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

29 September 2017

Oil rallied to a new 6 month high on Wednesday and then paused. We used the opportunity to eliminate our Marathon Oil position on Friday for a small profit/loss in accounts. MRO has been an oversize position for most of the year and at $13.40 it met resistance at its 200 day moving average. If we include last year's trading in the shares of Marathon we are ahead for the adventure but it would have been better to have rested with our profits from last year. Since we added to our XOP (equal % amounts of 50 Domestic Oil companies) during the week we are maintaining exposure to oil but in a less volatile issue.

We added a few shares of Cheesecake Factory to accounts and added to our Rite Aid holding in many larger accounts when the shares made a new low of $2 on Thursday after announcing disappointing revenues. (See below).

Walgreen Boots was willing to pay $9 per share plus assume $7 billion in debt. Now, with Walgreen buying less than half the stores and paying $4 billion for the ones it is buying; Rite Aid is priced at a 50% discount to Walgreen's valuation of the company. We trust their valuation more that the analysts'.

Our accounts have rallied a bit this month but we still remain down for the year. Hopefully the last quarter will be kinder.

*****

Shares of Rite Aid Corp. slumped in premarket trade Thursday, after the drugstore chain matched loss expectations but missed on sales. Net income for the quarter to Sept. 2 rose to $170.7 million, or 16 cents a share, from $14.8 million, or a penny a share, in the same period a year ago. Excluding non-recurring items, the adjusted per-share loss of 1 cent matched the FactSet consensus. Revenue fell 4.4% to $7.68 billion from $8.03 billion, below the FactSet consensus of $7.84 billion, as pharmacy segment sales declined 3.4%. Same-store sales declined 3.4%, while the FactSet average of two analyst estimates was a decline of 2.2%, as pharmacy sales fell 4.6% and front-end sales declined 0.9%. Separately, the company named Kermit Crawford as chief operating officer. Walgreens received regulatory clearance last week to buy Rite Aid assets, with store purchases expected to begin in October and be completed in spring 2018. Rite Aid's stock has plunged 42% over the past three months, while Walgreens shares have gained 1.4% and the S&P 500 SPX, +0.41% has tacked on 2.7%.

*****

Elon Musk Projects First Private Trips to Mars by Middle of Next Decade

But, will they return? Musk has a lot on his plate right now. Building Tesla's lower priced cars on time would seem to be Job 1.

*****

22 September 2017

And so in Anno Domini 2017- Jewish calendar 5778- leaders of nations have resorted to name calling – hopefully instead of war as the deranged dotard and rocket man text it out on twitter. And who says civilizations have not made progress? ☺

Question? Is the Apple craze waning? The new phone was offered today and there were no lines? Of course it may be that the $800 to $1000 price tag may mean phones have reached their upper price point. Maybe banks will being making 6 year loans on cell phones and package them as CPBs.

During the week we added Ford, Twitter and XOP (security for trouble with Iran) to accounts; took scratch profits in Apache and Anadarko and AT&T and a nice profit in The Gap.

We used The Gap money to buy Bed Bath & Beyond.

BED Bath & Beyond OMG!! BBBY slashed its guidance for the year from $4 to $3 and the share rice dropped to $23 from $30 three days ago down from $49 in December of last year. So now the shares are at 8 times earnings and maybe management which owns 5% of the stock and might have a brain or two will be able to right the ship. We took our Gap money in which we realized a 20% profit. In July The Gap swooned when analysts and the big boys and girls did the same thing to GPS share price and we bought. Guess we have more confidence in management of these retailers who have spent their lives in the industry when the big boys and girls were playing Pokémon in High school and beer pong in college.

We do think Bed Bath's products can profit from web selling and like Abercrombie, American Eagle, The Gap, etc. they may be late to the game but that's what CEOs and their cohorts get paid the big bucks to figure out...

