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Lemley Yarling Management Co
15624 Lemley Drive
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Comments on activity in client accounts

31 August 2018

We decided to reduce our positions in GE and Ford this week. As we sometimes do, we overloaded on these two issues with the conviction that we were correct and the markets were wrong. We do believe that in the long run we will be correct in owning them; but with the autumn correction season arriving and the uncertainty in Washington we feel the need to have more cash in accounts and these two issues were the obvious place to find the funds. We are maintaining normal holdings in both.

Abercrombie reported good numbers this week; Chico's numbers were so so; and Michael's Stores disappointed but raised full year numbers yet dropped. We have had good results trading all three this year and we purchased all as they dropped on their respective news.

Happy Labor Day.

*****

Abercrombie:

https://www.thestreet.com/investing/stocks/abercrombie-fitch-ceo-why-we-are-excited-about-the-holiday-season-14698057?puc=yahoo&cm_ven=YAHOO&yptr=yahoo

https://finance.yahoo.com/news/abercrombie-fitch-misses-same-store-114655736.html

****

Chico's:

https://finance.yahoo.com/news/edited-transcript-chs-earnings-conference-180047504.html

Michaels Stores:

https://finance.yahoo.com/news/why-michaels-companies-inc-apos-211500245.html

Eddie Lampert continues his destruction of Sears while lining his own pockets. There ought to be a law.

https://www.nytimes.com/2018/08/28/business/sears-seritage-edward-lampert.html

*****

24 August 2018

During the week we had a nice trade in Marathon Oil and a too soon repurchase in LB Brands. The purchase did entitle us to the 60 cent quarterly dividend and the yield at our initial purchase price was over 7%. When the shares dropped on better than revenues and earnings but a disappointing forecast we purchased half as much as we had the day before and the yield on that purchase was 8%. Obviously the gurus think that LB will cut its dividend since the forecast predicted earnings of $2.40 which is the dividend rate. But Chairman Wexner owns a ton of stock and even paid a $2 extra in 2016. Even if the dividend is cut by 40% that still is a yield of 5%. $2.40 earnings would be disappointing but these will be trough earnings and prices the shares at 12X.

We are 50% cash in many counts except the smaller ones.

*****

LB Brands (Victoria's Secrets, Pink, Bath & Body Works):

https://finance.yahoo.com/news/why-investors-wait-buy-l-133947259.html

and

https://marketrealist.com/2018/08/strength-in-the-beauty-business-drives-l-brands-2q-top-line

Cramer opinions sometimes need to be taken with a bit of salt:

Stock price at $20

https://www.thestreet.com/video/14139627/jim-cramer-urban-outfitters-threw-in-the-towel.html

Stock price at $45

https://www.cnbc.com/2017/08/16/cramer-finds-3-businesses-that-can-win-in-this-new-retail-environment.html

WDC

https://finance.yahoo.com/news/why-western-digital-shareholders-nothing-100400747.html

Remember the prices on 1999:

By 1999, Broadcast.com had grown to 330 employees and $13.5 million in revenue for the second quarter.[32] In 1999, Broadcast.com helped launch the first live-streamed Victoria's Secret Fashion Show.[33] That year, during the dot com boom, Broadcast.com was acquired by Yahoo! for $5.7 billion in Yahoo! stock.[34]

https://en.wikipedia.org/wiki/Mark_Cuban

For ordinary folks it's called buying on margin.

Chicago tried to lower its pension deficit with budget cuts, benefit reductions and tax increases. Now the third-largest U.S. city is considering a controversial new fix: more debt.

Finance Chief Carole Brown said she would decide in the next week whether to endorse a $10 billion taxable bond offering that would be used to help close Chicago's $28 billion pension funding gap. If the proposal is accepted by Mayor Rahm Emanuel and approved by the City Council, it would become the biggest pension obligation bond ever issued by a U.S. city.

The bet is that Chicago can earn more investing the proceeds than it paid to issue the new debt, setting an example for other large governments wrestling with sizable pension deficits. Many cities and states around the country don't have enough assets to afford all future benefits owed to retirees. The soaring costs are squeezing budgets across the U.S….the proposed interest rate is 5.25% which would be taxable. That means the pension funds would have to earn at least that much to break even.

(Over the last 30 years, the average investor saw a return of 3.66%, whereas the S&P 500 had an average return of 6.73%. When pundits talk about the soaring stock market this year, last year, and the last nine years, they forget to mention the nine dismal years before 2009. If you take the full 18 years from the end of 1999 to the end of 2017, the S&P 500 has only risen 82%, which works out to only 3.4% per year, annualized.)

https://www.wsj.com/articles/chicagos-new-idea-to-fix-its-pension-deficit-take-on-more-debt-1535036421?mod=hp_lead_pos4

*****

17 August 2018

Markets continued to meander up and down 1% as Turkey caused down and talks with China caused ups. By the end of the week not much had changed.

