Lemley Yarling Management Co
309 W Johnson Street
Madison, WI 53703
Comments on activity in client accounts
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:
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.
The Trumpster is worth $10 billion by his own reckoning. Why doesn't he help his son in law out of his financial problems?
And for more detail:
26 August 2017
We added to our Chipotle holding this week and also bought Abercrombie. ANF same store sales were only down 1% and Hollister same store was up 6%. Abercrombie is priced at $500 million with no net debt and does over $3 billion in sales. It plans to close 60 stores as leases expire in the second half of 2017. The gurus have overlooked that retailers can close profitless stores as leases expire and thus improve profits and same store sales numbers.
Markets continue to meander without any true sense of direction. Most the specialty retailers are reporting better than numbers and that gives us some hope that their value may eventually be acknowledged in the markets.
Investing is a journey.
Below is a letter from a hedge fund value investor on how tough times have been for value investing.
Stunning drops in solar and wind costs turn global power market upside down
Uber has a private valuation of $80 billion. In the second quarter:
Uber generated $1.75 billion in adjusted net revenue in the second quarter of this year, up 17 percent from the prior quarter. Uber narrowed losses by 9 percent to $645 million. And-- Uber doesn't include the cost of stock-based compensation in its losses.
Among Uber's biggest costs: India, Southeast Asia, discounts for passengers and bonuses for drivers, insurance payments, employee salaries and self-driving car research.
18 August 2017
Mr. Market has been a mystery to us this year and as trading has begun to look toppy again we raised cash (we had hoped to make a bit back on one final rally) in accounts getting them back to 60% and above. Our accounts have suffered from our usual – and obviously too early -concentration on value in a market that cares little for the old time Graham and Dodd fundamental analysis (https://en.wikipedia.org/wiki/Value_investing ).
Oil and retail are cheap as are GE and Viacom and Kroger and Teva and Astra Zeneca et al. But the big boys and girls are following the leader at the top of this eight year bull run and whatever a few buy/short many follow.
In the past this type of follow the leader investing has ended badly but gurus are positing that it is different this time. (In the past they have also posited it was different.). Amazon is a great company but its current operating theory will never make money unless AMZN puts all other retail businesses in bankruptcy and then tries to raise prices and charge for delivery. Tesla seems to have the electric vehicle market figured out and may eventually earn money. But if TSLA does begin earning it will then be priced like all the other auto companies who will be selling as many or more electric vehicles.
As we mentioned several weeks ago, in 2000 Microsoft was a market darling as was Cisco and QUALCOMM. In 2017, Cisco and Qualcomm are now fine prosperous companies but are valued at less than they were in 2000 because now they are being priced on earnings not hope. Microsoft has just recently risen above its year 2000 market value.
So will it be with Tesla sometime in the next fifteen years when it is priced at ten times earnings as are other auto companies. Netflix is great but it too earns little because it spends all its free cash creating new content. Eventually Verizon or another Telco will buy it for the content and connectivity. That is the main reason it is priced at a gillion times earnings. Facebook has become like a weekly shopper with every other post an ad. And our guess is that it is populated on a daily basis by mainly old folks trying to contact long lost high school friends. (Our grandkids have moved on to other platforms).
We missed the moves in all these issues. But our 50 year investment philosophy has kept us marching to a different drummer hitting singles and not home runs. And over the years we have usually matched market returns with half the risk. We don't think it is different this time.
Last Friday we purchased Macy's in accounts and during the week we sold QUALCOMM for a plus scratch. We flirted with increasing our Target holding by adding to our positions when TGT reported great numbers but then decided (correctly- and for a small profit that the TGT rally would be short lived) and that we liked cash better. We sold Occidental and switched Devon to Marathon Oil at a too big loss to raise cash while still maintaining but lessening our exposure to oil. Oil failed and rolled over at $50 last week (third time this year while making lower lows ach time it moved down into the lower $40s) so it is probably on a trip back to those levels.
Our three year affair with oil stocks has been painful but in reviewing the trading we were surprised to discover that we are basically scratch flat on the trading. Given that oil has dropped from $80 to $40 we take some small comfort from that fact.
Unfortunately our continuing oil adventure has been painful for accounts this year. We are maintaining the position because we continue to think that Trump will start trouble with Iran before the year is out. As Bannon said this week, Trump can't do anything in North Korea until he figures out how to keep the North Koreans from killing 20 million South Koreans if the U.S attacks North Korea. So Trump's aggressive posturing to deflect and control the news flow is going to have to move towards Iran, unless he adopts the Reagan strategy of going after a Western Hemisphere country. But Venezuela is not Grenada and we hope the generals point that out.
We have seen no recent comments on this in media. Maybe The Trumpster will light the torch.
The 2018 Winter Games are set to take place next February in the South Korean ski resort town of Pyeongchang, just 50 miles south of the demilitarized zone, or DMZ—which is actually heavily fortified—that separates the two Koreas. And this time, North Korea's actions are raising concerns months ahead of time, in the form of intensifying nuclear-war rhetoric with the U.S.