Of course BBBY analysts who were blindsided have some thoughts:

https://www.benzinga.com/analyst-ratings/analyst-color/17/09/10082506/bed-bath-beyonds-not-so-cozy-quarter-keeps-sell-side-si

We also added To Rite Aid when the FTC finally gave approval to a rejiggered sale agreement that leaves Rite aid with 2200 stores $4 billion in cash for the stores and $375 million for their trouble. there is an analysis below of the deal that we agree with and it's the reason for our purchase of more shares.

Walgreens and Rite Aid have finally devised a combination of the nation's largest and third-largest drugstore chains that will get past antitrust regulators.

The companies said Tuesday that they have Federal Trade Commission clearance for a slimmer version of a store-purchase agreement announced in June. Walgreens will now spend $4.38 billion on 1,932 stores, three distribution centers and inventory.

The drugstore chains had said earlier this summer that Walgreens planned to spend about $5.18 billion on 2,186 stores.

That deal marked a step down from Walgreens' initial plan to take over Camp Hill, Pennsylvania-based Rite Aid Corp. for $9.4 billion. That deal spent a couple of years in regulatory review before the companies abandoned it.

Deerfield, Illinois-based Walgreens Boots Alliance Inc. says the latest deal should be completed by spring.

https://finance.yahoo.com/news/walgreens-rite-aid-revise-store-135239844.html

Rite Aid Offers Deep Value Here: read more;

https://finance.yahoo.com/news/rite-aid-rad-stock-worth-100441203.html

Interesting article on corporate tax rates U.S. versus the rest of the world:

https://www.washingtonpost.com/news/fact-checker/wp/2017/09/18/speaker-ryans-fuzzy-math-on-the-u-s-s-terrible-tax-system/?hpid=hp_hp-top-table-main_fc-ryan-1003am%3Ahomepage%2Fstory&utm_term=.5601de542d03

Another can't shoot them down missiles column:

https://www.benzinga.com/news/17/09/10068691/why-doesnt-the-u-s-intercept-north-korean-missiles-maybe-it-cant

Teva Pharmaceutical Industries Ltd. said Monday it has entered into two agreements to sell the remaining assets of its specialty global women's health business for $1.38 billion.

Proceeds from the sales, along with funds from the $1.1. billion sale of its Paragard product earlier this month, will be used by Teva (NYSE: TEVA) to pay down term loan debt.

In one deal, CVC Capital Partners Fund VI will acquire a portfolio of products within Teva's global women's health business across contraception, fertility, menopause and osteoporosis for $703 million in cash. The portfolio of products, which is marketed and sold outside of the U.S., includes the fertility treatment Ovaleap, the oral contraceptives Zoely and Seasonique, and the osteoporisis drug Actonel.

In the second deal, Foundation Consumer Healthcare will acquire Plan B One-Step and Teva's brands of emergency contraception products Take Action, Aftera, and Next Choice One Dose for $675 million in cash.

The products in the two deals had combined annual sales of $398 million in 2016.C

"Today's announcement, coupled with the recent announcement of the sale of Paragard, demonstrate Teva's commitment to delivering on our promise to generate net proceeds of at least $2 billion from the divestiture of non-core assets," said Dr. Yitzhak Peterburg, Teva's interim CEO, in a prepared statement. "With these initial divestitures we have exceeded expectation."

Completion of the transactions is subject to customary conditions, including antitrust clearance in the United States and European Union. The transactions are expected to close before the end of 2017.

Morgan Stanley acted as financial advisor to Teva, Ernst & Young served as its accounting advisor and Goodwin Procter is Teva's legal counsel for these transactions.

Based in Israel, Teva has its North American headquarters in North Wales, Pa.

https://www.bizjournals.com/philadelphia/news/2017/09/18/pharma-teva-sells-ovaleap-zoely-planb-seasonique.html?ana=yahoo&yptr=yahoo

This Saturday, an invisible rogue planet will bring about the Rapture . . . maybe

According to Christian astrologer David Meade, the key to understanding all of this is the number 33. In the Bible, Jesus is said to have lived for 33 years before being crucified. Elohim, the Canaanite god who was later adopted as the supreme god of ancient Israel, is mentioned 33 times in the Bible.

