Lemley Yarling Management Co
309 W Johnson Street
Madison, WI 53703
Comments on activity in client accounts
17 November 2017
Well the folks at JP Morgan were wrong. Abercrombie beat big time today and the shares rose 25% as the huge short interest rushed to cover. We reentered the stock as an investment with room to add if it slips lower after the short covering wanes. This is the second quarter in a row that Hollister (Abercrombie's lower priced division) same store sales have been up 8% and even the Abercrombie division's sales were flat after being negative forever.
During the week we also added to Viacom, repurchased Target when both dropped on earnings reports. Dicks Sporting Goods is down 50% on the year and we bought on an upgrade. Finally we repurchased are trading position in Apache when it dropped on oils slight pullback.
The AT&T/Time Warner merger drama continues. AT&T is paying $85 billion plus assuming $22 billion in debt for Time Warner which has revenues of $30 billion and free cash flow of $13 billion.
Viacom has content and movies but not Turner broadcasting. But VIA is priced at $10 billion with $10 billion of debt and revenues of $14 billion and free cash flow of $6 billion. So VIA is priced at half of what AT&T is willing to pay for TWX.
Viacom is owned/controlled by Sumner Redstone who is 93 and has dementia. His daughter will inherit and VIA at this level (a nine year low) is ripe for a stock bid from Verizon.
We have accumulated large positions in accounts in AT&T and Verizon. Both yield over 5% and are cheap. We view them as aggressive cash positons. If both succeed in adding content to their distribution they have the both have the potential to become the darlings of the new era content and connections since they are under-owned by institutional investors.
Dicks Sporting Goods:
Viacom beats revenue estimates despite distribution headwinds
Celgene: Brian Feldone writes: It's been a rough couple of weeks for investors in biotech giant Celgene. A few weeks ago we learned that a pipeline drug called GED-0301 failed miserably in an important late-stage trial. Then management announced that sales of its fast-growing psoriasis medicine, Otezla, was slowing down. When combined, management was forced to dial back its short- and long-term financial guidance.
Despite all the recent doom and gloom, I firmly believe that Celgene's stock can bounce back strongly from here, for a few reasons.
First, management is still projecting annualized revenue and profit growth of 14.5% and 20%, respectively, between now and 2020. While that's down slightly from its prior guidance, those are still terrific numbers in absolute terms.
Second, Celgene's pipeline is still packed with potential. The company counts more than 50 molecules in various stages of development, many of which hold blockbuster potential.
Third, management told investors that it's going to immediately initiate a "strong share-repurchase program" to take advantage of the share-price weakness. With more than $12 billion in cash, the company certainly has a big enough bank account to take meaningful action.
Add it all up, and it's clear that Celgene's future still looks incredibly bright. With shares currently trading around 11 times next year's earnings estimates, now is a fantastic time to get in.
The Saudi Prince:
An Upstart Saudi Prince Threw a Tantrum Felt around the World
You justify (right or wrong) HOV lanes because they encourage people to not travel alone. You justify self-driving car lanes because otherwise they won't work. The people building the things know that.
Tesla can't get production going well on their low priced car but now they are going to build trucks and a high priced sports car.
10 November 2017
During the week we added Verizon when it dropped $3 on news that the Sprint/T Mobile merger talks had ended. For some reason the big boys and girls think the competitive cell pricing wars would be less with three main carriers rather than four.
VZ yields 5% and has 25% appreciation potential over next 12 months.
Celgene is a biotech stock priced at 12 times earnings that dropped from $150 to $100 this month. Cash equals debt.
We bought Celgene
On Friday we added Newell Brands.
Newell Brands (Newell Brands Inc. designs, sources, and distributes consumer and commercial products worldwide. The company offers markers and highlighters, pens, and pencils; art products; activity-based adhesive and cutting products; fine writing instruments; and labeling solutions under the Sharpie, Paper Mate, Expo, Prismacolor, Mr.Sketch, Elmer's, X-Acto, Parker, Waterman, and Dymo Office brands. It also provides indoor/outdoor organization, food storage, and home storage products; durable beverage containers; gourmet cookware, bakeware, and cutlery products; and hair care accessories under the Rubbermaid, Contigo, bubba, Calphalon, and Goody brands; and home fragrance products under the WoodWick Candle brand. In addition, the company offers hand and power tool accessories, industrial band saw blades, tools for HVAC systems, and industrial label makers and printers under the Irwin, Lenox, hilmor, and Dymo Industrial brands; cleaning and refuse products, hygiene systems, and material handling solutions under the Rubbermaid Commercial Products brand name; and infant and juvenile products, such as car seats, strollers, highchairs, and playards under the Graco, Baby Jogger, Aprica, and Teutonia brands. Further, it provides branded consumer products, consumables, and household staples under the Yankee Candle, Waddington, Ball, Diamond, First Alert, NUK, Quickie, and Pine Mountain brands; kitchen appliances and home environment products under the Crock-Pot, FoodSaver, Holmes, Mr. Coffee, Oster, Rainbow, and Sunbeam brands; products for outdoor and outdoor-related activities under the Coleman, Jostens, Berkley, Shakespeare, Rawlings, Völkl, K2, and Marmot brands; and plastic products under the Jarden Plastic Solutions, Jarden Applied Materials, and Jarden Zinc Products brands. https://finance.yahoo.com/quote/NWL/profile?p=NWL ) dropped from $54 in August to $41 on Monday To $29 on Friday. We added a few shares,
Hain Celestial meets 1Q profit forecasts
Macy's beats analyst estimates despite 11th quarter of falling sales
Funny thing, we own or want to own 4 of these:
At week end we own:
AT&T; Verizon; Macy's; Campbell soup; Hain Celestial; General Electric; Merck; Celgene; Walgreen Boots; Newell; Deutsch Bank; Viacom B; Domestic Oil ETF; Marathon Oil; Ascena Retail (Ann Taylor-Lane Bryant- Justice) and Rite Aid.
