Lemley Yarling Management Co
309 W Johnson Street
Madison, WI 53703
Comments on activity in client accounts
27 October 2018
Well, that was the week that was. Actually the week is in a way a mirror of 1987 (for those old enough to remember) with 3 down days and up day on Thursday to give hope and a down day Friday. But in 1987 the DJIA crashed from 2700 to 1800 (30%) over two weeks while these markets are down 10%. That is a huge difference. Our guess is that this is just a normal October pullback/correction. The markets are finally experiencing the correction we have expecting since the Trumpster was elected.
Reasons proffered for the pullback are that the FED is raising interest rates (which are still too low); that the Trumpian tariffs are causing disintermediation in company plans; and that the overextended nifty concept stocks have finally been found to have no-or very little clothes.
Corrections always need reasons which usually appear after the corrections occur. The same goes for Bull Markets. Life goes on.
Our accounts have given back all their gains for the year and we are suffering short term pain. But we do believe it is short term and that by year end our issues will be back up to more reasonable levels and accounts will be up for the year.
Happily, we had a hefty cash position in accounts and we have used the selloff to add new positions in beaten down quality issues.
Whirlpool and Caterpillar both announced great earnings and positive expectations yet the share prices of both dropped 10% in one day and WHR is down from $187 to $110 at our purchase price the shares yield 4.3% at 7 times earnings. CAT is down from $173 to $115 and is priced at 10 times earnings with a 3% yield.
Whirlpool: 3Q Earnings
AP October 24, 2018
BENTON HARBOR, Mich. (AP) _ Whirlpool Corp. (WHR) on Wednesday reported third-quarter net income of $210 million.
The Benton Harbor, Michigan-based company said it had net income of $3.22 per share. Earnings, adjusted for non-recurring costs, came to $4.55 per share.
The results surpassed Wall Street expectations. The average estimate of three analysts surveyed by Zacks Investment Research was for earnings of $3.68 per share.
The maker of Maytag, KitchenAid and other appliances posted revenue of $5.33 billion in the period, which fell short of Street forecasts. Three analysts surveyed by Zacks expected $5.44 billion.
Whirlpool expects full-year earnings in the range of $14.50 to $14.80 per share.
Whirlpool shares have decreased 38 percent since the beginning of the year, while the Standard & Poor's 500 index has dropped almost 1 percent. In the final minutes of trading on Wednesday, shares hit $104.13, a decline of 36 percent in the last 12 months.
Caterpillar Inc. shares are getting crushed by the weight of lofty expectations. The stock sold off sharply Tuesday morning despite record third-quarter profits from the industrial bellwether. The headline results themselves were excellent. Sales of $13.5 billion and adjusted earnings of $2.86 a share were up 18% and 46%, respectively, from a year ago, as demand for construction equipment remained strong. Both figures topped analyst expectations. Revenues grew in every single major geographic market.
Still, there was more than enough reason for investors to sense trouble ahead.
Caterpillar didn't raise its adjusted profit guidance for 2018, for one thing. Analysts' forecasts compiled by FactSet indicated that they were clearly expecting a boost. The midpoint of the company's guidance was $11.50 a share on Tuesday morning, below the consensus analyst forecast of $11.64.
Whirlpool and Caterpillar both announced great earnings and positive expectations yet he share prices of both dropped 10% in one day and WHR is down from $187 to $110 at our purchase price the shares yield 4.3% at 7 times earnings. CAT is down from $173 to $115 and is priced at 10 times earnings with a 3% yield.
We used the selloff in oil to reestablish positions in Marathon, Apache and Devon. Oil was overdone by hedge funds which also had significant positions in the FANG stocks (Facebook, Amazon, Netflix and Google). Since hedge funds are always leveraged to maximize gains-which also maximizes losses- when the FANGS began their pullback the big boys and girls also had to close their highly leveraged oil longs/hedges with the corresponding 20% one week drops in the prices of the three issue we purchased providing a good entry point.
We bought and sold IBM for a small loss because when Amazon and Alphabet (Google) announced excellent earnings and revenues and still one day dropped 10% we decided to exit IBM and revisit next week when IBM announces earnings. IBM is under selling pressure all year because earnings have been punk and more importantly, Warren Buffet abandoned his 3 year position in the shares.
IBM is a major player in ‘the cloud" but doesn't get anywhere near the credit or p/e that Microsoft and Amazon receive even though IBM is a very close number 3 player with $20 billion in cloud revenue. See this article:
19 October 2018
We are posting a day early because we are off the big city for client visits.
This weekend is the 41st anniversary of the 1987 Crash. A mini downturn has been occurring but we don't think this is the big one ala 2008. The pullback from the highs is only 5% although many stocks are 30% and more below their highs.
