Lemley Yarling Management Co
309 W Johnson Street
Madison, WI 53703
Comments on activity in client accounts
25 January 2019
Hooray! The government is open- until it isn't. At least the folks will get paid.
With the Trump known unknowns, the trouble in Venezuela, the Putin/Mueller/etc. probe, and the fact that we have bounced back 10% to 15% in the past three weeks we decided to take some money off the table. We sold IBM, General Mills, Southwest Air, Newell, and Hewlett Packard Enterprises for profits. We also sold The Gap and Limited Brands for plus/minus scratches and switched Micron and Western Digital to Intel to improve quality when Intel dropped on less than revenues.
We added a new stock, COTY, to accounts. The share price is down from $21 to $7 on bad news.
Coty Inc., together with its subsidiaries, manufactures, markets, distributes, and sells beauty products worldwide. It operates in three segments: Luxury, Consumer Beauty, and Professional Beauty. The Luxury segment offers prestige fragrances, and skincare and cosmetics products through various retailers, including perfumeries, department stores, and duty-free shops under the Alexander McQueen, Balenciaga, Burberry, Bottega Veneta, Calvin Klein, Cavalli, Chloe, Davidoff, Escada, Gucci, Hugo Boss, Jil Sander, Joop!, Lacoste, Lancaster, Marc Jacobs, Miu Miu, philosophy, Stella McCartney, and Tiffany & Co. brands. The Consumer Beauty segment offers color cosmetics, retail hair coloring and styling products, mass fragrance, and mass skin care and body care products primarily through hypermarkets, supermarkets, drug stores, pharmacies, mid-tier department stores, and traditional food and drug retailers. It provides its products under the Bourjois, Max Factor, Rimmel, Wella, Adidas, Guess, Beckham, Beyonce, Biocolor, Bozzano, Bruno Banani, Clairol, CoverGirl, Enrique, Jovan, Nautica, Mexx, Monange, Paixao, Rimmel, Risque, Sally Hansen, Stetson, Younique, and 007 James Bond brands. The Professional Beauty segment offers hair and nail care products to nail and hair salons, nail and hair professionals, and professional stores under the Wella Professionals, System Professional, OPI, ghd, Clairol Professional, Kadus Professional, Londa Professional, Nioxin, Sassoon Professional, and Sebastian brands. The company also sells its products to third-party distributors, as well as through direct-to-consumer, third party-operated, and own branded Websites. It sells its products to approximately 130 countries. The company was founded in 1904 and is based in New York, New York.
The reason Coty is down: https://finance.yahoo.com/m/e4e53b06-ca18-33c2-a553-3ebb332b30c3/coty-upgraded-as-stock.html
We now own:
AT&T, Intel, Walgreen Boots, Morgan Stanley, Macy's, Hain Celestial, Under Armour, General Electric, Ford, Ascena Retail, Rite Aid, Marathon Oil, Devon Oil, Apache Oil, Baker Hughes GE, and the Oil ETF XOP.
Why hedge funds don't fight money laundering — even though they should
18 January 2019
During the week we added Morgan Stanley and Southwest Airlines and JETS (airline ETF) to accounts; took profits in Citicorp and United Natural Foods and reduced our position in Ford. We switched Viacom at a nice profit to BankAmerica and received a nice bump from that switch when BAC exceeded expectations. After the pop we sold a bit of BAC in accounts that were overweight the shares but maintained most of our positions. We have also been adding Baker Hughes GE, the oil field drilling equipment company. GE is in the process of divesting its interest in the company and we think the price will magically rise into that divestiture.
On Wednesday, United Natural Foods provided upbeat fiscal 2019 financial guidance. The shares jumped 30% - on what looked like short covering/day trader action- and with a 40% one month profit we sold.
We reduced our position in Ford as the company forecast slightly lower earnings. The shares are undervalued but we've been fighting a losing battle with Mr./Mrs. Market for years and, while we are maintaining a smaller position out of stubbornness, the funds raised can be invested more profitably elsewhere.
Ford is calling for 2018 adjusted earnings of $1.30 per share, slightly below Wall Street's view, because of challenges including higher commodity and warranty costs and a business decline in China.
Analysts predict earnings of $1.33 per share, according to FactSet.
Looking ahead, Ford Motor Co. Chief Financial Officer Bob Shanks said in a statement that the automobile maker sees the potential for year-over-year improvement in revenue in 2019.
