Lemley Yarling Management Co
309 W Johnson Street
Madison, WI 53703
Comments on activity in client accounts
Labor Day Weekend 2019
Taking the time off. Goodbye to August.
24 August 2019
Markets continue their Trump Tweets reaction trading during the volatile (when computers control daily market moves) August vacation time.
Retail earnings were mixed this week but Nordstrom and Urban Outfitters were better than and we used the pop in both of them to exit; Nordstrom with a satisfactory scratch and Urban with a 10% profit. We were too exposed to retail and so sold American Eagle for a plus scratch and Tapestry with up to a 10% gain. That leaves us with Abercrombie, Macy's and Under Armour.
With the AEO money we did buy Huntington Bank for a potential 15% upside trade.
We have no idea where markets are going. The record low interest rates are the result of foreign money seeking a positive return from safe U.S. Treasuries. We don't think the inversion means recession and the companies we own are on multi year lows and multiyear low-price earnings ratios but …. the Trumpster‘s god complex and goofy tweets as in ordering all U.S companies to stop doing business with China (caused Friday's 500 point drop) are not inspiring market participants with confidence and coupled with the trade war with China, the India/Pakistan brouhaha over Kashmir, Brexit and the Iran whatever the rest of August and early autumn may cause markets to be more rocky than usual.
And so, we have a decent cash position and will continue to trade around earnings reports while maintaining a diversified portfolio of mostly 4% plus dividend paying stocks.
16 August 2019
This week was not kind to our accounts or our psyche. But we have been here many times before over the last 50 years and always survived. And the drop has given us an opportunity to repurchase many of our favorite trading stocks at value prices with excellent dividend yields.
With the Markopolos brouhaha yesterday we sold our position in GE for a too large loss that wiped out our gains for the year in the shares, (Did not sell Jim E. or Ron B.). We have abandoned the soap opera for good as the Long-Term Care/Boeing engines unknowns are too too- and there are many good values that have been created in the last two weeks that aren't the soap opera GE is. Our trading of GE this year while resulting in an overall small plus/minus (including yesterday's sale) has been less than stellar.
Discussion of Markopolos charges:
And the positive news:
The previous CEO did the same thing at $30 per share. That didn't work out to well for his pocketbook or the company. Of course, both Immelt and Culp were and are being paid millions so ---
With the GE proceeds we purchased Hewlett Packard Enterprises. We have been trading HPE profitably and it is a value trade that will eventually recover our loss on the GE trade.
Retailers have been under tremendous selling pressure because of the China tariffs, the Amazon -no one will ever shop in a mall theme- and the ability to sell short on downticks. We believe the disaster scenario is overdone. Rather than concentrating on one or two issues we have been adding companies as they blow up on earnings news that is or analysts' downgrades.
We added Tapestry @ $19(formerly Coach) with GE proceeds when it dropped $5 yesterday on less than earnings (TPR was already down 50% from its 12-month high). Analysts were disappointed and fled on info that the Kate Spade turnaround is not occurring as fast as analysts or the company hoped. After the conference call analysts abandoned the stock and lowered their price objectives on the shares by 50% and more, (now you tell us!!).
TPR Profile (https://finance.yahoo.com/quote/TPR/profile?p=TPR )
Bloomberg -- Disappointing results at Tapestry Inc.'s Kate Spade line prompted a string of rating downgrades on the stock, with analysts saying a recovery may take several quarters….
After sliding 22% Thursday to a 10-year low, Tapestry shares pared some of the losses to rise as much as 3.4% in New York on Friday….
Credit Suisse, Michael Binetti downgrade to neutral from outperform, price target to $22 from $38….
MKM Partners, Roxanne Meyer downgrade to neutral from buy, price target to $21 from $52….
Piper Jaffray, Erinn Murphy downgrade to neutral from overweight, price target to $23 from $40….
Telsey Advisory, Dana Telsey downgrade to market perform from outperform, price target to $22 from $42….)
For their reasoning go to:
We also added Urban Outfitters- down from $52 to $20. The analysts loved it at $40 and avoid it at $20. Richard Haynes and his wife founded and have run the company since 1970. Insiders own 37% and buy shares every time the shares crater. Urban is located in University towns and carries the kind of stuff that students decorate their dorms with as well as funky clothing that changes with the mood. Earnings come next week and if it drops more, we will be adding shares.
