Lemley Yarling Management Co
15624 Lemley Drive
Soldiers Grove, Wi 54655
Comments on activity in client accounts
8 March 2019
Last week we were smart; this week not so much. We decided to consolidate our holdings to three issues (and our Ascena speculation) which we have confidence holding no matter what the markets do. We want to remain with stock exposure but we also want to raise cash after the nice run we've had this year. Unfortunately, two of the three issues in which we are now invested dropped 10% this week and so the very short-term results of the strategy are negative but over the next few months we do believe we will be rewarded.
First- our sells. GE has been unkind to our fortunes (an understatement). And Stephen Tusa, the JP Morgan analyst who has been bearish and correct on this stock for the last year remains bearish- even with the $21 billion sale of part of the health division. The announcement that GE will be cash flow negative in 2019 was the final straw and we decided to move on.
We also realized that we ignored our comments of late January about only buying troubled stocks at year end and selling them before fourth quarter earnings announcements and to ignore them until the next December - only purchasing quality stocks suffering temporary pullbacks during the year. And so, when we reentered trades in Newell and Teva after profitably trading them from December to February we shouldn't have. We took our lumps and sold. For the same reason we traded out of Box for a scratch loss.
The oil rally has stalled and so we eliminated our oils for scratch profits. We also sold trading stocks Coke and Twitter for a scratch. Finally, Ford is unloved and unwanted by the poohbahs and gurus and we would rather concentrate the invested funds in CVS, Walgreen Boots and AT&T.
AT&T has a great yield, a desire to reduce debt, is reorganizing its Time Warner asset and dealing with losing customers at Direct TV. It is a survivor in the new economy with cash flow that will allow it to digest mistakes as well as improve performance. We view AT&T as a convertible bond holding with its 6.7% yield.
CVS, the largest drug store chain in the U.S. - (As of December 31, 2018, it had approximately 40 leased on-site pharmacies, 25 leased retail specialty pharmacy stores, 20 specialty mail order pharmacies, and 90 branches for infusion and enteral services; 9,900 retail locations and 1,100 MinuteClinic locations, as well as operated an online retail pharmacy Websites, LTC pharmacies, and onsite pharmacies. The company was formerly known as CVS Caremark Corporation and changed its name to CVS Health Corporation in September 2014. CVS Health Corporation was founded in 1963 and is headquartered in Woonsocket, Rhode Island.) -acquired Aetna health insurance for $80 billion (cash and shares of CVS) in November 2018. At that time CVS was priced at $80 per share. Today it is $53. The price is a 6-year lows on the shares during which time the company has grown earnings from $2 per share to $7 per share. Our thought is that as the Aetna shareholders exchanged their AET shares for CVS and a chunk of cash the arbitrageurs who had purchased Aetna began to unwind their CVS positions and their selling begat more selling pushing the share price lower. There were 290 million CVS shares issued to AET shareholders. Since CVS averages 12 million shares a day trading even only a quarter of those shareholders wanting to get out would exert significant downward pressure. And as Jim Cramer points our below, selling begets selling and last week the CEO suggested that earnings would be in the $6.75 range versus the $7.25 range due to consolidating of the two companies. analysts who were predicting the higher number lowered expectations and price targets and further selling resulted in the current price. At his level CVS is priced at $70 billion (excluding debt) which is less than what CVS paid for Aetna. With a 3.8% yield and priced at 8 times earnings we are content to endure temporary pain to use the sell off as a great buying opportunity to establish an oversize position in an excellent company that sold at $110 per share as recently as 2016 and was priced at $83 four months ago.
We have been profitably in and out of Walgreen Boots over the years, and the selloff from $86 in October to $70 in January encouraged us to reestablish holdings. Last Thursday WBA's Chief Financial Officer James Kehoe said at the Leerink Partners Global Health Care Conference... that since EPS growth guidance of 7% to 12% was provided: "I wouldn't say that reimbursement is higher, what I would say is the ability to mitigate it through winning more contracts, more volume and negotiating better, is there's less than we would have expected entering the year,". That gobbledygook is what set of the collapse of 15% in the share price this week as last Friday an analyst downgraded the shares and the subsequent 5 day sell off was exacerbated by other analysts jumping off the cliff in lemming like behavior. WBA is a great company and that has tripled earnings in the last five years. As with CVS we are using this collapse to oversize positions.
