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Lemley Yarling Management Co
309 W Johnson Street
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Madison, WI 53703
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26 April 2019

Markets are stuck at the old highs. 2nd quarter GDP was +3.2%, well above estimates and that should be support unless the gurus believe that this is the top in GDP growth.

Inflation remains under control because wages aren't rising as they used to even with such a tight labor market. Folks like to compare the situation to the 1950s and 1960s and marvel that there is not inflation as there was a back then. One reason there is no inflation is that wages can't rise because the union movement no longer exists.

During the week we added to AT&T when it dropped $1 on what we considered fine earnings but the big boys and girls disagreed. Bristol Myers reported excellent results as did Ford. Ford jumped 10% while Bristol remains under pressure with the arb situation resulting from their proposed purchase of Celgene for cash and stock.

Rite Aid completed its 1 for 20 reverse split and we purchased the new shares at 50% lower than we sold a few months ago. With the new price of $9 to $10 RAD will show earnings of 50 cents or more. Also, with a price above $5, individuals at brokerages can buy the shares. $20 billion in sales, earnings and manageable debt may encourage institutions to consider.

CVS and Walgreens Boots remain under pressure and our oil stocks are taking it on the chin as oil has retreated a few dollars from its $67 high of last week

GE was denigrated by its nemesis JP Morgan's Tusa again this week who reiterated his $5 price target, but the shares held up.

A positive take on GE:

Longleaf Partners Fund released its Q1 2019 Investor Letter and shared its views on several companies from its portfolio. Among those was General Electric Company for which it said the following:

Contributors/Detractors(Q1Investment return; Q1 Fund contribution)

General Electric (37%, 2.51%), the aviation, healthcare and power company, was the largest contributor. CEO Larry Culp began fulfilling his promise to simplify operations and strengthen the balance sheet. Since becoming CEO in September, Culp and his team have funded GE Capital's mortgage liabilities and long-term care reserves, improved accounting across the board and sold numerous non-core assets for good prices. Deals for transportation, distributed power, lighting, Baker Hughes GE shares and biopharmaceuticals have closed or are scheduled to bring in cash by the end of the year. The biopharmaceuticals sale alone realized $21 billion plus a pension liability assumption at high multiples of revenues andearnings before interest, taxes, depreciation and amortization(EBITDA). GE Capital, historically the most difficult segment to appraise due to its complexity and leverage, is simpler and less leveraged than it has been for decades, and Culp still has assets to sell. Aviation announced strong quarterly results and increased annual guidance due to the success of the efficient LEAP engine. Beyond selling assets for full prices, Culp's operational priority is turning around the underperforming power segment. Returning to profitability in this segment will not happen this year, but the company will benefit over the long run from a healthy high-margin gas-turbine service business. After rallying almost 40% in three months, the stock still trades at a substantial discount to our value.


We are halving our misadventure in Ascena as we realize that we have been buying to make ourselves correct as we did with CVS and WBA. Mr./Mrs. Market doesn't care what we think. We still have a healthy position but one that is more in line with the speculative nature of the holding.

Spring storm tomorrow- 4 to 8 inches. Ugh!


Good Friday/Passover 2019

During the week we took trading profits in Under Armour and Huntington Bank and reduced our holding in CVS and Walgreens Boots. Both CVS and WBA are cheap and have value but we have often made the mistake of believing we are right and Mr./Mrs. Market is wrong. We usually suffer when we fight fight City hall and so we sold the shares purchased recently and will hold those shares purchased higher for eventual recovery.

With our sales we raised a god deal of cash and have reduced positions to 10. They are:

AT&T with a 6% plus yield at 10 times earnings.

Bristol Myers with a 3.5% yield and 10 times earnings. Bristol is in the process of acquiring Celgene and we sold around this level in January when the merger was announced because we thought arbitrage would force the shares lower. We have repurchased because the shares have found support at this level and represent value.

CVS with a 3.5% yield and 10 times. See stories below.

Ford has begun to move higher and receive some positive reports with Goldman making it a buy. Yield of 7%- and 5-times earnings and just reported a very positive quarter.

General Electric is a continuing soap opera that we can't avoid.

Sprouts Markets is/has been for us.

