Lemley Yarling Management Co
309 W Johnson Street
Madison, WI 53703
Comments on activity in client accounts
29 March 2019
Happily, the first quarter ended for our accounts at a much more comfortable level than the last quarter of 2018.
Lyft gave a lift to the markets on Friday as the quarter ended. Although Lyft has never earned money and won't for the foreseeable future, talking heads were comparing it to Amazon in its early stages. The Lyft IPO at $25 billion set the stage for Uber to come to market with a valuation of over $125 billion. Uber also has never earned a dime and so the valuations on both Lyft and Uber are discounting many many years of future losses and then hopefully earnings. But that doesn't deter the institutions and funds who are run by folks who use those services daily and want to own a piece of the action to satisfy who knows whom.
The current climate continues to remind us of March 2000 and the following dot com crash from which it took Microsoft's valuation -after the fall – 17 years recover its 2000 valuation. Many of the have to own stocks of 2000 disappeared and history suggests that that will occur again.
In 2000 CNBC jubilantly covered the Time Warner/ AOL $100 billion merger as they are covering the Lyft IPO today and will cover the Uber IPO next month.
With the above in mind we reduced our CVS and Walgreens Boots positions this week to get more diversification and reinvested some of the money in Sprouts, Huntington Bank, Marathon Oil, Under Armour, and Ascena.
We have traded these companies over the years and they offer trading value at current levels. And most large accounts now have a 30% or more cash position.
At quarter end we own: CVS Drugstores (Aetna Insurance), Walgreens Boots, Kroger, Sprouts Food Markets, United Natural Foods (food distributor), Hewlett Packard Enterprises, Marathon Oil, Huntington Banks, Under Armour, and Ascena along with a good amount of cash.
Ascena has been a drag on accounts as it has dropped from $2.50 to $1.10 a share, giving the company an equity valuation of $200 million and a total valuation of $1.5 billion including debt of $1.3 billion which was assumed in the Ann Taylor acquisition several years ago. Luckily, we had reduced our position at $2.50 but then reestablished at $2 -ahead of earnings- which a costly mistake as 2nd quarter losses and lousy 3rd quarter guestimates gave the short sellers new vigor.
There are 60 million shares short- traders are betting on lower prices. We disagree with the short sellers- especially at this level.
ASNA announced this week that it is selling it maurices stores division for $300 million while retaining a minority position. Maurice's has sales of $900 million. With the net of $200 million ASNA will receive, ASNA will be able to reduce debt by that amount to $1.1 billion. On Friday Ascena announced it had placed its Dress Barn unit up for sale. With 2/3rds of maurices sales it could fetch $200 million allowing ASNA to further reduce debt
Ann Taylor and Loft (the premium brands), and Justice (teen clothes) are profitable with the 3 store names earning $80 million in the first six months of fiscal 2019. ASNA could sell Justice which has over $1 billion in sales for $800 million and eliminate all debt while retaining its premium brand and plus sized Lane Bryant and Catherine's. With no debt, Ascena would have current market value of only $200 million on sales of $3 billion. Or it could sell its plus size division for $600 million and have three profitable store divisions earning $1 per share with debt of $300 million and a total market value of $500 million on $3 billion in sales.
Hopefully our analysis of the fundamentals proves out over time and we are rescued from the current miasma with the shares.
Ascena Retail Group, has agreed to sell a majority stake in its subsidiary — Maurices Incorporated ("maurices") — to an affiliate of a private-equity firm OpCapita LLP for nearly $300 million.
The deal is likely to close by early summer and subject to customary closing conditions that include expiration or termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvement Act. Management anticipates to receive approximately $200 million in cash after expenses, which will be used to pay the term loan balance or reinvest in its business according to terms of the credit facilities.
As of Feb 2, 2019, Ascena had a total debt of $1,372 million, which represents the balance remaining on the term loan. Thus, repaying the term loan will aid in reinforcing the company's liquidity position.
However, Ascena will continue to have a minority interest in Maurices following the sale. Also, the company will support the brand's shared business services platform including IT, supply chain, sourcing and some back-office activities via services agreement.
Moody's Investors Service ("Moody's) said that Ascena Retail Group, Inc.'s ("Ascena") announcement that it signed a definitive agreement to sell a majority interest in its subsidiary maurices to an affiliate of OpCapita LLP is a credit positive but has no impact on the ratings or outlook. The sale is a credit positive because it results in a better-quality core portfolio and allows for accelerated debt repayment. Maurices has experienced mid-single-digit comparable sales decreases on average since FY 2016, as well as margin declines driven by the consumer mix shift to e-commerce.