More on the Tesla euphoria:
Overlooked by most of the media:
Iranian President Hassan Rouhani says fraught tensions with the U.S. over sanctions related to Iran's ballistic missile program might lead him to quickly restart the country's nuclear program and tear up its 2015 nuclear deal with major world powers, per the WSJ.
Rouhani's quote to his Parliament: "Iran will certainly return to conditions much more advanced than before the negotiations started in a short period, not on a weekly or monthly scale, but on a daily and hourly scale."
Why it matters: It's another potential nuclear threat for President Trump to address — and he hasn't exactly shown restraint when faced with strong rhetoric from North Korea. This one is also a serious threat to Western businesses, who poured billions in investment into Iran's economy after the nuclear deal.
Stanley Fischer, Fed vice-chair, on the business of bank reform (FT):
"It took almost 80 years after 1930 to have another financial crisis that could have been of that magnitude. And now after 10 years everybody wants to go back to a status quo before the great financial crisis. And I find that really extremely dangerous and extremely short-sighted. One can understand the political dynamics of this thing, but one cannot understand why grown intelligent people reach the conclusion that [you should] get rid of all the things you have put in place in the last 10 years."
Only in America:
Cheetos pop-up restaurant is real — and it's ‘classy' (NYP)
The Cheetos pop-up, dubbed "The Spotted Cheetah," is located on West Broadway at Franklin St. inside the Distilled gastropub. The menu — which includes Cheetos meatballs, Cheetos crusted fried pickles, and Flamin' Hot and White Cheddar Mac n' Cheetos — was created by celebrity chef Anne Burrell.
Analysts at FBR Capital announced (upgraded) American Eagle shares ahead of earnings(8/23), assigning the stock a buy rating and a $13 price target.
Now, issuing a buy recommendation just days before an earnings release is a pretty risky move. Roughly one week from now, FBR will either be proven really right about American Eagle stock -- or really wrong. If the latter happens, investors who heeded FBR's call to action may be (rightly) upset with the analyst. And yet, FBR seems pretty certain it is not wrong about American Eagle.
2. What FBR doesn't hate about American Eagle Outfitters...
Why is that? As explained in a write-up on StreetInsider.com (requires subscription) this morning, there is a certain amount of "mall risk in A the clothing specialist will fail to continue producing free cash flow and dividends in the future.
Why is that?
Currently, American Eagle Outfitters is generating free cash flow at the rate of about $170 million a year. Operating cash flow has been coming in pretty steadily at present levels for the past three years, and capital spending has held firm for the past two years (and is down from three years ago). All of this suggests that while American Eagle may not be growing much right now, at least it's not shrinking, either.
With cash profits secure, FBR is probably right about American Eagle being able to maintain is generous 4.5% dividend yield. In fact, with dividends accounting for less than 50% of the company's profits at present, and cash flows steady, it's even reasonable to believe American Eagle might increase its dividend at some point.
Read more: https://www.fool.com/investing/2017/08/15/american-eagle-outfitters-stock-upgraded-ahead-of.aspx?yptr=yahoo
11 August 2017
We repurchased Macy's on Thursday $12 below where we sold it in the spring as the death of store based retail continues to be the prevalent theme among the big boys and girls.
Teva Pharm continued its downward trajectory because analysts-who loved it last month - hate it this week. Since we began with a small positon our holding will not bankrupt us but it is disconcerting when a company that is going to earn more than $4 per share for the year is determined to be not worth owning at $20 per share. We are waiting to add to the positon.
The Trumpster has the markets in a quandary over his belligerent tweets about North Korea. The first day we laughed; the second day we smiled; this morning we prayed – and we never pray- that he really isn't serious.
Until next week---we hope.
Some thoughts and articles about our stocks:
Macy's executives said their store restructuring and inventory reduction put them on track to reach their goals for the year. "I don't want to make too much of one quarter, but it certainly feels better than it has in a long time," Karen Hoguet, Macy's finance chief, said in an interview. Read more: https://www.wsj.com/articles/departments-stores-slow-declines-in-sales-1502370175
Goldman Sachs and the customers Yachts-now they are Goldman's yachts. By the by, one of the practices that exacerbated the crash of 2009 (actually all crashes) was the forced selling of owners' stocks that had been pledged to the large brokerages to borrow money to buy goodies so the owners wouldn't have to pay taxes on selling the stocks. https://www.wsj.com/articles/why-goldman-sachs-seized-a-clients-217-foot-yacht-1502357403
When all the analysts loved the Teva/ Allergan deal: https://www.wsj.com/articles/teva-to-buy-allergan-generics-for-40-5-billion-1437988044
Now they tell us:
Aug 4, 2017 6:45 AM EDT
August 4 (FlashRatings.com) - Analysts at RBC Capital downgrade Teva Pharmaceutical Industries Limited (TEVA) from "outperform" to "underperform". The target price is reduced from $37 to $21.
RBC Capital Markets' Randall Stanicky and Ashley Ryu write that they think pressure on sector EBITDA will persist, with leverage for many pushing up on covenants, leaving elevated risk. While they write that full capitulation has already come (average 2018 EPS estimates are down 44% in the past 18 months), investors are focused on stabilization now, a process that will take time.