Same goes for 3D systems.

United Natural Foods sold at $50 last year and is going to earn $2.20 this year and is priced at $13. The institutions that owned it before the Super Valu takeover were severely burned and UNFI is now a show me stock. They also have a hundreds of millions dollars law suit against Goldman for conflicted advice last year.

Walgreens Boots is in their same analyst life raft as CVS.

Finally, we hold Ascena Retail which is Ann Taylor, Loft, Justice and Lane Bryant.

Ascena Paid way too much for Ann Taylor several years ago and has been digging itself out of a hole for the past few years. ASNA took on $1.8 billion in debt which it has reduced to $1.3 billion ($1 billion net of cash on hand). ASNA has announced the sale of Maurice's for $300 million which will net ASNA $200 million and allow it to reduce debt by that amount if it so chooses. That means in three years ASNA has ben able to redact the purchase debt by half.

Second quarter results and forward guidance caused the shares to plunge in March. We were surprised and remain surprised by the market action. With 200 million shares outstanding there are 60 million shares short. We can understand shorting higher priced stocks where the downside gains potential equals upside potential (50/50). But when the upside is 5 times and more (ASNA sold at $22 four years ago) the downside and there is no mediate term danger of bankruptcy – which is the case with ASNA we are flummoxed. But markets are markets and for every buyer there is a seller and we are certainly on the buy side.

For the second quarter of 2019 comparable sales were up 10% at both Ann Taylor and Loft for a total of $640 million. Sales at Justice were up 2% to $326 million. Lane Bryant was the drag with comparable sales down 8%.

Depreciation and amortization for the quarter was $83 million. D&A is a non cash item and the $83 million is greater than the $71 million net loss reported for the quarter. Moreover, the interest expense for the quarter was $27 million which is being reduced each quarter by debt repayment.

Value fashion which is maurice's and dressbarn lost $32 million in the 2nd Quarter and $38 million in the first 2 quarters and Plus Size Lane Bryant lost $30 million in the second quarter and $31 million in the first half. Catherine's which is part of the Plus Size stores also lost money in the 2nd quarter.

Ann Taylor and Loft made $13 million in the first quarter and $67 million in the first two quarters and Justice made $1 million and $11 million for the respective time period.

With the sale of maurice's and the possible closure/sale of dressbarn $38 billion first half losses will have been avoided. Moreover, for all of 2018 the Value Stores (maurice's and dressbarn) lost $83 million. If they had been discontinued in 2018 ASNA would have earned $128 million.

The sale of maurice's and the closing or sale of dressbarn will allow Ascena to treat their results as discontinued/sold operations with a positive impact on the earnings report.

Finally, brokerage firms do not allow their brokers to recommend stocks under $5 and institutions also do not purchase low priced issues so two major buy side forces are missing from the price discovery in ASNA. With a market equity value of $220 million and the prospect of reducing debt by another $300 million this year to a net debt of $900 million (half what it was three years ago) the shares represent home run speculative value.


One reason CVS is down this week.

Oppenheimer downgraded CVS Health to 'perform' from 'outperform'

Oppenheimer said they view CVS Health as an opportunity for the long-term and think there will be drug-price "noise" from DC well into the future.

"We are downgrading CVS Health to Perform from Outperform and removing our $85 price target. Furthermore, we are introducing our 2019/2020 EPS estimates of $6.75/$7.09. After recently assuming coverage, we are looking to reset the bar on our CVS rating, as we view it as more of a long-term opportunity given the potential timeline to execute on its strategy and the near-term legacy business challenges. Furthermore, we expect the drug-price noise out of Washington to continue for the foreseeable future. Lastly, we note that we remain bullish on the overall managed care sector—particularly in light of the recent weakness in the group—but CVS's exposure to the business is still quite modest, and we would prefer other names in the space right now."


Barron's has a positive take on CVS for the longer term.

Jack Hough

April 17, 2019 5:00 a.m. ET

Larry Merlo, a former pharmacist, has been chief executive of CVS since 2011. He oversees the country's largest chain of drugstores and walk-in clinics, and a major pharmacy benefit manager, which negotiates with drug makers for discounts on behalf of group buyers.