We sold Viacom and CBS for nice one week/day profits when
AT&T agreed to terms.
Why AT&T's Carriage Deal Is Important for Viacom
Impact on Viacom
The renewal deal with AT&T was significant for Viacom, which is struggling to produce consistent earnings. AT&T is Viacom's largest distributor and has a total video subscriber base (including U-Verse subscribers) of 24.5 million. AT&T has also contributed nearly 15% of the company's 2018 annual revenues. AT&T has reportedly been paying about $1 billion as carriage fees for Viacom channels.
In 2017, Viacom also settled a carriage fee dispute with Charter Communications and renewed the contract with a 15% decline in rates. However, as per reports, Viacom's board was seeking to merge with CBS in a distribution contract if AT&T and Viacom did not reach a deal.
Spring Equinox 2019
Markets moved lower late this week after The Fed said it wouldn't be raising interest rates and lowered is GDP forecast to 2% growth for 2019.
The statement the Fed made this week was what the markets wanted in December. In December the Fed said it was going to raise rates in 2019 and continue the process of selling off $50 billion of treasuries a month. Markets crashed.
Now the Fed has reversed itself and markets are dropping. Sometimes you just can't win.
During the week we added Viacom which we have trade profitably this year. Viacom is in a fight with Direct TV and Direct TV is going to drop Viacom programs this weekend. Viacom has content - and streaming services like Amazon and Netflix are ravenous for content.
We repurchased United Natural Foods which we have also traded profitably this year. With a $2 plus forecast for 2019 the stock is cheap. Investors are still licking their wounds from owning the stock last year when it dropped from $50 to $10 after the merger with SUPERVALU.
We sold AT&T for a profit equal or much greater than the dividend we are missing. We may revisit; but the sale replenished cash in accounts and with the market action on Friday we are happy to have more cash on hand.
Finally, we added to Ascena during the waterfall drop this week. What was as small position has now become larger- but not too large. We know the company is fumbling its performance but it has managed to turn around Justice and Ann Taylor and Loft. Patience is going to be required. One negative is that insiders who are paid millions of dollars a year and not buying shares.
Sure, I'll change my mind if you give me an important job.
Mr. Moore for many years argued against the Fed's post crisis policies to keep rates low and to buy long-term bonds to stimulate growth, warning that the measures would stoke high inflation. But he has recently said the Fed is making money too tight, echoing Mr. Trump's criticism of Mr. Powell and the Fed.
Mr. Moore now says the Fed should target a commodity-price index to seek a stable dollar.
UNFI, the rationale for owning:
UNFI took an enormous hit after closing on its purchase of Supervalu (previously SVU). Its shares fell from over $52 late in 2017, to just $9.23 on Christmas Eve 2018. After rebounding to a year-to-date peak of $15.63, it closed at $12.73 on March 13, 2019.
UNFI's management is convinced the acquisition will pay off handsomely once the disruption from the combination has been completed.
Prior to the purchase of SVU, UNFI often fetched pretty high multiples. From 2009 through 2018 its average P/E ran 20.6x. UNFI's seven "should have sold" moments (red-starred below) all came at north of 20x current year's EPS.
From 2009 through 2017 UNFI's best entry points for traders (green-starred) came with the shares at P/Es ranging from 10.8x to 20.7x.
If Value Line's earnings projection for FY 2019 holds true, UNFI now sells for less than 5x this year's EPS (FY ends Aug. 3, 2019).
Read entire article at:
Ascena, the good and the bad:
Ascena's conservative financial policies and good liquidity over the next 12-18 months provide key credit support, including solid positive free cash flow, ample revolver availability and a lack of near-term maturities. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating.
Company with No Profits Aims for Biggest IPO In American History
Trump, the con man:
In 2003, a Deutsche Bank team led by Richard Byrne — a former casino-industry analyst who had known Mr. Trump since the 1980s — was hired to sell bonds on behalf of Trump Hotels & Casino Resorts. Bank officials escorted Mr. Trump to meet institutional investors in New York and Boston, according to an executive who attended.
The so-called roadshow seemed to go well. At every stop, Mr. Trump was greeted by large audiences of fund managers, executives and lower-level employees eager to see the famous mogul. The problem, as a Deutsche Bank executive would explain to Mr. Trump, was that few of them were willing to entrust money to him.
Mr. Trump requested an audience with the bank's bond salesmen.
According to a Deutsche Bank executive who heard the remarks, Mr. Trump gave a pep talk. "Fellas, I know this isn't the easiest thing you've had to sell," the executive recalled Mr. Trump saying. "But if you get this done, you'll all be my guests at Mar-a-Lago," his private club in Palm Beach, Fla.
