’s a terrific asset, but what Buffet did was create a highly valued stock and use that as currency to buy lower-valued companies and turn them around. Which is why, when Kmart went belly-up, and everyone else gave up on it, Lampert bought all the Kmart bonds he could find and took the company out of bankruptcy in record time. Eddie knows that it doesn’t matter whether the core company in question is a (non)shirtmaker or a onetime textile manufacturer or a No. 3 retailer with a big K on its front door.

Still snickering? In a year’s time, Eddie has engineered a whopping turnaround. First, he fired just about everyone. How could you not? Kmart had to be the most mismanaged, poorly run institution ever to take up a strip mall. Too much debt. A philosophy that said “Keep those same-store sales up no matter what” to please Wall Street. This was a chain that was practically giving away expensive TVs because it hoped you’d buy a floor mop and some cheese balls on the way out. This was a chain that existed to show growth in sales even as the sales were at bigger and bigger losses.

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 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.

Blue Light Special