The rally Tuesday was followed on Wednesday and Thursday by a resumption of the pullback. 400 points on the downside seems large but it is only 1.5%. This is the time of year that pullbacks occur and also the time of year when beaten down value stocks become more battened down as Mutual funds sell to offset gains as their October 31 year end for tax purposes approaches.
We sold a few of our recently purchased issues and those that pay no dividends for scratch profits to rebuild cash when the Tuesday rally turned to dust.
We post positive and negative comments on companies we own to inform why we own them (positive news) and why they are in the doghouse (negative news).
How Abercrombie & Fitch CEO Fran Horowitz is saving the company
With legacy retailers such as J.C. Penney, Sears and Limited Brands having one foot in the grave thanks to Amazon's dominance, the 126-year-old Abercrombie & Fitch rides into this year's holiday season with momentum almost reminiscent of the chain's heydays in the early 2000s. Hollister, a California apparel brand and standalone division of ANF that Horowitz turned around as president when she joined in 2014, has served up seven straight quarters of same-store sales growth. That's no small feat with longtime rival American Eagle Outfitters at the top of its game and mall traffic continuing to be under severe pressure.
The Abercrombie & Fitch division, with 330 stores globally, has started to shed its problem-child status incurred after years of featuring dimly lit stores with half-naked models standing out front. It delivered its third straight same-store sales gain in the second quarter. The company reports Q3 earnings in mid-November.
Not too shabby. Read more https://finance.yahoo.com/news/heres-abercrombie-fitch-ceo-fran-horowitz-saving-company-172208413.html
Mat Boss at JP Morgan (Abercrombie downgrade last week) downgraded The Gap Thursday. Back in July 2017 he made the stock his specialty retail picks when it was $22. He then watched it go to $35 and now has basically said forget it with the shares at $27
Shares of Gap Inc. sank 5.8% in premarket trade Thursday, putting them on track to open at a 13-month low, after J.P. Morgan turned bearish on the apparel retailer, citing signs of continued sales weakness and growing pressure on margins. Analyst Matthew Boss cut his rating to underweight, after being at neutral since April 2017. He slashed his stock price target to $24, which is 11.5% below Wednesday's closing price, from $30. Boss said Gap is grappling with operational issues and an assortment imbalance for the holiday season, with more bottoms than tops, and the new brand president is unlikely to have an impact until the first half of 2019. He also expects gross margins to be hurt by elevated promotions in the near-term promotions and inflation in freight costs.
The time bond for the next significant correction. When not if.
‘If you want to worry about something, this is it': Central banks and investors are warning about the $1 trillion boom in 'leveraged loans'
Sears Is Dead. Eddie Lampert Is Still Very Much OK.
12 October 2018
Guru opinions on the selloff this week:
UBS Wealth Management: We're still bullish.
Morgan Stanley: There's no margin for error.
Bank of America Merrill Lynch: Stocks look expensive — for now.
Citi Private Bank: This is routine — don't panic.
Wells Fargo: Don't rush to sell everything.
Credit Suisse: There are important questions clients aren't asking.
BTIG: Volatility is back and will be around for a while.
Jefferies: major differences between now and the February sell-off.
SocGen: Investors are facing "the four horsemen of the apocalypse."
Raymond James: Internet stocks are still up a lot year-to-date.
Allianz Inv Management: The Fed is taking the punch bowl away.
Katie Lemley: This always occurs around your birthday (October 9).
We sold L Brands when it popped $3.50 on Thursday on positive sales and the announced sale of another division. Much of the gain was the result of what we think was short covering. After buying LB at an initially high price we were able to realize a profit on our trading in these shares plus receiving a 50 cent dividend.
We are overweight retail and with the overall market sell off we wanted to redeploy some money to other issues we own.
On Monday we abandoned our Ford position. We really don't understand the negative vibes that the street has for Ford but Mr. Market knows better than we that you can' fight the big boys and girls over the short term. If we do go back into autos we will probably choose GM given our lack of luck in trading Ford the last few years.
We repurchased shares of AT&T at $33 to $32 (sold at $34.20 two weeks ago) when it backed off in the markets downdraft.
We also repurchased GE higher/lower than we sold last Friday for an overall cost about equal to our selling price. Several gurus raised their ratings on GE while the perpetual JP Morgan GE permabear (and right so far) reiterated his sell rating. We just decided that we would rather live thru the misery of holding it than live through the misery of not holding it.
The new CEO Larry Culp (https://www.bostonglobe.com/business/2018/10/01/who-lawrence-culp-new-ceo/vaL6bZjJz3OBSICZI5BtSO/story.html ) was on GE's board –so he has current knowledge of the problems- yet he is new to GE's executive ranks unlike the two past CEOs Flaherty and Immelt.