Under Armour has been a profitable trade for us the past year and we repurchased after it dropped from $24 to $18 on analyst disappointment with the recent quarterly report.
We had scratch losses in Box in February at the $19 level and repurchased this week at $13-$14. It's a tech stock that is not overly expensive which traded at $29 last year.
Box profile https://finance.yahoo.com/quote/BOX/profile?p=BOX
In the large cap stocks, we bought Emerson Electric at $57 down from $80 with at 3.3% yield and at 15X; CBS when it dropped $7 this week on the announced remerge with Viacom priced at 8X with a 1.8% yield; GM down from $42 to $36 with a 4.5% yield and priced at 5X.
To fund all these purchases, we took another trading profit in AT&T.
Finally, we repurchased Michaels at $5+. We traded MIK over year end for a plus scratch when it was at the $13 to $15 level. Earnings projections are at $2 per share so the shares are priced ta 2.5X. MIK has a ton of debt acquired when it was taken private in 2007 by Bain Capital and Blackrock for $6 billion, (now valued at $4 billion). Those two companies still control over 50% of the shares. (It may be time for another buyout?)
Discussion by analysts at:
High dividend payers we own down 50% from 12 months highs
American Eagle 3.5%
Kraft Heinz 6.2%
Apache Oil 5%
Quality companies we own down 25% and more:
Walgreens Boots 3.6%
Wells Fargo 4.5%
Emerson Electric 3.3%
Hewlett Packard Enterprises 3.5%
Huntington Bank 4.6%
And the non-dividend payers:
United Natural Foods down 75%
Sprouts Food Markets down 40%
Urban Outfitters down 60%
Under Armour down 30%
Michaels down 75%
Rite Aid down 90%
And Ascena- UGH!
Timing is everything- we were early
Reminds us of Theranos (https://en.wikipedia.org/wiki/Theranos) and Uber:
Buffet on Kraft Heinz https://www.forbes.com/sites/alapshah/2019/08/12/obscure-berkshire-hathaway-filing-reveals-what-warren-buffett-thinks-about-kraft-heinz/#344921b33b82
9 August 2019
Volatility is back as Trumpster tweets and helicopter press gaggles roil markets until the White House clarifies or refines the tweets or spoken words. Thus, the up and down 200 to 600 points daily moves in the DJIA
The markets move daily on China comments and seemingly will until the trade imbroglio is resolved or some other major event takes center stage. Trump seems not to care about the effect on the economy suggesting present pain will result in long term gain. Time will tell.
We added retail stocks this week in small amounts. We may be early but they are priced attractively on multi year lows. The talking heads say consumers will spend more on line than in stores. All retailers now have on line presence and we are guessing that the younger generation can figure out how to reach websites if the offerings are attractive. Shorting retail ETFs and individual stocks is the trade of the month for the computer folks as well as doing the same with oil issues.
We are down to one oil issue, Apache (yielding 4.5%), having sold British Petroleum for a $2 loss and placing the funds in Kraft Heinz which plunged $5 this week to an all-time low of $26. Berkshire Hathaway owns 330 million shares with a mid $30s cost and that is too large a position to sell so we will ride along with Warren for a while with the 6% yield.
We also purchased Macy's at $19 (we last traded it at the $25 level this year for a scratch and last year in the $30s). With a 7.5% yield from a well-covered dividend and priced at 6X earnings it is worth the risk. Same goes for American Eagle Outfitters (3.5% yield 15X), Nordstrom (5%, 8X) and Abercrombie (4.8% and 12X).
We also added Hewlett Packard Enterprise and Huntington Bancshares when they dropped to prices from which we have traded profitably this year and last. GE moved lower on earnings- now it is Boeing engines- and we reentered for a trade. We have room to add more shares.
Intel is in the doghouse even though it had a positive report. Intel is priced at 10X earnings with a 2.5% yield. AMD priced at 54X earnings with no yield is supposedly eating INTC's lunch. That's the thinking controlling the current markets. A guru on CNBC commented that earnings and yield don't mean anything anymore only sales growth counts. That is the reality of Amazon, Beyond Meat, Match Group, Pinterest, and Uber type stocks leading the markets higher- just like JDSU, Microsoft, AOL and Qualcomm etc. in 1999.
We watch and wonder and continue to buy value.
