Retailers have taken a beating recently with weak consumer spending amid tough competition. Many names like Target Corporation (NYSE: TGT) and Sears Holding Corporation (NYSE: SHLD) are generating substantial losses for otherwise great investors. So, are these simply bad apples in their portfolios or should we expect to see a turnaround in the retail sector over the next few years.

Target has quickly become one of the most compelling stories on Wall Street today. The retailer saw its stock drop nearly half from it’s 52-week high of $70 per share. Billionaire William Ackman felt this drop in his own portfolio of leveraged Target stock. The activist investor, known for his 20%+ annual returns, took a huge hit on the stock (but was still able to return a rumored 23% last year). However, the activist hasn’t been selling. In fact, he recently increased his economic ownership to over 10% and is considering a new fund exclusively to invest in Target.

Bill Ackman believes that Target stock is worth $120 a share over the next three years. The value – in his eyes – is hidden within the company’s real estate and consumer credit divisions – both hindered by the current crisis. He argued that the company should complete a previously announced $10 billion share buyback, sell its $8 billion in credit card loans, and extract cash through its sizable real estate holdings. In fact, the activist estimates Target’s real estate worth as $42 billion – the same as its market cap!

Eddie Lampert is another well-known activist investor that took a large position in Sears before the consumer credit and subprime crisis hit the street. Like Ackman, Lampert saw his Sears investment nearly cut in half and there is no indication that the pain is over. However, this situation is a little different in that Lampert is actually CEO of Sears. The activist took over after pushing for the merger with Kmart that pushed shares above the $100 level for the first time.

Initially, Lampert planned to milk the retailers’ cash flows in order to fund other investments – similar to the his idol did with Berkshire Hathaway in the early days. However, plans are now changing as the retailer has failed to produce rising same-store sales for several months. Now, the plan may be to leverage its portfolio of valuable brands and real estate and break up the company to unlock value. Many argue that a spin-off of Kenmore or Craftsman could generate extra cash that could be used to fund more profitable acquisitions. Meanwhile, real estate assets could also be leveraged but this may not be the best time to do it.

In the end, these are two of Wall Street’s best investors that have found themselves stuck in losing stocks. The lesson is that intrinsic value is not always equal to market value; the market can undervalue a company long enough for its intrinsic value to fall. Declining consumer spending, consumer credit and real estate prices may put a wrench in these strategies. However, both are interesting stocks that are worth watching in case the activists are able to successfully effect change!

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Wal-Mart Stores, Inc. (WMT)
Costco Wholesale Corporation (COST)
Dollar Tree Stores, Inc. (DLTR)