Because of Culp's background at Danaher analysts now posit that GE's health care subsidiary won't be spun off. That's good. (We think that subsidiary alone is worth $75 billion of GE's total equity value of $110 billion).
Hopefully Culp will spin off the power sub that is the current albatross. The company has already announced that it will write down $23 billion of good will (non- cash) on the power subsidiary. Maybe getting ready to spin off?
GE's pension liability of $30 billion is benefiting from rising interest rates https://www.washingtonexaminer.com/how-market-rattling-rate-hikes-could-help-ge-erase-a-31-billion-pension-shortfall .
The big boys and girls want GE to cut the dividend- it won't be eliminated. So that occurrence should already be priced into the share price.
So many opinions- take your pick- that is what makes a market.
We added shares of Abercrombie when the analyst mentioned below lowered guidance on ANF in the middle of the overall market decline.
Abercrombie: Hope this analyst is as prescient (NOT) this year as he was last year.
October 10 2018: Abercrombie & Fitch price target lowered to $16 from $19 at JPMorgan JPMorgan analyst Matthew Boss lowered his price target for Abercrombie & Fitch to $16 and maintains an Underweight rating on the shares. Work in the field and talks with management points to elevated risk, Boss tells investors in a research note. Such risks, according to the analyst, include Abercrombie's Europe exposure with has seen unfavorable weather and its exposure to a potentially increasing minimum wage.
Last year November 1 2017:Abercrombie & Fitch Co. (NYSE:ANF) saw its shares take a tumble in early trade after JP Morgan cut its rating on the retailer following a meeting with the company's executives. The analysts, led by Matthew Boss, slashed their recommendation on the retailer to 'underweight' from 'neutral'. Boss also cut its price target to US$10 from US$12.
After this rating change Abercrombie moved from $12 to $28 within 6 months.
We currently own:
AT&T (6.2%, 10X)
GE (0.?%, 10X)
Western Digital (3.6%, 5X)
Hewlett Packard Enter (3.0 %, 10X)
Newell Co (5.2%, 7X)
Abercrombie (4.3%, 20X)
Michael's Stores (0.0%, 7X)
Chico's (4.5%, 12X)
The Gap (3.6%, 10X)
Macy's (4.5%, 8X)
Rite Aid ( .0%, 20X)
Wisdom Tree Floating Rate Treasury ETF 2%
ISHARES MAR 2020 term A, AA Bond ETF 2%)
5 October 2018
The US 10-year Treasury yield surged as high as 3.23% on Thursday to its highest level since mid-2011, and other bond markets around the world joined the action.
The increase resulted from strong economic data in the US, which fueled speculation the Federal Reserve would hike rates quicker than expected.
Such tightening of liquidity conditions has long been viewed by Wall Street experts as one of the biggest risks to markets going forward.
With the spike in interest rates markets decided to pull back this week on fears that higher interest rates will dampen the economy. The Fed has been saying it was going to raise rates for the past 6 months. And so they have begun.
Last week we said it looked as if the markets would make it through autumn without their usual pullback. We wrote too soon. Market action late this week has caused us to do some selling- even of recently purchased issues to replenish our cash positions in accounts.
We react to market conditions since predicting market movements is for gurus and TV talking heads. We chose to sell AT&T (even with dividends added in); Sketchers and United Natural Foods- mainly because they pay no dividends; Campbell Soup which we bought this week and sold for a plus scratch and GE.
GE is up 20% in the last two weeks on news of the new CEO. It popped 5% on Friday on news of the new CEO's salary package. If – and that's a big if-the share price rises to $20 and then $40 the CEO stands to make hundreds of millions of dollars.
Even if the share price doesn't increase the CEO is going to make $20 million a year so there will be no tag days for him anytime soon. He now has a heads I win tails I win even more contract.
Our guess is that the share price gained Friday from short covering and it the markets sell off for the next month we think-hope- that GE will head back down into year end. The earnings call this month may suggest the dividend will be cut and if the general markets are in a foul mood at that time that news may cause the stock to drop.
We may be too cute taking this approach- we have been wrong on the stock for two years. Quick sell action at various points in the share price drop from $30 to $11 has mitigated damage to accounts but the losses are still too much.
Amazon raised its minimum wage to $15. Hooray!
Retail stocks dropped on that news because retailers may have to pay more to retain workers if Amazon is doing so. But Amazon workers have a much more physically demanding job than Gap or Abercrombie workers do.
We own retail. A $15 minimum wage means folks who now spend all their disposable income will continue to do so even if they earn more money. That is good for them, the economy, and retailers.
With Hill City, Gap Is Taking on a Red-Hot Lululemon
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