For your reading enjoyment:
The most influential analyst for GE stock is Stephen Tusa, who has been bearish on the company for a long time. The following quote from Tusa shows he was not impressed with the earnings beat and improved guidance:
"The quarter was a miss operationally, with the combined Power/Renewables segments worse (despite no H-deliveries which is accretive), offset by modest upside at Healthcare and a material miss at Aviation, the key value driver."
GE Stock Positives
GE reported earnings last week that beat Wall Street earnings expectations. Expectations were for EPS of 12 cents and results came in at 17 cents. Since GE is in the midst of a turnaround, what is just as important as quarterly results is guidance towards the future.
Given the improvements the company saw, they increased their guidance adjusted EPS to between 55 and 65 cents (up from 50 to 60 cents). In addition, they also raised adjusted industrial free cash flow guidance to -$1 billion to +$1 billion vs. prior estimates of flat to -$2 billion.
Kraft Heinz released its financial results for the first half of 2019 Thursday morning. The company noted that first-half revenues dropped 4.8%, and operating income sank 55% from the same period last year.
Here are the numbers for Kraft Heinz first half, compared to Bloomberg-compiled estimates:
Q1 net sales: $5.96 billion vs. $6.06 billion expected
Q1 adj. EPS: 66 cents vs. 61 cents expected
Q2 net sales: $6.41 billion vs. $6.59 billion expected
Q2 adj. EPS: 78 cents vs. 75 cents expected
"The level of decline we experienced in the first half of this year is nothing we should find acceptable moving forward," CEO Miguel Patricio said in a statement. "We have significant work ahead of us to set our strategic priorities and change the trajectory of our business https://www.bloomberg.com/opinion/articles/2019-06-25/a-100-year-austrian-bond-at-1-2-what-fresh-madness-is-this
Wal-Mart should be included in this group https://markets.businessinsider.com/news/stocks/16-retail-stocks-vulnerable-to-new-china-tariffs-trade-war-2019-8-1028412860#1-kohl-s16
Sprouts Farmers Markets
If Trump imposes
the final round of tariffs on China he will in effect have imposed a $100 billion per year ($1 trillion over 10 years) tax increase on consumers which will offset the $100 billion per year ($1 trillion over 10 years) tax cut he and his folks in Congress gifted to corporations and the 1% in 2017. Guess that's how Trump-Repubs balance budgets. https://www.washingtonpost.com/business/economy/trump-says-he-will-impose-new-tariffs-on-300-billion-in-chinese-imports-starting-next-month-ending-brief-cease-fire-in-trade-war/2019/08/01/d8d42c86-b482-11e9-8949-5f36ff92706e_story.html?utm_term=.2dd34725447c
More China trade articles
The Treasury report
projected the tax cuts and the budget would boost economic growth to 2.9% a year for the next 10 years. That prosperity would boost tax revenue enough to offset the tax cuts.
Two Other Reports Disagree
The Joint Committee on Taxation analyzed the tax cuts alone. It came to a different conclusion. It said the Act would increase the deficit by $1 trillion over the next 10 years. The Committee expected the economy to grow just 0.7% a year. It did not take into account the other changes in the FY 2018 budget.
The Tax Foundation came up with a second conclusion. It said the Act will add almost $448 billion to the deficit over the next 10 years. It looked at the effect of the tax cuts themselves and eliminated the Affordable Care Act mandate.
The Foundation said the tax cuts would cost $1.47 billion in decreased revenue. But eliminating the mandate would add $700 billion in growth and savings. The plan would boost gross domestic product by 1.7% a year. It would create 339,000 jobs and add 1.5% to wages.
Only in America
Boeing and the 727 Max
How can we get one?
Danish bank is offering mortgages at a 0.5% negative interest rate — the latest sign of just how twisted the global economy currently is
Jyske Bank, Denmark's third-largest bank said this week that customers will now be able to take out a 10-year fixed rate mortgage with an interest rate of -0.5%.
That means it will effectively be paying customers to borrow money.
The move is the latest sign of just how topsy-turvy the global economy is right now.
"It shows how scared investors are of the current situation in the financial markets, and that they expect it to take a very long time before things improve," one analyst said.
2 August 2019
Fed Cuts; employment good; earnings good; Trump tweets; market falls. Glad we're on vacation. Back next week.
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