Lemley Yarling Management Co
309 W Johnson Street
Madison, WI 53703
Comments on activity in client accounts
28 October 2017
High multiple tech stocks (Adobe 40X; NVIDIA 55X; Salesforce 76X; etc. even Google is at over 30 times earnings); and large cap Dow stocks (22X to 25X earnings) and Amazon (300X) and Tesla (none) continue to motor higher while we continue to lose money in our value stocks. We have never been so painfully out of step with the markets as we are this year and our wrestle is whether to stay invested or go to cash and await the inevitable correction. With the economy humming along and the tax bill likely to pass conditions suggest further gains for the markets.
Our value holdings have been a different story. Retail is to be avoided- never mind that retailers are readjusting by closing losing stores and beefing up internet shopping; GE may cut its dividend which is good or bad depending; and Ford which reported a blowout quarter languishes while Tesla – which has never earned money- moves higher. Food stores will be ruined by Amazon—or so the storyline goes and so Kroger and Sprouts make new lows while Amazon moves to new highs.
Consistency has worked of us for 50 years and so we will continue to plod along and expect that eventually value will be rewarded.
In our maybe final reconfiguration of accounts for this year we took a much too large loss in Teva (a hubris mistake in that we had profitably traded three other drug stocks on earnings misses this year and then we doubled down instead of selling when the Teva trade wasn't working) and moved the funds to American Eagle and Sprouts which are both also under selling pressure but in both of which we have confidence and both of which don't have the suffocating debt as does Teva. We also purchased at the same number of Teva shares of Ascena and Rite Aid with the sale. (In for a dime in for $1.60 and $2.)
During the week we added to AT&T and Macy's and repurchased Abercrombie and Juniper.
Hopefully that's it in accounts until next year. The continual readjustings have not been profitable and so we are going to stand pat barring any unusual occurrence.
We will hold:
AT&T – is under pressure by folks arbitraging (selling AT&T/buying Time Warner) the Time Warner merger- 5.7% yield.
Rite Aid- is awaiting the closing of the deal to sell 1900 stores to Walgreen for $4 billion. Will use funds to pay down debt from $7 billion to $3 billion.
Ascena Retail- owns Ann Taylor, Justice, Lane Bryant and other name label stores. Main drawback is $1.5 billion in debt from Ann Taylor buyout. ASNA has the cash flow to handle and with store closings and internet we think the leverage to earnings will allow this stock to trade above $10 in a few years.
Chico's, Macy's, American Eagle and Abercrombie- very cheap retailers with a combined avenge yield of over 5% while we wait.
Ford- has a 5% yield- till the big boys and girls realize that Ford has does and will continue to sell electric vehicles.
Hain Celestial- is publicly traded organic food company that has resolved its accounting issues.
General Electric- is one of the original nifty 50 that will not suffer the fate of Eastman Kodak or Xerox. New management will straighten out.
Deutsch Bank- actually doubled earnings this quarter over a year ago quarter because they didn't have to pay any humongous fines.
3D- provides 3D printing products. We have traded it profitably.
Juniper- develops designs and sells networking products. Priced at less than 2X revenues, Cisco priced at over 3X revenues. Has $8 per share in cash.
Sprouts Food Markets-placed itself for sale a few months ago- popped on that news and has now sunk back to multi year lows. Same kind of action occurred in The Fresh Markets a few years ago before TFM was finally acquired. The Amazon/Whole Food's curse is why shares are on their lows now.
Kroger- also down on Amazon/Whole Foods buyout curse.
Apache Oil- has a big find in Texas that it is developing. moves with the price of oil.
20 October 2017
During the week we sold Twitter for a scratch profit and Chipotle and Bed Bath for scratch losses.
We added to our Ascena Retail and General Electric and repurchased Hain Celestial.
We Own AT&T, Rite Aid, Ascena Retail, Chico's, Macy's, Under Armour, Ford, Hain Celestial, GE, Teva Pharmaceutical, Deutsch Bank,3D, Sprouts Food Markets, Viacom B stock, and Apache Oil. Large accounts are 50% or more cash.
Meteor shower tonight:
Why caution is warranted: Carlyle Group is surely hoping to do an IPO ASAP.
If Trump is worth $10 billion why not help his son-in-law?
Why Rite Aid Corporation (RAD) Stock Might Still Have a Chance.
by Lawrence Meyers InvestorPlace October 16, 2017
With all the activity surrounding Rite Aid Corporation, the elephant in the room is whether or not investors should buy RAD stock or not. The answer is that I wouldn't buy RAD stock as an investment, but I would buy it as a speculative trade with substantial possible upside.
RAD stock news has been driven lately by the sale of a bunch of its stores. The FTC approved the sale of a whopping 1,932 stores and three distribution centers to competitor Walgreens Boots Alliance for $4.375 billion in cold cash.
What we know is that Rite Aid is not a company that is being positioned for growth and certainly not for a turnaround. There is only one arguable direction for Rite Aid now and that is a sale. Management sure isn't hanging around waiting for some massive turnaround effort to send shares higher.
So the question is whether investors want to get involved with the stock at $1.78 per share and market cap of $1.87 billion.
Frankly, I don't see why the stock fell from around $2.70 after the deal was announced, since it meant 254 stores fewer got sold than expected. That 10% difference, or about $750 million, should not have mattered so much.
