market folly

Eddie Lampert's hedge fund ESL Partners just filed an amended 13D with the SEC regarding its position in AutoZone (AZO). After owning almost 5 million shares in January, Lampert now owns 2.4 million shares.

The hedge fund manager executed numerous open market sales of AZO shares at the beginning of April at prices ranging from $378-$385, with the bulk of them coming in the middle of the range.

Earlier in the year, Lampert cut his stake in AutoZone and distributed almost a billion dollars worth of AZO shares to investors. Additionally, he used some AZO shares as payment in kind to meet year-end redemptions.

In December of 2010, ESL Partners owned over 33% of the company. In the latest filing, they own only 6.1%. Lampert recently made a rare television appearance and talked about the markets and his positions in retailers.


Covered Call Sales

Lampert also sold 1,904 covered call options (representing an aggregate of 190,400 shares). These calls have exercise prices of $350, $360, and $370. The expiration dates include June 16th, 2012 and September 22nd, 2012. In aggregate, Lampert netted $5,011,110 from the call option sales. The vast majority of the calls sold were the June $360 strike.

It appears as though Lampert is hedging his position a little bit. AZO shares have been on quite a run, from $280 up to $376 over the past year.


AutoZone Thesis

AutoZone is a specialty retailer that sells automotive parts and accessories. The investment thesis on AutoZone is largely predicated on two factors. First, bulls point to the fact that more and more cars are aging each year and are in need of more parts/repair.

Second, while many traditional retailers face heat from internet-based competition offering lower prices, bulls argue that car parts are something that you "need now" if a car is broken. Not to mention, those less familiar with the mechanical aspects of vehicles seek professional advice/help from AZO staff. Lampert has been selling shares, but AZO has been on quite a run.

ESL had returned 25% annually in its first 14 years. In 2007 it was down 27% and in 2008 it was down 33%. In 2009, the fund rebounded, up 55% that year and up 16% in 2010.

For more on this manager, head to lessons Lampert's learned as an investor.