Why Ed Lampert Sells His AutoNation Stock

Not long ago, Edward Lampert was crowned as the next Warren Buffet by Wall Street analysts, Business Week and other financial publications, in no small part because of his investment in auto-related companies, including dealerships.

But today, while Buffet is investing millions of dollars in acquiring major car dealerships, Lampert is dramatically reducing his holdings in AutoNation, the biggest dealer chain in the country.

He previously sold all shares of parts retailer AutoZone, including those owned by his hedge fund, ESL Investments, ESL Partners and other ventures he manages and controls.

His most recent sale in June of 1,488,523 shares of AutoNation stock at an average price of $63.20 each amounted to $94 million while a sale just two years ago generated $393 million.

That’s a return on investment of 416% from the $12.26 paid for the stock originally. Lampert’s stake in AutoNation now is just 17% (19 million shares), down from a high of 55% two years ago.

As big as this investment was, the billionaire investor made even more money for his hedge fund with an investment in the AutoZone chain. Three years ago Lampert sold 4.5 million shares of AutoZone stock for the staggering amount of $1.5 billion for a remarkable profit of $750 million on the original investment. 

Investors in Lampert’s hedge funds, who are among the nation’s top “one percenters,” know why these sales have been made: Lampert needed to cut his celebrity investors’ losses elsewhere. But even a novice investor has to ask: “What’s behind these sales?”

The answer is a bit complicated. Lampert’s not so astute investments include Sears, once a major retail department store chain that continues to lose market share and customers.

Fast Eddie, as some detractors have called Lampert, bought Sears through a convoluted venture involving Kmart, which Lampert bought after the once-dominant discount retailer declared bankruptcy. 

Originally this investment looked good. It appealed to the big-bucks investors who relied on Lampert’s business acumen and previous successes.

Unfortunately Sears, once the nation’s largest department store chain, was and is in a downward spiral. The company is bleeding money. All efforts to staunch the flow have not worked.

The hundreds of millions of dollars generated by sales of AutoNation and AutoZone have been necessary to mollify Lampert’s client investors in his hedge fund and partnerships. They stood to lose their millions. He had to make good on their investment and prove he still had his financial mojo. 

A WardsAuto column I wrote in 2008 hypothesized that the combination of the automobile service businesses of AutoNation, AutoZone, Sears (with its automotive service centers) would create an automotive sales, parts and service behemoth.

This was not a joke. Using AutoNation’s current operating results, as reported in the company’s 2014 Annual Report, substantiates a major business opportunity: Parts and service generated just 15% of AutoNation’s annual business but accounted for 45% of the profits.

Rather than losing vast sums of money in his quest for Sear’s profitability, much more could probably been made in automotive service and repair. 

The past is prologue. Lampert reduced his AutoNation holdings at a time when the dealership group is on a roll, spurred on by CEO Mike Jackson. The company has nearly 300 stores in 15 states. It is aggressively branding itself. It has trend-setting plans for the future.

Among them: a $100 million investment in a digital storefront for consumers to purchase new vehicles with AutoNation Express. It is an Internet process that allows online consumers to schedule a test drive for a specific model at a specific price. It also reduces paperwork.     

To announce and commemorate the sale of its 10 millionth vehicle, AutoNation has mounted a major national multi-media advertising campaign.

About a dozen years ago, Lampert, then in his 40s and reported to be one of 300 richest men in the nations, was the victim of a bizarre kidnapping from his office in Greenwich, CT.

He was held captive in a cheap motel room by four men, one of whom said they’d been paid $3 million by AutoZone to murder him because Lampert had aggressively purchased its stock and wanted changes made to the company including replacing the CEO.

Lampert is said to have offered his kidnappers $5 million if they let him go. The FBI and the U.S. Attorney in New Haven, CT doubted the AutoZone aspect of this tale, but four men were arrested and convicted of the kidnapping.

So even though Lampert may seem like he’s in a jam now, he’s been in worse situations before.