Lemley Yarling Management Co
309 W Johnson Street
Madison, WI 53703
Comments on activity in client accounts
24 April 2020
Markets settled this week and we continued to reevaluate and move funds to already owned companies and ETFs.
We currently Own: Western Digital, Morgan Stanley, Nucor Steel, Exelon (CWE in Northern Illinois), Timken Ball Bearing, AT&T, Johnson Controls, Hexcel, Carpenter Tech (specialty steel) NCR, Viacom CBS, Ebix Inc (software), Hewlett Packard Enterprises, Marathon Oil, Apache Oil and Devon Oil.
We own: ITB9 building ETF0, KBWB 9Large bank ETF0, DON and EES (small cap ETFS) and XLK (technology ETF).
May is on the way.
17 April 2020
These markets are exhausting in their unpredictability. We have been adding quality issues and taking some trading profits-and finally abandoning all our oil exposure except Marathon. Obviously, our love affair with oil has been a negative but not as bad as that drop in oil prices would suggest -which is a small comfort to our psyche.
We currently own:
Industrial Select Spider ETF-The Fund seeks to provide investment results that, before expenses, correspond generally to the price and yield performance of the Industrial Select Sector Index. Under normal market conditions, the fund generally invests substantially all, but at least 95%, of its total assets in the securities comprising the Index. Among holdings are Boeing, Union Pacific, 3M and stocks of that caliber.
First Trust Cloud Computing ETF-The Fund seeks investment results that correspond generally to the price and yield of an equity index called the ISE Cloud Computing Index. The Fund will invest at least 90% of its assets in common stocks and depository receipts included in the Index.
ISHARES Home Construction ETF-The Fund seeks to track the investment results of the Dow Jones US Select Home Construction Index composed of US equities in the home construction sector. The Fund generally invests at least 90% of its assets in securities of the Underlying Index and in depositary receipts representing securities of the Index.
Invesco Major Bank ETF-The Fund seeks investment results that generally correspond to the price and yield of the KBW Bank Index. The Index is a float adjusted modified-market capitalization-weighted index that seeks to reflect the performance of national money centers and regional banks and thrifts that are publicly-traded in the US.
Wisdom Tree Midcap Divd ETF-The Fund seeks to track the price and yield performance of the WisdomTree U.S. Midcap Dividend Index, a weighted index that is comprised of the mid-capitalization segment of the US dividend-paying market & comprised of the companies that compose the top 75% of the market capitalization of the WisdomTree US Dividend Index.
Wisdom Tree Small Cap ETF-The Fund seeks to track the price and yield performance, before fees and expenses, of the WisdomTree U.S. SmallCap Earnings Index. The Index is a fundamentally weighted index that is comprised of earnings-generating companies within the small-capitalization segment of the U.S. stock market.
Individual Companies: Marathon Oil, Hexcel- lightweight composites for aerospace, Timken- ball bearings, Nucor- electric steel production, Carpenter -specialty steel, NCR -computers for supermarkets and banks, ViacomCBS- ugh, Ebix -software and e-commerce for docs and finance, Canadian Solar-solar panels, Snap -connecting young folks, Fifth Third and Huntington- remnants of our too early foray into regional banks.
Trading positions in Morgan Stanley-money and Exelon- electricity in Chicago and northern Illinois.
And long-term positions in small amount in Starbucks, Emerson Electric, Raytheon Tech and Western Digital.
A big deal is the huge expansion of folks filing for unemployment. The total continuing claims are at 30 million. A goodly portion of those filing (think bartenders, waiters, hourly retail workers etc.) are going to wind up making more on a weekly basis for the next four months - than they did working - because the Feds are adding $600 a week to whatever their states are paying.
In a historic expansion of unemployment insurance, the federal government would give jobless workers an extra $600 a week on top of their state benefits for four months as part of the $2 trillion stimulus bill the Senate passed unanimously late Wednesday night.
"It has unemployment insurance on steroids," Senate Minority Leader Chuck Schumer said Tuesday of the package. "But, and most importantly, the federal government will pay your salary, your full salary for now four months."
While the extra money in the legislation wouldn't fully replace the lost wages of some higher-paid workers, it would significantly add to everyone's regular state benefits, which range from $200 to $550 a week, on average, depending on the state.
That's all folks
Easter, Passover, Ramadan Weekend 2020
The country remains shutdown which has created a strange never before reality for all of us. But that hasn't prevented Mr. Market from doing his thing as the markets rallied 10% the past week as technical trading and a return to greed investing encouraged the big boys and girls to overlook the second quarter non-earnings and invest for earnings 6 to 12 months from now. After all, if companies lose money in the second quarter and then earn a few pennies in the third and a few dollars in the fourth, the analysts will be able to marvel at the quarter to quarter earnings growth rate. Our better half suggests that six months from now might not see the rosy scenario that the markets' rally seem to be predicting.