All of this links back to the constellation Virgo and last month's solar eclipse which was visible throughout most of the United States, according to Meade.

While many in the mainstream Religious Right saw the eclipse as a sign that America needed to repent of its sinful ways, Meade believes it means much more than that.

"When the eclipse begins on August 21, the sunrise will be dark, just as Isaiah predicts," he told the British tabloid Daily Star last month.

Since the totality of the eclipse was first visible in Oregon, the 33rd state, and ended in South Carolina on the 33rd degree latitude, this means those 33 days after the event, something enormous is going to happen. According to Meade, that enormous event is going to involve Nibiru, a supposed hidden planet with an orbit that is so large; astronomers haven't been able to detect it.

Notably, a FoxNews.com article about the Nibiru theory devotes literally one sentence to NASA debunking it, without even so much as a quote. The rest of the piece consists of Bible quotes and a calm recitation of the nonsensical belief.

http://www.salon.com/2017/09/18/this-saturday-an-invisible-rogue-planet-will-bring-about-the-rapture-maybe/

Bitcoin's Wild Ride Shows The Truth: It Is Probably Worth Zero

https://www.wsj.com/articles/bitcoins-wild-ride-shows-the-truth-it-is-probably-worth-zero-1505760623

Crude Oil Back At $50, But Can It Go Any Higher?

After dipping as low as $45.58 in late August, WTI crude oil prices are once again knocking on the door of $50/bbl. Oil has had a bumpy ride since its 2014 sell-off, but its trading range has narrowed to between around $42/bbl and $55/bbl in the past year.

Hurricane Harvey didn't have much of a lasting impact on U.S. oil prices. Despite Harvey temporarily knocking out roughly 15 percent of the nation's total crude oil refining capacity, WTI prices have been on the rise throughout the month of September and are now testing $50 resistance that served as a short-term top in late July.

Oil appears to be settling into a narrower trading range over the past year after swinging from a 2014 high of $107.68/bbl to a 2016 low of $26.05/bbl. In the past 12 months, WTI has twice bounced off the $42 level, but hasn't dipped lower than $45 since June. The $55 resistance level held twice in early 2017 and hasn't been tested since. WTI climbed as high as $53.76 in April and $52.00 in May.

However, oil bulls have reason for optimism that a re-test of $55 could be coming. After making a series of lower highs from February to August, crude oil's latest move may be a breakout to the upside.

If WTI can push to $51 or higher in the next several days, is could be just a matter of time before $55 is back in play. Of course, every move higher in oil prices in recent years has been met with an uptick in U.S. shale production that compounds any technical resistance in the charts.

https://www.benzinga.com/etfs/specialty-etfs/17/09/10069916/crude-oil-back-at-50-but-can-it-go-any-higher

15 September 2017

During the week we took a 15% profit in

Astra Zeneca. We also added Cheesecake Factory to some accounts and added to positons in General Electric, Chicago Bridge and our retail issues.

Markets continue to meander and so do we. Happy autumn.

*****

Interesting charts on Apple revenues by item sold:

http://www.businessinsider.com/revenue-problem-apple-needs-iphone-8-to-solve-2017-9

Closing stores is the new normal. It's like firing folks- Wall Street gurus love it. The Gap jumps 10% on news.

Gap Inc. (NYSE: GAP) said Sept. 6 that it will close 200 underperforming stores, which is around 10 percent of its store total, news that sent the company's share price up more than 7 percent in late trading.

https://www.bizjournals.com/houston/news/2017/09/06/gap-stock-jumps-on-news-company-will-shutter-200.html?ana=yahoo&yptr=yahoo

U.S. Missile Defense: Not as Effective As We Think

http://www.theamericanconservative.com/articles/u-s-missile-defense-not-as-effective-as-we-think/

Saudi Arabia Clamps Down as Crown Prince Consolidates Power.