Hewlett Packard Enterprise
By Daniel Newman, the principal analyst at Future Research
Unlike Dell Tech and its massive portfolio, HPE narrowed its focus following its split from Hewlett-Packard Co. and the PC business. HPE is out-innovating the competition in two areas. Its Green lake IT service offerings integrate smart metering so enterprises can pay for only the amount of IT services consumed. Second, its Edge line of specially designed servers for industrial applications and Aruba wireless networking solutions means it has the most complete offering and what I believe to be the most innovative hardware to support investments in Edge computing, one of the hottest tech trends of 2019. Edge computing is all about processing data closer to where it is being created to improve the speed that data is turned into insights. Autonomous vehicles, smart cities, digital factories and mobile telecommunications are just a few of the areas using it.
Western Digital dropped after Evercare ISI analyst C.J. Muse downgraded Western Digital to underperform from an in-line rating.
"The current competitive positioning for WDC is not ideal," Muse says, adding the company's annual dividend could be at risk.
The other side for Western Digital:
Ascena retail group, Inc. announced sales results for its holiday period, and updated its fiscal 2019 second quarter earnings per share guidance. Holiday comp sales were up 3%, as presented by segment and brand below.
|Segment ||Comparable Sales |
|Premium Fashion ||12% |
|Ann Taylor ||7% |
|LOFT ||14% |
| || |
|Value Fashion ||2% |
|maurice's ||2% |
|dress barn ||3% |
| || |
|Plus Fashion ||(8%) |
|Lane Bryant ||(9%) |
|Catherine's ||(3%) |
| || |
|Kids Fashion (Justice) ||1% |
|Ascena ||3% |
Ascena retail group, Inc. is a leading national specialty retailer offering apparel, shoes, and accessories for women under the Premium Fashion segment (Ann Taylor, LOFT, and Lou & Grey), Value Fashion segment (maurices and dressbarn), Plus Fashion segment (Lane Bryant, Catherines and Cacique), and for tween girls under the Kids Fashion segment (Justice). ascena retail group, inc. operates ecommerce websites and approximately 4,600 stores throughout the United States, Canada and Puerto Rico.
BMO Upgrades Micron
… The reason Srivastava's decision got so much attention is the fact that he did an about-face and turned from bull to bear. Srivastava says the decision to reverse comes from the fact that BMO believes the shares have "bottomed out." BMO still sees some risks on the horizon, namely worries that the market for memory chips won't be strong forever and a downturn is on its way. However, Srivastava says Micron has been able to shore up its business to create a more profitable, financially stable company even in times of trouble.
The last time that the memory business faced a cyclical downturn, MU had negative free cash flow of $2.6 billion. Srivastava and BMO say that even in a worst-case pricing scenario, he doesn't see Micron's new improved structure turning out negative free-cash-flow again.
11 January 2019
Our portfolios improved nicely this week. We adjusted them by selling GM when it popped on Friday on an improved earnings forecast. We don't think the hate fest for Ford or GM is over.
We sold part of our mall retail package for a 10% gain to redeploy the money into Macy's which dropped 15% on Thursday and into The Gap. We are more comfortable with these two issues- having traded them for years. Macy's now yields 5.8% at 6X earnings and Gap 4% at 9 tX earnings and is close to its 7 year low. Macy's should benefit from Sears bankruptcy.
We also exited Whirlpool for flat to a nice gain in accounts and eliminated our holding in CBS and International Paper as they both recovered from their December lows. We sold to redistribute the money into stocks with more percentage gain potential.
We added shares in Southwest Airlines, and Newell and Baker Hughes GE.
We are maintaining a fully invested posture.
What we've been saying about computer trading from the WSJ:
Investors have started to shake off last year's steep losses, helping markets regain some ground in 2019. But the robots are still almost uniformly bearish.
Trend-following investment strategies—a computer-based way of trading that has become a major force in some markets—have gone from bullish to bearish to a degree not seen in a decade, according to an analysis of algorithms that buy or sell based on asset-price momentum.
Funds that use such strategies likely went from holding net long positions, or betting that prices would rise, in four major asset classes—stocks, bonds, currencies and commodities—in the third quarter of 2017, to being short, or wagering against, everything but bonds by 2019. And even their embrace of bonds is bearish, signaling a flight to haven assets.
These are the findings from research by quantitative investment firm AlphaSimplex Group LLC, based on models that gauge the magnitude of price moves and perform like typical trend-following algorithms. Trend-followers generally try to ride markets when they move strongly in one direction.
