Lemley Yarling Management Co
309 W Johnson Street
Madison, WI 53703
Bud: 312-925-5248 Kathy: 630-323-8422
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Memorial Day Weekend 2017
During the week we added The Gap to accounts. We know we are violating our wait and see with retail comment of last week but GPS is really cheap - $15 billion sales, $8 billion market cap, $2 earnings – and the Fisher family owns 40% of the shares. Revenues and sales for the quarter were OK but the price dropped 10% on the news. Our two main investment themes- Oil and Retail -are in the doghouse and it seems it will be a painful slog to recover and profit from these stocks. Our reason for investing in these two areas is that they are two of the value places in the market. Unfortunately the big boys and girls are having fun shorting these two areas and so—patience will be needed.
We also added to Marathon Oil in larger accounts when oil sold off 5% after the OPEC meeting. The negative thesis on oil is that U.S. shale producers are not in OPEC and they can make money at $50 oil so their production will negate the OPEC cuts. OPEC believes that the oversupply reserve condition will be resolved by year end. We don't know who will be right- maybe both- but we do know that at $50 Marathon Oil and Devon make money. At $60 oil we think share prices will recover substantially and we do think there will be a spike to that level sometime this year, hopefully not from a conflagration in the Middle East or Israel (Trumpography).
Ford replaced its CEO this week with a more tech minded individual. The reported reason for the change was some gobbledygook while the real reason for the change was that Ford's share price has gone nowhere for the last few years. We're confident ex CEO Fields walked away with a nice severance package so no tears are needed. Bill Ford, the Chairman of Ford, was widely quoted in the financial media talking about a new way forward for Ford in self driving and electric cars. Those memes are the result of Tesla's fantastic share price performance and Ford's unfavorable share price performance. Also Tesla cars are most probably over owned by hedge fund and institutional money managers. Tesla is burning cash while trying to reach breakeven. The supposed savior or profit producer for Tesla is the $35,000 car expected in the fall. The reality is that the $35,000 car will be a $50,000 car when they include wheels and windows. Electric cars will be widespread in the future but the idea that Ford and GM and Toyota won't be in the mix competing is beyond reality.
(GM and Toyota have each sold at least 75% of the eclectic cars sold by Tesla. http://insideevs.com/monthly-plug-in-sales-scorecard/ )
Also it should be noted that the Federal Tax credit of up to $7500 per purchase expires when electric car sales for a particular company reach 200,000. So the preorders of 500,000 of the cheaper Tesla car will cause the expiration over a two year period for Tesla buyers and thus eliminate one financial incentive for buying.
We own the Domestic Oil ETF; Marathon Oil; Devon Petroleum; Verizon; Deutsch Bank; The Gap; Ascena Retail (Ann Taylor, Lane Bryant, Justice); Ford; Viacom and a very comfortable cash cushion.
19 May 2017
It's been an interesting week- to say the least. We repurchased Viacom (down 20% on earnings), Deutsch Bank and added to Verizon. With a 5% yield Verizon is taking is a savings bond with appreciation potential. We are tempted to add to Ford which also yields 5% but the big boys and girls are so enamored of Tesla that we doubt the gurus will develop any appreciation interest in Ford.
Ascena was smashed this week as they warned of 8% lower comps for the quarter in a difficult environment. We haven't added more shares yet since we have a substantial position. The guru engendered negative retail news and the negative market reaction to a Gap stores beat and Urban Outfitters disappointing report caused to take a more than we like loss on the URBN. It looks to us like The Street – in keeping with their mall is dead thesis and Amazon is king and queen of all retail- has decided to short most specialty retailers till they get to single digits - and so we have moved to the sidelines for the present. On a positive (or thank god we sold) note we avoided worse results for portfolios by abandoning the department stores and other specialty retailers last month before the most recent carnage.
Ascena is now so cheap that we think someone like Sycamore Partners (a private equity fund that takes publicly traded special retailers private and that acquired Talbots and Coldwater Creek on the cheap) may approach the insiders at Ascena (who own 25% of the company) to suggest buying out the public shareholders. The entire company is priced at $400 million with sales of $7 billion and free cash flow of $200 million. ASNA does have $1.5 billion in debt taken on in its Ann Taylor acquisition but its cash flow is sufficient to handle the yearly payments. Even with the debt, ASNA sells for less than $2 billion or one third of revenues.
Trump's troubles are dominating the daily news but the appointment of the special counsel will free Congress to tone down its inquiries and get back to the business of cutting taxes and figuring out how to reward supporters with a huuuge infrastructure program. That is what the markets want. Wall Street would welcome a President Pence but that isn't going to happen. Worth the read: http://www.motherjones.com/politics/2017/05/trump-congressional-republicans-russia-comey-flynn-scandals
We have and will be maintaining a 50% or greater cash holding as market and political events unfold. Stay tuned.
We currently own: Domestic Oil ETF (XOP); Marathon Oil; Devon: Verizon; Deutsch Bank; Ford; Viacom B; and Ascena (L).
12 May 2017
Since it is Sell in May and Go Away time we eliminated Sprouts, Abercrombie, Apache and 3D. All were sold at a profit.
With the Comey imbroglio- seems there is an event like this every month — we are expecting some country to be bombed in the next few weeks to change the story. No, we aren't kidding.
We don't know whether such an event will have a positive or negative effect on the markets. These unusual news events keeps taking away from the tax reform and infrastructure spending legislation and we do think the slowness of getting to these two issues will eventually be reflected in market actions.
As for now the markets continue to meander higher with the no/50X earnings stocks leading the way. 2000 redux.
Cinco de Mayo 2017
During the week we sold First Solar when it jumped 20% on analysts' up grades and earnings. Three analysts upgraded the day before earnings as the share price rose 20% the previous 10 trading days. Then after what we viewed as a tepid report the shares jumped another 15% and we took a profit. Our surmise is that short covering was the reason for the overall rise from $25 to $34 over the two weeks including the day of the report.
We also sold GE for a scratch loss to raise cash and added Devon to the accounts that sold FSLR. We remain cautious and underwater with our large oil companies' position. That is why we are maintaining a large cash position of over 50% in most accounts.
Happy Spring planting.
Must be fake news:
U.S. reported first-quarter US GDP growth of 0.7%, below the 1% economists were expecting.
A large reason for the lackluster print was a big drop-off in the amount Americans spent.
Real personal consumption grew by just 0.3% in the first quarter, down from an increase of 3.5% in the fourth quarter of 2016. It's the smallest increase since Q4 2009, just two quarters removed from the recession.
More fake news:
The US economy added 211,000 jobs in April, rebounding after an unexpectedly weak month, according to the Bureau of Labor Statistics.
Economists had forecast that nonfarm payrolls rose by 190,000, according to Bloomberg.
The bounce in jobs growth confirmed that the slowdown in March was a weather-related aberration, said Tony Bedikian, head of global markets for Citizens Bank.
Reinforcing last week's Lemley Letter comment on ETFs and the next correction:
A real life Billions story or how to not loose when managing OPM- other people's money:
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