Saudi Arabia is stamping out traces of internal dissent in a far-reaching campaign targeting influential clerics, liberal thinkers and even princes as Crown Prince Mohammed bin Salman moves to consolidate power ahead of his expected accession to the throne.

https://www.wsj.com/articles/saudi-arabia-clamps-down-as-crown-prince-consolidates-power-1505345008

Also: Saudi Arabia has begun a wide-ranging crackdown against perceived opponents of the policies of the kingdom's new crown prince, Mohammed bin Salman.

Over the last week, 16 people were held, their friends, relatives and associates said in interviews. They include prominent Islamic clerics, academics, a poet, an economist, a journalist, the head of a youth organization, at least two women and one prince, a son of a former king.

https://www.nytimes.com/2017/09/14/world/middleeast/saudi-arabia-clerics.html?hp&action=click&pgtype=Homepage&clickSource=story-heading&module=second-column-region&region=top-news&WT.nav=top-news

*****

8 September 2017

We added to retail positions in accounts this week as short covering after decent earnings reports in all of them suggested that the lows in these stocks may have been made in August. We didn't go overboard given that the overall markets still could use a decent correction.

We also added Apache Oil an Anadarko in small amounts and repurchased AT&T and QUALCOMM and added to Viacom and Sprouts.

In 1983 and 2000 the high flying stocks corrected and the money moved to value and that may occur this time. We would be much more bullish on our value issues if the overall markets had a 10% correction or Tesla and Netflix and Amazon et al experienced more reality pricing. But Mr. Market seldom does as we wish and so we will continue to gingerly add to our undervalued issues.

We currently own;

Marathon Oil- our main oil investment. Earnings should arrive this year after three years of adjusting expenses and holdings.

We purchased Anadarko and Apache this week; both are 50% lower than in January.

Ascena Retail: the owner of Ann Taylor, Lane Bryant and Justice reports on September 18. With 44 million shares short it will be interesting if the report is a positive surprise.

The Gap announced on Wednesday that it expects Old Navy sales to exceed $10 billion in a few years. That news popped the share price $2.

Macy's, American Eagle, Abercrombie and Chico's all had OK reports with Hollister (ANF) showing same store sales gains of 7%. All these stocks yield over 4% from dividends.

Under Armour is in the doghouse and will never again sell a single shoe and on and on and on. Not real cheap but is still growing but down from the double digit growth of its early years.

Chipotle is under pressure from the isolated reported sicknesses. Bill Ackman, a hedge fund guru has a 9% position and we think other hedge fund snipers are shooting against him by shorting the shares (games rich people play). Every other restaurant chain has sickness reports on a regular basis but Chipotle is a short seller target right now and so those illnesses get media play.

GE, AT&T, Astra Zeneca (a major European drug company) and QUALCOMM are high quality cheapo stocks with 4% dividends.

Teva Pharmaceutical, a major generic drug company selling at less than revenues and projected to earn $4 plus this year. It languishes at $16. Large debt ( $35 billion- ouch)-from a takeover of Allergan's generic drug business a few years ago -when the share price was $60 and analysts loved it- is the ball and chain on the share price now. It's cheap.

Deutsch Bank sells at half of book, has been under pressure for years and is slowly working its way out of its dumb decisions of the early oughts.

We have traded 3D profitably for the last two years. Eventually GE or some other manufacturer is going to buy it. we hope we own it for a trade at that time.

Sprouts and Kroger are down on the Amazon/Whole Foods takeover- much ado about nothing.

Viacom is a takeover target. With Sumner Redstone out of the picture one of the telecoms/cable companies may want to own it.