"This is like the chaos bet," said Kathryn Kaminski, chief research strategist and portfolio manager at AlphaSimplex, who added that the last time trend-followers reversed positions so dramatically was in 2007 and 2008. "Pretty much any way you run the models, you end up net short a lot of asset classes."
AlphaSimplex employs trend-following and is also bearish across global markets. Exact strategies tend to vary among funds, which can make adjustments for different time frames, asset classes and additional data points.
And what these trend-following funds do is increasingly important. In the past 10 years, the amount of money managed by Commodity Trading Advisors, or CTAs, which are largely made up of trend-followers, has risen by about 36% to $357.5 billion as of the third quarter of 2018, according to BarclayHedge.
The shift by these funds occurred as weak economic data and geopolitical uncertainty late last year raised doubts about the rate of global growth. That took stock markets from all-time highs to their worst annual performance since the financial crisis.
SEARS RIP 2019
Shares of Roku Inc. ran up 9.1% in premarket trade Monday, after the streaming TV content connection services company provided an upbeat fourth-quarter outlook. The company said active accounts in the latest quarter rose about 40% from a year ago to 27 million while streaming hours jumped 68% to 7.3 billion hours. The FactSet consensus for streaming hours was 6.6 billion. Roku said it would provide 2019 guidance when it reports full fourth-quarter results in February.
GE shares were marked sharply higher in pre-market trading Monday following a report that suggested Apollo Global Management could be preparing a $40 billion bid for the group's airplane leasing division. Bloomberg reported Friday that the private equity group is in the process of securing around $30 billion in funding for a bid to buy all or part of GE Capital Aviation Services, a wholly-owned unit of GE with a near 2,000-strong fleet of aircraft that generated around $271 million in third quarter profits. Reuters reported similar interest in the aviation unit late Friday as well, with both citing an enterprise value of $40 billion.
4 January 2019
This is our short review of last year and positive forecast for our accounts in 2019. We offer the review with a few regrets for what might have been; and the positive forecast - with a grain of salt - for the New Year.
Last year accounts rallied into March, moved back to even into June, rallied into August and then it was all downhill into year end. Goodbye to 2018.
The positive effect of the 4th quarter market correction is that it offered us the opportunity to diversify and buy high quality companies at bargain basement prices. Markets are undergoing a much needed correction and the companies we now own are at compelling investment levels.
We had been awaiting a serious correction for several years as the tech stocks moved higher and higher into the realm of never-never land. The last two months have seen many of those one way investments drop 30% to 50% in value. As those stocks were sold, the prices realized still represented profits for sellers; and so the natural reaction was to sell losers to offset gains. The result was a 20% drop in the DJIA and S&P 500 over the last two months of 2018.
Markets are lower because of the "supposed" uncertainty of the Fed's interest rate policy.
The Fed Chairman cleared up any doubt about interest rate policy on Friday, January 4.
Markets are lower because of the trade/tariff wars with China.
Trump will settle with China and declare victory no matter what the deal as he did with Canada and Mexico.
Markets are lower because of the government shutdown.
The government shutdown will end.
Markets are lower because of the forecast of slower earnings' growth next year.
Earnings growth will slow but the prices of the stocks we own have already accounted for this fact.
Markets are lower because of the forecast that GDP will return to 2% growth in 2019 from 3.8% in 2018.
GDP grew at a 2% rate as markets rose steadily for 7 years before the Trump tax cut – and as an aside – that tax cut will rob future generations, and led to onetime stock buybacks that pumped up share prices and with the correction in the markets, those buybacks look pretty stupid now.
Markets are lower because China growth has slowed.
China will pump yuan (renminbi) into their controlled economy if the growth slows too much.
Markets are lower because Europe is in a Brexit caused slowdown.
The British and Europe will muddle through as they always do.
Unfortunately there is the great Trumpian unknown. Your guess is as good as ours.
With the above known knowns and the great Trumpian unknown it is no wonder that markets are where they are. Regular folks and the big boys and girls woke up and discovered that the emperor has no clothes. We had been expecting a serious correction for a few years but we admit we were surprised - as we always are - by the rapidity of the downturn.
And so we are where we are. We consider the glass half full and the long term risk in the stocks we own – minimal. We are more content with our investment posture than we have been in a long while.
Stocks We Own January 2019
AT&T is yielding 6% and priced at 9 times earnings. The Time Warner merger has confused the gurus because they can't decide whether T is an entertainment company or a communications company. Eventually they (the gurus) will figure it out. We're paid 6% while they do. T is at a 10-year low.
