Lemley Yarling Management Co
309 W Johnson Street
Madison, WI 53703
Comments on activity in client accounts
26 June 2020
Markets moved lower on Wednesday and Friday after a positive Monday and Tuesday with the Wednesday selloff occasioned in part by Peter Navarro of hate china fame saying the trade negotiations were kaput; only to have the White House clarify the remarks on Thursday leading to a late day minor rally followed by a Friday Covid selloff.
For the past few weeks, we have traded the up/down days with middling results. This week we made little progress and so decided to revamp the portfolios with non Covid value stocks.
We did try the Hope trade for one day buying a tech ETF (XLK) and a Cloud ETF (WCLD) but our heart and mind were not in it. We just can't own stocks trading on their highs because the buyers hope other buyers will come along to pay a higher price. With no/or miniscule earnings and with several priced at 100 and more times sales, Shopify and Spotify, and Zoom and Vroom and Fastly and Splunk (what kind of name Is that), and Nikola (no plant or operations and a $30 billion market cap), have become the darlings of the trading crowd. The Hope trade is alive and well as is the one stop shopping for institutions in the huge cap easy to buy Microsoft, Apple, Amazon, Google, Facebook, Netflix, Salesforce, Tesla, and Nvidia. At least they have earnings.
And so, we own: The Major Bank ETF (KBWB), the equal weight Major Bank ETF (KBR), and Huntington Bank. Without banks the economy fails as 2009 demonstrated. It's too bad that sound stocks with earnings and employing thousands of folks aren't considered worthwhile investments. In individual stocks we own IBM, AT&T, Verizon, Exelon, Pfizer, Lyft, Boyd Gambling, Carpenter Steel, NCR, and Parsley Energy (our Marathon Oil replacement).
We eliminated Marathon, Ford and GE as we decided to concentrate on stocks that have treated us well and to give up our own hope trades that have not been profitable for the last few years.
The markets recovered this week as the mantra has become "the stock markets are the only place for your money to be" what with no yield on CDs or government bonds.
With that in mind, Apple. Microsoft, Amazon and Facebook moved higher as they are the easy places for institutional money to be invested in large amounts without moving stock prices. (see last week's post). Also, with the stimulus of must own in some amount so we look prescient on July 1 , almost panic buying continues in Shopify (mkt value $100 billion with no earnings and at 100 times sales); Spotify (only $42 billion with a loss); Workday ($20 billion and zilch on the earning's line), - you get the picture.
The day trading work and jobless home millennials are also in on the fun with Nikola ($25 billion market cap and no operations but great hope); and other stocks such as Urban One that has moved in the last five days from $1 to $40 to $10 to $40 to $25 to $50 on more daily volume than shares outstanding. See https://realmoney.thestreet.com/investing/stocks/sometimes-it-all-comes-down-to-the-float-15352813?puc=yahoo&cm_ven=YAHOO&yptr=yahoo.
The younger set, no commission, Robin Hood investors have moved on from bankrupt Hertz and near bankrupt Charter oil to existing companies so the at least that is a positive.
This market action rhymes with 2007, and 1999 and 1987 and 1972 only with different names. Shopify and Spotify and Workday and Tesla and Zoom and Vroom may be real companies that will survive and prosper. But as with Mosaic, Agco, AK Steel and Varco in 2007; and Microsoft and Amazon and QUALCOMM in 1999, these present-day market wonders have the next fifteen year of sales and earnings growth baked into their current prices. Many of today's traders don't remember JDS Uniphase, EMC, Solectron, AOL, Yahoo, MCI, Myspace, even The Gap, from 1999: or the collapse of the United Airlines proposed $187 leveraged buyout in 1987 and the failure of touted newfangled futures protected portfolio insurance; the panic of the oil/real-estate banking/saving and loan crisis coupled with the collapse of real estate limited partnerships and annuities in the mid-1980s; the Hunt Gold/Silver fiasco of 1979: and the nifty 50 of the 1960s- Eastman Kodak, Xerox, U.S Steel, GM etc. and the flameouts like National Video (color TVs which are much cheaper now than they were then).
The one decision stocks of the 1950s and 1960s eventually stabilized at lower valuations or disappeared and the 2020 new economy changers will too. We don't question the fact that these new wonder stocks are disruptors and positive for the future but past history suggests that eventually the last 100,000 investors in may be very sorry.
We don't know when this mania will end. And maybe it is different this time; but in the middle of a pandemic with 20% unemployment and only low paying jobs returning we are not willing to take the risk. Greed is rampant and even we are having a hard time remaining on the sidelines.
We having been trading major down moves like last Thursday and we were able to realize trading gains on Tuesday from positions established Friday thru Monday; but we are again back to 80% plus cash with positions in three under-valued value plays- GE, Ford and Marathon Oil. We also have a trading/investment position in the Wisdom Trust Small Cap ETF - EES.
For your reading enjoyment:
12 June 2020
This week was not a lot of fun. Monday, we went mostly to cash because of the huge move Friday and the Monday follow thru. Greedily we tried to make a few dollars in some low-priced oil issues hoping that the day traders who were running Hertz and Charter Oil and Nikola would latch on to them. No luck and those were our worst trades of the week. On Wednesday when the major stock measures moved lower after Tuesday's sell off, we added some issues and on Thursday morning when the DJA was down 500 points we added more issues assuming that the correction would peter out. Unfortunately, the DJIA decided to close down 7% on the day. Luckily the markets rallied Friday morning and we were able to exit most of our buys with little damage if no great profit.
Twice burned and humbled, we are going to concentrate on a few ETFs and quality shares like Verizon, AT&T, Exelon and Walgreen Boots. Plus, Marathon Oil, Carpenter Tech, ViacomCBS, GE and Ford plus the Large Bank ETF -KBWB and the small cap value ETF- DON. We will continue to trade Boyd Gaming, NCR, Huntington Bank, Hewlett Packard Enterprises, Lyft, Twitter and Pinterest- hopefully more profitably.
The Nasdaq hit a new all time high of 10000 on Monday. In March of 2000 the Nasdaq made an all-time high of 5000. So, it took 20 years for the Nasdaq to double or an average annual return of 3.4%. Moreover, many of the stocks that were in the Nasdaq in 2000 are no longer in it. If they were the Nasdaq would be much lower since many have passed on to the speculative stocks' graveyard of memory. The same thoughts apply to the DJIA and S&P 500 which were created as untraded neutral measures of market performance. 16 of the stocks in the DJIA in 2000 have been dropped including GM-Bankrupt; GE, Eastman Kodak, International Paper, Alcoa, Hewlett Packard, Goodyear- all once a $500+ stocks if one includes all their splits and now mostly gone or just hanging on .
The Thursday sell off was partly blamed on the spike in Covid cases. We have been amused by the talking heads – sheltering in place at their mansions or NYC co-ops explaining there is little to fear from reopening.
Also, we would make the point that most of the gurus who pontificate on the tube are talking of Apple and Facebook, Nvidia and Google etc. That is because they run so much money that they can't consider buying a Carpenter Technology or a Wintrust both of which trade less than 500,000 shares a day. Yet in the last week Carpenter has traded between $31 and $22 up from March low of $15 and a February high of $52(multiply by 10 and you get a March to June move of $520 to $120 to $310 to $220 or by 100 a move from $5200 to $1200 to $3100 to $2200.). The same goes for most of the stocks we have been trading. The percentage moves well exceed the moves in the FANG shares and other large cap guru favorites.
Wonder if the Trumpster will be working the line and shaking hands at his Tulsa rally?
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