Another story on analysts who -after the fact -have changed their ratings, the real reason being that the shares price has tanked.
Share of Teva Pharmaceutical have not done very well lately, with shares tumbling more than 30% over the past two trading days. TEVA stock is now down 43% since the start of 2017, hitting its lowest levels since 2003.
The trouble began when Teva reported its second-quarter earnings. Although sales grew 13%, earnings plunged and cash flows dried up. As a result, management cut guidance. Then the analysts piled on. Monday isn't getting much better, with Teva stock down 4% one hour into the session.
Analysts at the Bank of Jerusalem downgraded Teva to market perform and assigned a $26 price target -- $6 per share higher than its current price. However, Morgan Stanley downgraded the stock to underweight and assigned a $16 price target. The target implies about $4 per share or 20% more downside from current levels.
That's analyst David Risinger's best-case scenario, who used to have a $36 price target on it. Pricing pressure on generic drugs should continue, weighing on Teva earnings, he reasoned. As a result, Risinger cut his EPS forecast for fiscal 2017, 2018 and 2019.
Risinger's bear case is far starker, with a price target of just $9. The bear case price target factors in an even worse-than-anticipated decline in Teva's business
Ford's electric SUV:
Ford's first fully electric, long-range car is on schedule to arrive by 2020 and will boast an affordable price tag. But it's going to have some serious competition.
Ford first announced it was planning to launch a long-range, all-electric crossover utility vehicle (CUV) in January at CES. And while the company hasn't revealed exactly how much the vehicle will cost, Raj Nair, the company's chief technology officer, told Business Insider that it will be priced for the masses.
"Our plan is for it to be an affordable vehicle, a mainstream model," Nair said.
"To get electrification volumes where we would all like them to be we have to make sure we make the affordability targets or otherwise they are going to stay as a niche item or a pure luxury item," he said.
But Ford isn't the only company planning to roll out an affordable electric SUV in this timeframe.
This year, is expected to have a range of more than 215 miles. Read more
4 August 2017
As earnings season continues we have added small amounts of companies that have disappointed. In this market the big boys and girls turn on stocks quickly with 20% drops not uncommon. Under Armour, 3D, and generic drug manufacturer Teva Pharmaceutical all disappointed and we added small amounts of each to accounts. Viacom dropped on Friday on the end of cable talk and we bought a bit. We now own:
Marathon Oil; Devon Oil; Occidental Pete; Rite Aid; Ascena Retail; The Gap; American Eagle; Chico's; Under Armour; target; Chipotle; QUALCOMM; General Electric; Bristol Myers; Astra Zeneca; Teva Pharm; Deutsch Bank; 3D; Kroger and Viacom B.
Cash positions are reduced but remain substantial in most accounts.
We are posting URLs on Teva and all are so negative they even scare us. Read with many grains of salt and remember that these are analysts who were wrong on the shares. Debt is huge ( from a $40 billion buy of Allergan's generics business last year but cash flow is fine and the dividend cut makes $800 million more a year available and is a prudent move.
When the last oil trader gives up:
Are the markets high?
While nobody knows what catalyzed for the sharp selloff over the last hour on July 26, with Citi blaming it on Acrophobia, or fear of heights, saying that "US equities opened at record highs, key levels were being approached in fixed income while USD enjoyed a bid across the board... However since then, it looks like markets have gotten a small case of cold feet", Bloomberg had a different idea, when it observed that stocks erased gains around 12:30 p.m. as S&P 500 fell 0.5% over 60 minutes to low of 2,469.51. It notes that the "weakness occurred as traders circulated a note by JPMorgan quant strategist Marko Kolanovic that cautioned investors on the risks of record-low volatility in the equity market."
In his latest note …
"In what is akin to the law of ‘communicating vessels,' once inflows in bonds stop, funds are likely to start leaving other risky assets as well, including equities. The FOMC statement yesterday alleviated immediate fears – normalization of balance sheet will start ‘relatively soon,' but only if ‘the economy evolves broadly as anticipated.' This reasonably dovish stance pushes this market risk out for a few weeks (the next ECB meeting is Sep 7th, Fed Sep 20th, BoJ Sep 21st). This gives volatility sellers and other levered investors a limited window to position for a seasonal pickup in volatility and central bank catalysts in September."
For the TL/DR crowd, picking up on an article posted here two days ago in which MS explained what would happen if VIX went "bananas", Kolanovic writes that "strategies that boost leverage when volatility declines, such as option hedging, CTAs and risk-parity, share similar features with the dynamic ‘portfolio insurance' of 1987," which "creates a ‘stop-loss order' that gets larger in size and closer to the current market price as volatility gets lower." Additionally, growth in short-vol strategies suppresses both implied and realized volatility, and with volatility at all-time lows "we may be very close to the turning point."
Read whole article: http://www.zerohedge.com/news/2017-07-27/we-may-be-very-close-turning-point-selloff-blamed-note-jpms-marko-kolanovic
Trump Administration Proves Its Goldman Sachs Bona Fides by Parting Ways with Anthony Scaramucci
a stock character in the Italian commedia dell'arte that burlesques the Spanish don and is characterized by boastfulness and cowardliness
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