General Electric is at 8 times expected earnings. The near-term price action will depend on what CEO Culp says at the January earnings report. Culp's only TV appearance since becoming CEO was less than reassuring. Hopefully he has taken some elocution lessons and also found someone to dress him. We are in for the long haul after losing a bunch of dollars trading the shares over the past few years. 10 year low
IBM yields 4% and is priced at 8 times. It is cheap. It is a major player in cloud computing toe to toe with Amazon and Microsoft. Microsoft is priced at 20 times and Amazon at 50 times earnings. IBM is on an 8-year low
Whirlpool also yields 4% and also is at 8 times earnings. (There is a theme here.) WHR shares haven't traded at this price since 2012. It is the premier appliance dealer in the U.S. and is down on the China tariff woes. Settlement with China may relieve these concerns. WHR is priced at a 6-year low.
Walgreen Boots reported great quarterly results but some nitpicking by analysts and the December market collapse caused a $20 sell off and allowed us to reenter the shares at the price we sold in the spring. Walgreen's is a great company with a 3% yield and is priced at 11 times earnings. Amazon is not going to put them out of business. WAG on a 4-year low.
International Paper (think boxes) is down from $67 to $45 and yields 4.5% and is priced at 8 times. At current level it is on a 6-year low.
General Mills is in disfavor as are all packaged food purveyors but at 12 times with a 5% yield and 6 year low the risk in the shares on a long-term basis is nonexistent.
Hain Celestial is on an all-time low and at a historically low 15 times earnings. HAIN is the premier packaged organic foods purveyor and will eventually be acquired at a higher price. We have successfully traded the shares for years at much higher prices.
United Natural Foods is a distributor and also a provider of fresh and packaged organic foods. UNFI purchased Super Valu in 2018 using $2.3 billion of new debt. The shares currently priced at $11 sold as high as $50 in 2018. The market and all the analysts hate the Super Valu purchase and as the share price declined selling begat selling into year end. Our take is that these folks have been successful for 42 years in building the company and we are willing to take a chance on their leadership at these fire sale levels at which the company equity is valued at $600 million. For comparison, Sysco, the largest fresh and packaged food distributor, has sales of $60 billion and $8 billion of debt and an equity value of $32 billion. UNFI has sales of $20 billion, debt of $3 billion and equity value of $600 million.
Teva Pharmaceutical has new management. We tried to trade the shares 2 years ago and lost money. Warren Buffet's Berkshire Hathaway owns a billion dollars of shares at higher prices than we which gives some comfort. Teva is a leading generic drug manufacturer and is priced at 7 times earnings.
Citigroup and BankAmerica are both down 30% from highs this year and at 2-year lows. We are in them for a trade higher of 25%.
Western Digital, Micron and AMD are commodity chip manufacturers which were much higher last year until the big boys and girls woke up and smelled the oversupply in the industry. WDC is down from $100 to $40, Micron down from $66 to $30 and AMD from $34 to $20. WDC is priced at 4 times earnings and yield 5%. Micron is at 4 times and AMD is at an expensive 40 times.
Hewlett Packard Enterprises has been a profitable trade for the last few years and we own it for a move to $17. Priced at 10 times HPE provides a 3% dividend while we wait.
3D is speculative and we have traded profitably for the past few years. The name explains the 3D printing machines it makes.
We traded oil issues profitably last spring but were too eager with our purchases this fall when oil dropped from $70 to $60 and the corresponding oil shares were down 20% from their highs. To our dismay the shares fell another 30% and turned our oil share gains for the year into losses. But with the tentative Middle East situation we want to own some oil in accounts and so we reduced individual stock commitments and expanded the companies we own: Apache, Marathon Oil, Devon, The Oil ETF XOP, Schlumberger and Haliburton.
We have established year end retail positions. We own Limited Brands (Victoria's Secret, Pink and Bath & Body); Abercrombie (Hollister); Under Armour; Michael's Stores (Abby's favorite stock); Bed Bath & Beyond; Chico's (Black & White); and Ascena (Ann Taylor, Loft, Justice, Lane Bryant).
We bought Roku, an internet provider of content ($30 down from $85) in larger and more aggressive accounts. We also own CBS and Viacom which will eventually merge when Sumner Redstone dies. Finally, we have to own GM and Ford as we watch Tesla trade at infinity times earnings while GM & Ford both languish at 5 times with a 4% yield for GM and a 9% for Ford.
And we reestablished a speculative position in Rite AID (a real company with $22 billion in sales and only $3 billion in debt) at under 80 cents a share for at least a double.
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