It operates through two segments, Media Networks and Filmed Entertainment. The Media Networks segment provides entertainment content and related branded products for consumers through approximately 250 locally programmed and operated TV channels, including Nickelodeon, Comedy Central, MTV, VH1, SPIKE, BET, CMT, TV Land, Nick at Nite, Nick Jr., Channel 5 (UK), Logo, Nicktoons, TeenNick, Paramount Channel, and others, as well as through online, mobile, and apps. The Filmed Entertainment segment produces, finances, acquires, and distributes motion pictures, television programming, and other entertainment content under the Paramount Pictures, Paramount Animation, Nickelodeon Movies, MTV Films, and Paramount Television brands; and distributes films released under the Paramount Vantage, Paramount Classics, and Insurge Pictures brands. This segment exhibits motion pictures theatrically through home entertainment, licensing to television and digital platforms, and ancillary activities. The company releases its content through download-to-own, download-to-rent, DVDs, Blu-ray discs, transactional video-on-demand, pay television, subscription video-on-demand, basic cable television, free television, and free video-on-demand, as well as airlines and hotels. Viacom, Inc. is headquartered in New York, New York.

https://finance.yahoo.com/quote/VIAB/profile?p=VIAB

Chicago Bridge is a construction outfit that lost a ton on some fixed price contracts and we own as a speculative trade that should bounce when CBI sells it technology division.

*****

Investing is journey that never ends and is full of surprises.

1 September 2017

During the week we purchased a new portion in Chicago Bridge and Iron, added to Deutsch Bank, switched half our Ascena position to Chico's and repurchased AT&T for another trade. In many accounts we also purchased new or added to Abercrombie, American Eagle, Teva, Macy's Viacom, Kroger, Sprouts, Chicago Bride3D and Gap.

Chicago Bridge is down from $40 this year as the company mispriced some fixed price contracts and had to take a $500 million charge- OUCH. CBI plans to sell its Technology division to wipe out its long term debt and promises to be more careful on fixed price contacts in the future. Once burned and all that is -we hope- the lesson they learned. CBI is a major player in building refineries and oil storage facilities and may pick up some unexpected work in Texas.

Chico's reported same store sales down 8% and missed on earnings but not sales. As with all retailers the new environment will require sore consolidation but with no debt and priced at one half revenues CHS is a good add to our bet that retail isn't dead- just under pressure. We sold half our Ascena for a large loss on our higher priced stock. Strange as it may seem we are till ahead on our Ascena trading since January 2016 since we had a few very good trades last year. That is small comfort at present but it gives us room to hold the remaining shares. The position is now in line with our other retail holdings on an exposure basis.

We continue to lag market performance but the value stocks we own should help us recover when the rush to purchase concept stocks subsides. It has slowed in the last few months.

During 50 years in the business we have outperformed some years and underperformed others but always remained consistent in our value approach to investing. Those experiences give us confidence. But the waiting is trying- to say the least- and the still palpable fear the Trumpster will cause some international incident leaves us wary of over committing at this time.

Investing is a journey.

*****

Chicago Bridge news- why it has dropped 55% in value in the last three months:

https://finance.yahoo.com/news/chicago-bridge-iron-plunges-disastrous-112911072.html

*****

GDP grew at 3% in Second quarter:

U.S. economic growth was stronger than initially thought during the second quarter, a sign of momentum headed into the second half of 2017.

Gross domestic product, a broad measure of the goods and services produced across the U.S., rose at a seasonally and inflation-adjusted annual rate of 3.0% in the second quarter. That was the strongest quarter of growth since the first quarter of 2015.

The agency in late July estimated last quarter's growth rate at 2.6%. Economists surveyed by The Wall Street Journal had expected a smaller upward revision to 2.8% growth.

The more robust GDP reading reflected stronger consumer spending and business investment, offset in part by a steeper pullback in spending by state and local governments.

https://www.wsj.com/articles/u-s-gdp-growth-revised-up-to-3-0-pace-in-the-second-quarter-1504096685

The Trumpster is worth $10 billion by his own reckoning. Why doesn't he help his son in law out of his financial problems?

http://talkingpointsmemo.com/edblog/an-update-from-the-kushner-swamp

And for more detail:

https://www.bloomberg.com/graphics/2017-kushners-china-deal-flop-was-part-of-much-bigger-hunt-for-cash/

*****

 


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