The sales team managed to sell hundreds of millions of dollars worth of bonds. Mr. Trump was pleased with the results when a Deutsche Bank executive called, according to a person who heard the conversation.
"Don't forget what you promised our guys," the executive reminded him.
Mr. Trump said he did not remember and that he doubted the salesmen actually expected to be taken to Mar-a-Lago.
"That's all they've talked about the past week," the executive replied.
Mr. Trump ultimately flew about 15 salesmen to Florida on his Boeing 727. They spent a weekend golfing with Mr. Trump, two participants said.
A year later, in 2004, Trump Hotels & Casino Resorts defaulted on the bonds. Deutsche Bank's clients suffered steep losses. This arm of the investment-banking division stopped doing business with Mr. Trump.
8 March 2019
Last week we were smart; this week not so much. We decided to consolidate our holdings to three issues (and our Ascena speculation) which we have confidence holding no matter what the markets do. We want to remain with stock exposure but we also want to raise cash after the nice run we've had this year. Unfortunately, two of the three issues in which we are now invested dropped 10% this week and so the very short-term results of the strategy are negative but over the next few months we do believe we will be rewarded.
First- our sells. GE has been unkind to our fortunes (an understatement). And Stephen Tusa, the JP Morgan analyst who has been bearish and correct on this stock for the last year remains bearish- even with the $21 billion sale of part of the health division. The announcement that GE will be cash flow negative in 2019 was the final straw and we decided to move on.
We also realized that we ignored our comments of late January about only buying troubled stocks at year end and selling them before fourth quarter earnings announcements and to ignore them until the next December - only purchasing quality stocks suffering temporary pullbacks during the year. And so, when we reentered trades in Newell and Teva after profitably trading them from December to February we shouldn't have. We took our lumps and sold. For the same reason we traded out of Box for a scratch loss.
The oil rally has stalled and so we eliminated our oils for scratch profits. We also sold trading stocks Coke and Twitter for a scratch. Finally, Ford is unloved and unwanted by the poohbahs and gurus and we would rather concentrate the invested funds in CVS, Walgreen Boots and AT&T.
AT&T has a great yield, a desire to reduce debt, is reorganizing its Time Warner asset and dealing with losing customers at Direct TV. It is a survivor in the new economy with cash flow that will allow it to digest mistakes as well as improve performance. We view AT&T as a convertible bond holding with its 6.7% yield.
CVS, the largest drug store chain in the U.S. - (As of December 31, 2018, it had approximately 40 leased on-site pharmacies, 25 leased retail specialty pharmacy stores, 20 specialty mail order pharmacies, and 90 branches for infusion and enteral services; 9,900 retail locations and 1,100 MinuteClinic locations, as well as operated an online retail pharmacy Websites, LTC pharmacies, and onsite pharmacies. The company was formerly known as CVS Caremark Corporation and changed its name to CVS Health Corporation in September 2014. CVS Health Corporation was founded in 1963 and is headquartered in Woonsocket, Rhode Island.) -acquired Aetna health insurance for $80 billion (cash and shares of CVS) in November 2018. At that time CVS was priced at $80 per share. Today it is $53. The price is a 6-year lows on the shares during which time the company has grown earnings from $2 per share to $7 per share. Our thought is that as the Aetna shareholders exchanged their AET shares for CVS and a chunk of cash the arbitrageurs who had purchased Aetna began to unwind their CVS positions and their selling begat more selling pushing the share price lower. There were 290 million CVS shares issued to AET shareholders. Since CVS averages 12 million shares a day trading even only a quarter of those shareholders wanting to get out would exert significant downward pressure. And as Jim Cramer points our below, selling begets selling and last week the CEO suggested that earnings would be in the $6.75 range versus the $7.25 range due to consolidating of the two companies. analysts who were predicting the higher number lowered expectations and price targets and further selling resulted in the current price. At his level CVS is priced at $70 billion (excluding debt) which is less than what CVS paid for Aetna. With a 3.8% yield and priced at 8 times earnings we are content to endure temporary pain to use the sell off as a great buying opportunity to establish an oversize position in an excellent company that sold at $110 per share as recently as 2016 and was priced at $83 four months ago.