Markets are consolidating from their explosive run up in January and if we include our AT&T holdings, we have at least a 50% cash/AT&T position in most accounts. The present pullback may be the pullback that would have occurred with the completion of the China agreement. Brexit remains a problem as does the Trumpster melodrama but the Trumpster has been doing his thing for a while and the markets seem to be ignoring him. As long as there are no major conflicts in the world that require reasoned judgment, the daily Trumpster reality show seems to be a headline grabbing aside and not a major concern for market participants.
Come on Spring!!!
For CVS the Action Is Bad, the Stock Is Cheap
This is one where many shareholders can no longer take the pain and will sell at all costs.
By JIM CRAMER
Mar 05, 2019 | 11:26 AM EST
... Then there are more sellers who come in with the same motivation which is to beat still other sellers regardless of what's being done at the company. That's what is see happening at CVS Health (CVS) where the last word came from CEO Larry Merlo who took numbers down to below $7.00 for the year and made the stock a total pariah.
All we see now are sellers saying "get this off my sheets" without any recognition that at this level buyers would come in if you just give them a chance. It is not often that you get a high-quality company with a stock that is cut in half and a higher yield than I have ever seen this stock trade at.
People keep saying what a horrible mistake this one has been. I freely admit that we are wrong now. But CVS is not an old stock as some would say and it is not a candidate to be crushed by the Death Star, Amazon, even though many think BECAUSE OF THE ACTION it will be. The action is bad. The stock is cheap. The pressure on the holders is ridiculous. But I sense that this is one where many shareholders can no longer take the pain and will sell at all costs.
And Walgreen Boots also under pressure but cheap:
AT&T debt and dividend policy
1 March 2019
Markets consolidated during the week as did a few of our stocks. On Friday Walgreen's dropped 6% after the Chief Financial Officer James Kehoe said at the Leerink Partners Global Health Care Conference late Thursday that since EPS growth guidance of 7% to 12% was provided: "I wouldn't say that reimbursement is higher, what I would say is the ability to mitigate it through winning more contracts, more volume and negotiating better, is there's less than we would have expected entering the year," according to a transcript provided by FactSet. We added shares to a few accounts.
We also sold Kraft Heinz for a slight loss after purchasing it last week when it crashed on earnings. Over the weekend Warren Buffet, who owns 26% of the company said he wouldn't be buying more shares although he would hold his current position. We may revisit the shares at year end.
We sold Southwest Airlines and Hain Celestial for profits when both popped on Thursday on less than exciting – to us- news.
We eliminated Avon for our second small gain of the year. We want to concentrate on more substantial companies until next December.
On a 1 for 18 ratio shares of Wabtec were distributed by General Electric as a result of the merger of the locomotive sub with Wabtec. We sold the odd lots.
Box, https://finance.yahoo.com/quote/BOX/profile?p=BOX ) dropped 20% Thursday on less than revenues-they have no earnings 😊; and we added shares for an anchovy pop once the selling resolves.
We also added to our GE, Baker Hughes, CVS, Walgreens Boots and Twitter positions in various accounts.
Happily, an Appeals court upheld the decision allowing AT&T to buy Time Warner. The Justice Department cried 'uncle' and the merger is now complete.
Happy March, hopefully winter moves on.
Walgreens Boots Alliance — The pharmacy operator dropped more than 5 percent after an analyst at Baird slashed his price target on the stock to $67 per share from $70. "WBA is advancing many new initiatives (some supportable, some dubious), but can't change its market environment, which is universally tough," the analyst said.
GE sells division for $20 billion cash and offloading some pension liabilities.
CVS is cheap:
After the purchase of Aetna, CVS Health Corp CVS 2.29% is one of the absolute cheapest stocks, said Cramer. January 21 2019 - CVS $65
CVS even cheaper:
CVS Health Corp (NYSE: CVS) should be doing much better, said Cramer. He was disappointed with the report. February 26,2019 - CVS $58
On CNBC's "Mad Money Lightning Round", Jim Cramer said he wouldn't sell Twitter. He thinks there are just a couple of social media stocks that are working and he sees Twitter as inexpensive. He is a buyer of the stock.
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