Now, Walgreens can terminate the deal if Rite Aid sells 50% or more of itself to a third party. Yet were that to happen, those stores would likely end up getting sold to another third party or that specific buyer itself.
In the meantime, RAD stock news has centered on the remaining value in the 2,591 stores it currently still owns. Because we know Walgreens offered $4.375 billion for 1,932 stores, we can assume the market value per store is $2.26 million. Thus, the remaining stores alone are worth $5.87 billion.
Rite Aid has a pharmacy benefit management operation called EnvisionRX. It was purchased for $2.1 billion just two years ago and PBM's tend to hold their value in this health care market. Thus, I put a rough estimate of Rite Aid's total value at just under $8 billion. Add in the $4.375 billion in cash from the store sales, and assets come to $12.375 billion.
Then we must back out $7.3 billion in long-term Rite Aid debt, which brings our final asset total to $5.075 billion. We divide by 1.05 billion shares and find a reasonable price per share of $4.83. To be conservative, I would knock 10% of that share price to end with $4.35.
That's a potential of 144% return from here.
The important element of the store sales is that the cash pile that Rite Aid received is likely going to pay down that debt load. In turn, that means RAD stock news will be further driven by the reduced debt service. At an average of about 6.2% annually, it means RAD stock news will be highlighted with an improvement in cash flow of about $275 million annually.
Bottom Line on RAD Stock
With TTM FCF currently at about $190 million, and capex being stalled because Rite Aid doesn't want to throw money at stores unless it has to, that will boost FCF up to $465 million annually. That in turn will lead to paying down debt even more, since the cash flow isn't going to be used to expand!
This will make RAD increasingly interesting to private equity shops and other potential suitors, in whole or in part.
Should I buy Rite Aid stock? I think RAD is a speculative buy here at $1.78 and there's very little downside here. Alternatively, the chance for a big move up to over $4 per share is very possible.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance and is the Manager of The Liberty Portfolio at www.thelibertyportfolio.com. He owns RAD stock and RAD January 2019 $2 calls. He has 22 years' experience in the stock market, and has written more than 1,600 articles on investing.
13 October 2017
During the week we took small profits in Abercrombie, American Eagle, Cheesecake Factory, QUALCOMM, and Chicago Bridge and sold the XOP Oil SPDRS for a scratch. We added to Chico's in some accounts and bought Apache Oil and AT&T when they dropped.
We were too heavy in retail and also wanted to raise cash. The longer the markets meander higher the greater the risk. We have been wrong since Trump was elected- our political view coloring our investing decisions- which is never a good thing. But Trump is an accident waiting to happen and as with all things Trump when the accident occurs it is going to be HUUUUGGGGGGEEEEE.
Rite Aid nosedived last Friday on news/rumors that Amazon is going to put all drugstores/pharmacies out of business. we know we should just sell all our stocks and place our money in Amazon but 50 years in the business and remembrances of 1974, 1982, 1987, 1990, 2000, and 2008 remain in our psyche and inhibit a carefree attitude towards the market.
Obviously our caution and value approach has cost our clients this year. As in the past we think consistency our approach will eventually be rewarded.
Be careful out there kids- it is paraskevidekatriaphobia day!!
Positive discussion of GE
4 October 2017
We are heading to Minneapolis to visit RBC, our clearing broker, for the week and so our post is early and short.
Markets are meandering and that may help in working off the overbought condition but only time will tell.
Some reading material:
Macy's: 6.8% yield
Macy's is deep into what seems sure to be its third straight year of declining comps. The wheels aren't falling off this iconic retailing business, though. In fact, executives recently affirmed full-year guidance that calls for comps to dip by between 2% and 3%, compared to a 2.9% slump in 2016.
Cash flow isn't a problem, either, with the business generating $900 million of free cash flow last year, easily covering the $459 million it paid in dividends. Macy's is augmenting that financial strength by selling off pieces of its valuable real estate portfolio, and that move might contribute to impressive gains for long-term shareholders -- assuming its core business begins to expand again in 2018.
Given their sluggish sales momentum, an investment in any of these retailers is risky, especially heading into a holiday season that might bring unprecedented disruption to the industry as shoppers embrace e-commerce spending. Risk-tolerant income investors can get paid well for that exposure, though, in the form of protected dividends and a decent chance that these retailers will outperform Wall Street's low expectations.
6 Reasons to be buying Teva Pharmaceutical Industries
The GOP Tax Plan Shows Signs of Being Created By One Former Hedge Manager and One Future Hedge Fund Manager
The CHIP program that provides health care to 9 million children was not renewed by Congress by October 1. It costs about $14 billion a year. Money well spent. On the same day Congress let the program expire Secretary of Energy Rick Perry authorized up to $3.7 billion in taxpayer-backed loan guarantees to finish building the last remaining new nuclear plant under construction in this country.
This loan, to the Southern Company's Vogtle plant in Georgia, is on top of $8.3 billion in previous federal loan guarantees for the troubled $25-billion nuclear plant. That means if — or, rather, when — the project goes belly up, U.S. taxpayers will have to bail out Southern Company and its partners with a record-breaking $12 billion.
Three Important Points about the Republican Tax Plan
G.M. and Ford Lay Out Plans to Expand Electric Models
Mars will have to wait.
Chipotle Back At $300 Area: Buy, Sell Or Hold?
Goldman Sachs Might Be Desperate Enough To Start Trading Bitcoin
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