We have been profitably in and out of Walgreen Boots over the years, and the selloff from $86 in October to $70 in January encouraged us to reestablish holdings. Last Thursday WBA's Chief Financial Officer James Kehoe said at the Leerink Partners Global Health Care Conference... that since EPS growth guidance of 7% to 12% was provided: "I wouldn't say that reimbursement is higher, what I would say is the ability to mitigate it through winning more contracts, more volume and negotiating better, is there's less than we would have expected entering the year,". That gobbledygook is what set of the collapse of 15% in the share price this week as last Friday an analyst downgraded the shares and the subsequent 5 day sell off was exacerbated by other analysts jumping off the cliff in lemming like behavior. WBA is a great company and that has tripled earnings in the last five years. As with CVS we are using this collapse to oversize positions.
Markets are consolidating from their explosive run up in January and if we include our AT&T holdings, we have at least a 50% cash/AT&T position in most accounts. The present pullback may be the pullback that would have occurred with the completion of the China agreement. Brexit remains a problem as does the Trumpster melodrama but the Trumpster has been doing his thing for a while and the markets seem to be ignoring him. As long as there are no major conflicts in the world that require reasoned judgment, the daily Trumpster reality show seems to be a headline grabbing aside and not a major concern for market participants.
Come on Spring!!!
For CVS the Action Is Bad, the Stock Is Cheap
This is one where many shareholders can no longer take the pain and will sell at all costs.
By JIM CRAMER
Mar 05, 2019 | 11:26 AM EST
... Then there are more sellers who come in with the same motivation which is to beat still other sellers regardless of what's being done at the company. That's what is see happening at CVS Health (CVS) where the last word came from CEO Larry Merlo who took numbers down to below $7.00 for the year and made the stock a total pariah.
All we see now are sellers saying "get this off my sheets" without any recognition that at this level buyers would come in if you just give them a chance. It is not often that you get a high-quality company with a stock that is cut in half and a higher yield than I have ever seen this stock trade at.
People keep saying what a horrible mistake this one has been. I freely admit that we are wrong now. But CVS is not an old stock as some would say and it is not a candidate to be crushed by the Death Star, Amazon, even though many think BECAUSE OF THE ACTION it will be. The action is bad. The stock is cheap. The pressure on the holders is ridiculous. But I sense that this is one where many shareholders can no longer take the pain and will sell at all costs.
And Walgreen Boots also under pressure but cheap:
AT&T debt and dividend policy
1 March 2019
Markets consolidated during the week as did a few of our stocks. On Friday Walgreen's dropped 6% after the Chief Financial Officer James Kehoe said at the Leerink Partners Global Health Care Conference late Thursday that since EPS growth guidance of 7% to 12% was provided: "I wouldn't say that reimbursement is higher, what I would say is the ability to mitigate it through winning more contracts, more volume and negotiating better, is there's less than we would have expected entering the year," according to a transcript provided by FactSet. We added shares to a few accounts.
We also sold Kraft Heinz for a slight loss after purchasing it last week when it crashed on earnings. Over the weekend Warren Buffet, who owns 26% of the company said he wouldn't be buying more shares although he would hold his current position. We may revisit the shares at year end.
We sold Southwest Airlines and Hain Celestial for profits when both popped on Thursday on less than exciting – to us- news.
We eliminated Avon for our second small gain of the year. We want to concentrate on more substantial companies until next December.
On a 1 for 18 ratio shares of Wabtec were distributed by General Electric as a result of the merger of the locomotive sub with Wabtec. We sold the odd lots.
Box, https://finance.yahoo.com/quote/BOX/profile?p=BOX ) dropped 20% Thursday on less than revenues-they have no earnings 😊; and we added shares for an anchovy pop once the selling resolves.
We also added to our GE, Baker Hughes, CVS, Walgreens Boots and Twitter positions in various accounts.
Happily, an Appeals court upheld the decision allowing AT&T to buy Time Warner. The Justice Department cried 'uncle' and the merger is now complete.
Happy March, hopefully winter moves on.
Walgreens Boots Alliance — The pharmacy operator dropped more than 5 percent after an analyst at Baird slashed his price target on the stock to $67 per share from $70. "WBA is advancing many new initiatives (some supportable, some dubious), but can't change its market environment, which is universally tough," the analyst said.
GE sells division for $20 billion cash and offloading some pension liabilities.
CVS is cheap:
After the purchase of Aetna, CVS Health Corp CVS 2.29% is one of the absolute cheapest stocks, said Cramer. January 21 2019 - CVS $65
CVS even cheaper:
CVS Health Corp (NYSE: CVS) should be doing much better, said Cramer. He was disappointed with the report. February 26,2019 - CVS $58
On CNBC's "Mad Money Lightning Round", Jim Cramer said he wouldn't sell Twitter. He thinks there are just a couple of social media stocks that are working and he sees Twitter as inexpensive. He is a buyer of the stock.
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