We added to Western Digital when it dropped a bit on a Cowen downgrade (see below). We also repurchased Marathon Oil for another trade when it moved lower to the $19.50 level where we have had luck initiating a trading position several times this year.

Finally we repurchased Rite Aid when it dropped from $2 to $1.40 as the merger with Albertson' was called off. At $1.40 it is priced as a perpetual option with the possibility of another suitor arriving. The company has been willing to sell itself for the last 3 years. With the $4 billion they received from Walgreen they paid down debt. Of course it's a spec but we have traded profitably this year recovering half the money we lost year when the WBA deal collapsed.

*****

The legendary investor who predicted the past 2 bubbles breaks down how the 9-year bull market will end

https://www.businessinsider.com/jeremy-grantham-financial-bubble-predictor-trump-impact-on-market-outlook-2018-8

Why Western Digital is under pressure. But it is priced at 6X and yields 3%. Buy on bad news.

Western Digital's profitability will disappoint investors as competitors cut flash memory hard drive prices, according to Cowen.

The firm lowered its rating to market perform from outperform for Western Digital shares, predicting the storage provider will report earnings per share below expectations next year.

Western Digital's "sell-side and buy-side numbers are still way too high for [2019 and 2020], which should create an overhang on the stock," analyst Karl Ackerman said in a note to clients Wednesday. "Our decision rests on our field work that indicates substantial, unabated competitive pricing tactics by [Western Digital], Toshiba and to a lesser extent [Intel] to gain share of enterprise and client SSDs [solid-state drives]."

The analyst lowered his price target to $70 from $100 for Western Digital shares, representing 8 percent upside to Tuesday's close.

"We think WDC may have to forfeit market share or margins near term – tackling both at the same time while peers invest in yield improvement is an arduous task that we struggle to support near term," Ackerman said.

He predicts the company's flash memory average selling prices will decline by 27 percent this year and fall 30 percent next year.

Ackerman estimates Western Digital will generate fiscal 2019 earnings per share of $10.97 versus the $11.78 Wall Street consensus.

The company's stock has underperformed the market this year. Its shares are down 18 percent this year through Tuesday versus S&P 500's 6 percent gain.

Western Digital did not immediately respond to a request for comment.

https://www.cnbc.com/2018/08/15/western-digital-will-suffer-from-a-massive-price-war-in-the-storage-ma.html?__source=yahoo%7Cfinance%7Cheadline%7Cstory%7C&par=yahoo&yptr=yahoo

More WDC:

https://finance.yahoo.com/news/pricing-pressure-extend-western-digital-134500289.html

Marathon Oil:

https://finance.yahoo.com/news/marathon-oil-corporation-apos-growth-153200361.html

AT&T:

https://seekingalpha.com/article/4198493-t-bulls-missing

AT&T:

https://www.barrons.com/articles/at-ts-gotten-way-to-cheap-heres-why-it-could-be-time-to-buy-1534171026?mod=trending_now_1

https://dealbreaker.com/2018/08/the-blockchain-has-inaugurated-a-golden-age-of-criminality/

More Tesla-we emphasize Tesla as the symbol of excess and cult investing ala Microsoft and Qualcomm in 2000. Great products but priced for perfection. It took investors 16 years to recover their investments; same will occur with Tesla.

As he has spent the past several years teaching David Einhorn, Jim Chanos and the other haters and doubters, the rules do not apply to Elon Musk or any of his companies, most especially Tesla. Still, many thought he might have found one that does last week, when he tweeted that he'd already "secured" funding for what would be a $70-plus billion going-private transaction so that he'd never have to explain to some boneheads why Tesla wasn't making as many Model 3s as he'd repeatedly promised, or why the concept of profitability doesn't apply to a religion, or how reversing the traditional cash-flow relationship between buyer and supplier is really nothing to worry about. This included the SEC, which is apparently not a fan of offhand tweets announcing such things and which would like to know if Musk had any basis for typing it.

https://dealbreaker.com/2018/08/elon-musk-totally-wasnt-lying-about-going-private-funding/

Take the money and run. Same thing occurred 1998 to 2000.

WhatsApp cofounder Jan Koum announced he planned to leave Facebook in April.

But he's still showing up to the office once a month so he can continue to collect $450 million in Facebook stock he's contractually due from when Facebook bought his company.

It's a high-dollar example of "rest and vest," where big tech companies pay senior employees who don't do much work.

Koum has already sold over $7 billion in Facebook stock.

https://www.businessinsider.com/whatsapp-founder-jan-koum-rest-and-vest-for-450-million-facebook-stock-2018-8

****

10 August 2018

During the week we sold a bunch of stocks for scratch profits. We want cash in the accounts. We did repurchase Newell when it dropped 10% on confusion over its divestiture plan. This is one time we are going to trust Icahn and Starwood who together own 15% of the shares and control the board.

We currently own:

AT&T (6% yield and 9X earnings); Ford (6% and 6X); GE (3.7% and 13X); Newell (4% and 10X); and Western Digital (3% and 5X). We know dividends and P/E ratios don't matter until they do. Almost all accounts are approaching 50% cash or short term bond ETFs.