Last year's acquisition of Aetna gives CVS a path to boost profits by nudging patients toward better health and lower-cost care. Now, CVS is testing Health Hub stores in Houston, which offer greatly expanded medical and wellness services, including in-house blood analysis, nutrition plans and yoga.

Merlo recently sat down with Barron's for an interview. Below are edited excerpts. https://www.barrons.com/articles/cvs-ceo-larry-merlo-interview-51555441312?siteid=yhoof2&yptr=yahoo

12 April 2019

As markets approached their October 2018 highs on Friday, we decided to raise a cash from our trading stocks. We sold Kroger, keeping Sprouts; and sold Marathon Oil and the Oil ETF (XOP). We sold the oils when they popped on the announcement by Chevron of its takeover of Anadarko.

We currently own: AT&T, CVS, Walgreens Boots, Bristol Myers, Sprouts Food Markets, United Natural Foods, Huntington Bank, Under Armour, Ford, GE, 3D (purchased earlier in the week), and Ascena ( Ann Taylor, Loft, Lane Bryant and Justice).


JPMorgan Chase & Co.'s Steve Tusa an d his great white whale GE:




The current IPO boom reminds of Spring 1983. Many weren't around by 1985 but insiders and investment bankers and lawyers were happy. https://www.scaruffi.com/svhistory/sil11.html

Wall Street's Favorite Former Congressman Jeb Hensarling Apparently Gets Lost in Revolving Door, Ends Up At UBS



5 April 2019

The US economy added 196,000 jobs in March, the Bureau of Labor Statistics said Friday. That comes after an unexpectedly weak gain of 33,000 nonfarm payrolls a month earlier. Wages rose 3.2% year-over-year, a slightly slower pace than in February.

Markets meandered higher this week climbing within 1% of all-time highs. As I tell folks who ask, the Trumpster's texts are ignored by markets and will be so long as there is not international crisis. The "China deal" will be huuuuuuuuge and spectacular and the U.S. will get everything it asks for and more so there will be no surprises on that front-or so the Trumpster says.

During the week we repurchased Bristol Myers, as its close to the level that we sold in January when we took our gain in Celgene.

We added Ford and GE in much smaller amounts than we sold a month ago.

We reentered GE because all the hoopla has died down and Lyfte and Uber and Amazon have regained the attention of the talking heads.

Ford reported a record quarter and Goldman Sachs reaffirmed its recommendation of a potential 45% upside over the next twelve months.

We also added Sprouts Food Markets. SFM tanked in December on news (see below) and is 30% lower than it was in October 2018.

Finally, Walgreens Boots disappointed and dropped 12% on Tuesday last. Luckily, we had reduced our position by half ahead of earnings and so were able to repurchase shares $9 lower than we sold two weeks ago.

Keep the faith.


December 2018: Sprouts CEO quits, stock drops 15%, but insiders buy $2.37 million of SFM into the selloff




Walgreens Boots Alliance fell nearly 12% to $56 after reporting fiscal second-quarter earnings. The drugstore chain earned $1.64 a share, reporting revenue of $34.53 billion. Analysts were looking for EPS of $1.72 and revenue of $34.57 billion. For the full year, management expects EPS to be $5.98. That would be roughly flat year over year, with a four-cent currency headwind, below the $6.38 consensus estimate.




The on again of again trade war with Mexico:

The U.S. might run out of avocados in three weeks if Donald Trump follows through on his threat to close the border with Mexico, but the U.S. auto industry could shut down even more quickly—within a week, according to one expert, because basically every car made in the U.S. includes parts made in Mexico.

"You can't sell cars with missing pieces," the Center for Automotive Research's Kristin Dziczek told CNN. "You've got to have them all. I see the whole industry shutdown within a week of a border closing." Some of the imported pieces are installed at the beginning of the production process, so, for instance, "You can't build the whole car and slap the wire harness in later. This is a big critical part that shuts down the assembly line if you don't have it."

That means that workers in auto assembly plants would be out of work, and workers in U.S. car parts plants would follow, since with assembly plants shut down, parts plants would be idled, too. We're talking about an economic catastrophe for as many as a million workers, with a ripple effect throughout their communities.




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