With tax selling occurring and hedge funds shorting depressed stocks and as yearend approaches we have lowered our cash position but a great portion of that invested cash has gone into shares of high quality companies across many industries and down 20% to 50% from their highs.
Weekly Bubble watch:
Corporate tax breaks are like a wishing well for municipalities
It's a power grab not a corruption purge.
A humorous but ribald take on the happenings in Saudi Arabia last weekend:
And another take on Saudi:
Prison- Saudi style
3 Bad News Buys: Celgene, Under Armour and General Electric:
This is a discussion of two that hurt this year that we hope to reenter lower before year end and Celgene which we just purchased.
After a Tax Crackdown, Apple Found a New Shelter for Its Profits
"We pay all the taxes we owe, every single dollar," Mr. Cook declared at the hearing. "We don't depend on tax gimmicks," he went on. "We don't stash money on some Caribbean island."
True enough. The island Apple would soon rely on was in the English Channel.
Five months after Mr. Cook's testimony, Irish officials began to crack down on the tax structure Apple had exploited. So the iPhone maker went hunting for another place to park its profits, newly leaked records show. With help from law firms that specialize in offshore tax shelters, the company canvassed multiple… read more
His accountant must be Bugs Bunny
3 November 2017
AS is obvious from the trades clients received this week, we finally admitted that Mr. Market and Amazon mania have gotten the best of us. When 3 issues blew up on us on three consecutive days we decided to head to the sidelines with our retail and grocery stocks. In the long run Kroger and Sprouts and even Abercrombie and American Eagle will survive but this is a take no prisoners market with the loved stocks doing no wrong and the unloved stocks doing no right.
Aside from our retailers a case in point is Newell companies- which is Rubbermaid and a host of other home products. NWL missed sales and earnings targets and the share price dropped 30% immediately. At the time of the announcement there were 15 analysts covering the company and 13 had buys or strong buys. Go figure.
Our value approach has certainly been out of step this year and coupled with our fear of Trump doing something stupid we have missed one heck of a rally and looked foolish in the process.
Rather that continuing to fight the big boys and girls we even halved our GE holding. We decided to keep half of Macy's- see story below in which the analyst places a sell on the stock even though the analyst says they will earn $3 a share this year. And we cut our speculative Rite Aid and Ascena positons to 'sleep at night levels'.
We have tiptoed back into oil with the purchase of Marathon Oil and the Domestic Oil ETF to go with our Apache shares. The price of oil needs to exceed to $56 to enter new territory but the chart with higher highs and higher lows since July suggest it will.
We added to at&t which is being arbitraged with the Time Warner deal (short at&t buy Time Warner). If the deal falls through all the shorts will have to buy at&t and the share price will cover. If the deal goes through the short selling will cease and the share price will recover... and at&t yields 6% at $33 per share.
The tax bill will be passed in some form and the markets will like that. The economy is strong and unemployment is at record lows, interest rates are abnormally low and what could go wrong? We have adjusted our stock picking towards the big caps with earnings hiccups (Campbell Soup), product questions (Merck), or special situations (AT&T). We did add Walgreen Boots to accounts as a large cap down 20% that can compete with Amazon. (We haven't given in completely just chosen higher quality.)
And we have a large cash holding in most accounts. Selling in the beginning of November allows us to revisit our losers in December after earnings season is completed to maybe –maybe- reconsider one or two of them.
Marathon Oil beats
Deutsch Bank beats
Shares of Macy's Inc. lost more than 2 percent Monday and hit a new 52-week low of $19.00 after analysts at Citi turned bearish on the company.
The firm's Paul Lejuez downgraded Macy's stock rating from Neural to Sell with a price target lowered from $21 to $16 (see his track record here).
Simply put, Macy's is no longer a strong performing retailer after years of "significant" sales and margins, Lejuez said in the downgrade note. In fact, the core retail business is not only weak but is getting weaker, as credit income and asset sales won't support profits in the future as has been the case in the past. Various initiatives put in place to offset negative store traffic and margin pressures, such as Last Act and Blue Mercury, has seen some success but not enough to "move the dial."
In the near term, the retailer will likely be forced to become increasingly promotional during the Holiday season, Lejuez wrote. Accordingly, the analyst is slashing his fourth-quarter earnings per share estimate from $2.38 to $2.33 and the full-year fiscal 2017 estimate has also been lowered from $3.22 to $3.17, mostly due to expectations for a challenging holiday season.
Finally, dividend investors looking at Macy's 7.88 percent yield should be cautioned that this payout may not be sustainable over the long term. While the company should have a strong enough free cash flow to pay the dividend in the near term, management may want to decide to pay down debt instead of paying the full amount of the current dividend--See: (https://finance.yahoo.com/news/why-apos-m-not-worried-124000431.html )
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