We also added Wisdom Tree Floating Rate US Treasury ETF to accounts for it 1.7% yield.

What Are Floating Rate Notes?

While it is a relatively new asset class, floating rate Treasury notes have had some proven success during prior rate hike environments, and investors should look to use them as alternatives to traditional short-term Treasuries. FRNs are 2-year notes that reset weekly to the rate of the newly auctioned 13-week bill. Put simply, these bonds have a one-week duration, because any risk of missed opportunity of investing in higher-yielding bonds is mitigated by the weekly rate reset.

Launched in February 2014, FRNs are the first new marketable security issued by the U.S. Treasury since Treasury Inflation-Protected Securities (TIPS) in 1997. While they may be new, the common risks most new bond issuances face are not as relevant here. First, new bond issuances from untrusted issuers can certainly cause doubt in the minds of investors. However, the U.S. Treasury has been issuing debt for hundreds of years and is arguably the safest lender in the world. Second, investors in bond funds are generally wary of smaller issuances as they can create a constraint on the size of the fund, in addition to potential mispricing due to escalating demand. However, total market value of FRNs is currently above $300 billion and will likely increase given the Treasury's preference toward issuing additional short-term bonds. Due to the supply constraints of bonds to use in money market funds, the Treasury is increasingly favoring FRNs as a way to meet short-term liability needs.

https://www.wisdomtree.com/blog/2017-01-31/why-you-should-take-a-look-at-floating-rate-treasury-notes

Newell was at $26 when Cramer said buy. We bought and sold for a buck profit and then bought back at $23 this week,

https://www.cnbc.com/2018/04/23/cramer-walks-back-negative-newell-call-after-proxy-fight-ends.html

Why we raised cash.

https://www.benzinga.com/markets/cryptocurrency/18/08/12147982/the-buffett-indicator-says-stocks-are-more-overvalued-now-than

Why we raised cash 2.

Waymo is worth $100 billion more than previous estimates, Morgan Stanley says (GOOGL) https://markets.businessinsider.com/news/stocks/google-stock-price-waymo-worth-100-billion-more-than-before-morgan-stanley-2018-8-1027439248

Why we raised cash 3.

Elon Musk tweets that he's considering taking Tesla private at $420 per share with 'funding secured'

https://www.businessinsider.com/elon-musk-says-may-take-tesla-private-2018-8

Why we raised cash 4

http://fortune.com/2018/06/30/pinduoduo-files-us-ipo/

AT&T

From the start, AT&T appears attractive with its price-to-earnings multiple at a 20-year low, the Time Warner merger driving cash and earnings accretion, wireless business trends exceeding expectations and "positive call optionality" from the union of AT&T's distribution network with Time Warner's content and advertising inventory, Barden said in the Monday note.

https://www.benzinga.com/analyst-ratings/analyst-color/18/07/12097860/boa-upgrades-at-t-the-landscape-has-dramatically-change

Everything you wanted to know about Newell and were afraid to ask:

http://www.starboardvalue.com/wp-content/uploads/Starboard_Value_LP_Transforming_Newell_Presentation_05.01.2018.pdf

3 August 2018

As we head into the last full month of summer the markets continue to tread water and react to earnings announcements. Apple hit a trillion dollars in market value but the other FANG stocks are just marking time with Amazon and Facebook reaction negatively to in-line earnings. As always it is the reaction to the news, not the news itself that is important.

During the week we traded CBS for a plus scratch. We bought when the shares dropped 10% early in the week. When the news turned out to be Les Moonves' women problems and CBS chose to let him continue as CEO while lawyers investigate- we decided to move aside. We also traded out of Viacom -which is connected to the CBS imbroglio- for a $1 a share profit. Shari Redstone who is the major shareholder of both Viacom and CBS wants the two companies to recombine and Moonves doesn't. With his troubles, odds are improving that the remerger may occur. If so CBS will be under pressure from short sellers because the proposed deal is all stock. And so the sidelines are best for now.

We had a nice trade in DISH which popped a few dollars on better than lower earnings and fewer subscriber losses than predicted- yes the reaction versus the news is the tell. We have been trading the shares because we think Verizon or Comcast or--- will buy the company for its wireless spectrum. But we also don't think that will occur before the AT&T court case is settled.

We traded out of Chico's for a scratch because we have expanded our other retail holdings. Chico's has been good for us this year. Thank You Abby and Tyler.

We bought 3D at $12.80. It has backed off from its high of $15 a few weeks ago. We have had good luck trading it this year.

Finally we left Whirlpool for a scratch to place more funds in large accounts.

We currently own:

AT&T, Ford, GE, Limited Brands (Victoria's Secret and Bath & Body) The Gap, Skechers, IBM, Western Digital, 3D and a comfortable cash position approaching 50% in large accounts.

The Little prince is leaving today so this post is short as we have to drive him to the airport.

Peace.

 


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