With this in mind we continue to readjust and have move most of our invested funds to ETFs instead of individual stocks. We still are maintaining a 50% or more cash position in larger accounts as we remain cautious and expect a retest of some sort. We don't know why the retest will occur but the big boys and girls have their fingers on their computer triggers at any sign of weakness. Since many talking heads are predicting a retest it may not occur in the next week or two but at some point, it probably will.
We are obstinately maintaining holdings in Marathon Oil, Viacom CBS, and Fifth Third Bank with a current trading position in EOG Resources. We will continue to trade the issues we have been, but in reviewing the past few years and more particularly this year, it is obvious that only a few stocks have ruined what otherwise would have been profitable years. Value has not worked and the trend to move individual investors to ETFs and of institutional investors and hedge funds to trade and arb ETFs has made them the most rational investment vehicles. The days of value investing in individual out of favor issues has passed. The safer way to pick out of favor issues is to invest in out of favor industry ETFs which spread the risk.
We have been resisting the move to ETFs over the past few years but we do realize that times have changed. Thus, this past week we moved funds to EWW (IShares Mexico), ITB (IShares U.S. Home Construction), KBWB (Invesco Bank ETF), XLU (Select Utility), XLI (Select Industrial), XLF (Select Industrial), XLE (Select Energy), XRT (Select Retail), and EES (Wisdom Tree Small Cap).
Most accounts are down around the market decline of 15%, with a few more aggressive accounts including our own down 20%. We have had an interesting two months trying to understand what has and is occurring and while our crystal ball remains cloudy, we do think that we have a better understanding.
3 April 2020
These are difficult times for folks and for the markets. We've decided not to charge clients their fees for the 1st quarter as a small measure of sharing the pain. Hopefully this quarter will see the discovery of a therapy for the folks who have been sickened by the virus. A vaccine is certainly at least a year away and so a therapy and a home test are needed to allow folks - especially us old folks- the ability to feel safe out in public.
We have continued to readjust portfolios taking losses and reducing what became oversize positions in the banks (we wanted to prove Mr. Market wrong). We are reinvesting those funds in other industries that are down the same percentages or greater to obtain diversification. We are 50% or more cash in larger accounts and 25% in smaller accounts. March was a rough month and the next few may also be uncomfortable but eventually a therapy will be proven and the virus will be controlled.
This is a stock pickers market and the crazy moves are offering an opportunity to pick up quality issues at 10-year lows. We are concentrating on issues that are and will be integral components of the economy when it begins to recover. Most of our purchases and really most companies will have losses or miniscule earnings for at least the next three quarters. Eventually analysts and investors will quit worrying about earnings and just consider those companies that will prosper on the other side of the valley.
We currently own:
We have traded AT&T profitably for the last two years. T owns content thru Time Warne. Direct TV was a mistake (only $40 billion- ugh!) and will have cancellations of over 1 million in each of the next few quarters. But the cell phone service will remain strong and the shares are down are down 30% and yielding 7.5%.
Walgreens Boots announced better than but still dropped 10% which allowed us to repurchase at a multi-year low.
EBIX, Inc. engages in the provision of software and e-commerce services to the insurance, finance, and healthcare industries. Share price is down from $53 to $12 and priced at 3X last year's earnings. We think this price level is the result of insider share-holders being sold out because of special loan margin calls.
Toll Brothers is a premier home builder whose shares are at a 10-year lows. Cash on hand equals debt.
Viacom CBS is our albatross but the value is there and we will be adding to positions.
Every time GE has good news another negative arrives. They closed the $20 billion sale of their Bio Health unit this week. And they also furloughed half of their engine building workers as Boeing remains closed for business. They have $50 billion in cash to survive.
We are back in Western Digital. It offers participation in the chips and is again on an 8 year low after trading over $60 this year and $100 a few years ago.
Utilities have been abandoned this month as the big boys and girls short them because current wisdom is that no one will pay their bills. We added Exelon in small amounts down from $51 to $32.
Starbucks, Twitter and Beyond Meat have been profitable trades and we have made small purchases with room to add.
Wintrust, Fifth Third, Huntington and Wells Fargo have been major culprits in loses in our portfolio values. We bought them down 30% and then the Covid crisis became serious and they proceeded to fall another 30%. Ugh. We have reduced positions and moved the money to other areas.
Finally, we own Marathon Oil and XLE. The Energy Select ETF (XLE) has a large position in Exxon and Chevron Texaco and smaller positions in a number of high-quality producers, servicers and drillers. We feel better with an industry ETF rather that having to pick individual issue.
Other companies we have owned and will again are First Solar (sold at loss), Nucor (plus scratch), Timken (profit trade), Johnson Controls (flat trade), Carpenter Tech (profit trade), NCR (scratch), Hewlett Packard Enterprises ((profit) and United Natural Foods and Sprouts both traded profitably.
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