Lemley Yarling Management Co
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Madison, WI 53703
Comments on activity in client accounts
28 September 2018
Markets continued to meander into Quarter end near their highs for the year. We initiated no new positions and are content to watch and wait.
Rite Aid on Thursday reported second-quarter earnings that met Wall Street's expectations and revenue that slightly surpassed them.
It also announced that it is separating the CEO and chairman position. Director Bruce Bodaken will become chairman and John Standley will remain CEO. Here's how Rite Aid did compared with what Wall Street analysts polled by Thomson Reuters expected: Adjusted losses: 1 cent per share vs. 1 cent per share; Revenue: $5.42 billion vs. $5.36 billion
Newell Brands' divisions, including Goody Products and Rubbermaid Commercial Products, said tariffs on items ranging from elastic hair bands to art supplies would hurt American consumers since the tariff prices will be paid by the company and consumers.
They also said consumer goods targeted under tariffs do not come under the scope of "Made in China 2025" programme.
When it rains it pours on southwest Wisconsin and GE.
JP Morgan lowers GE price target all the way to $10: 'Assuming weaker results' for power business. J.P. Morgan lowered its price target on General Electric stock to $10 per share from $11 per share on Thursday, calling a recent gas turbine failure in Texas "a negative development for a company that has little wiggle room" in its struggling power business.
"Bottom line, while we give GE some benefit of the doubt in its comments [minimizing the issue], we think the mere occurrence is significant in the context of the state of the story," J.P. Morgan analyst Stephen Tusa said in a note.
J.P. Morgan now assumes "weaker results at power and some franchise value impact" for GE, Tusa said.
"We have said time and again how orders at GE do not ultimately equal cash flow, but here the story could be how orders may equal losses and liabilities with a mosaic that confirms our concerns around the on-the-ground impact of everything that has transpired in the past decade," Tusa added.
GE power CEO Russell Stokes said in a LinkedIn post Wednesday his unit identified an "oxidation issue" that affects the lifespan of its new, larger H-class gas turbines.
"Obviously, this was a frustrating development, for us, as well as for our customers," Stokes said in the blog first posted on Wednesday, adding that the company had implemented a fix that had the turbines working within targeted parameters.
CFRA Investment Research also lowered its price target on GE stock Thursday to $14 per share from $15 per share but did not see the gas turbine problem as overly concerning.
"Overall, we see this as minor bad news for a company struggling to gain traction in its turnaround efforts," CFRA analyst Jim Corridore said in a note.
OPM (Other People's money)
21 September 2018
Both the DJIA and S&P 500 made new all-time highs this week. That is an unusual occurrence for September.
We have been adding to our retail holdings. Our theory is that if markets are going to continue moving higher retailers will benefit because the positive news will encourage retail spending into year end.
We added United Natural Foods on Friday when it dropped 15% on better than earnings and revenues but less than better than—see story below. $29 is a six year low on the shares price. During that time period revenues and earnings have both increased over 50% and the shares currently trade at less than 10 times forward earnings.
We have spent some cash reserves as our expectations of a pullback have not been realized but most large accounts still have a healthy cash reserve.
United Natural Foods Inc. (UNFI) on Thursday reported fiscal fourth-quarter profit of $32.8 million.
On a per-share basis, the Providence, Rhode Island-based company said it had profit of 64 cents. Earnings, adjusted for one-time gains and costs, came to 76 cents per share.
The results did not meet Wall Street expectations. The average estimate of 16 analysts surveyed by Zacks Investment Research was for earnings of 85 cents per share.
The organic and specialty foods distributor posted revenue of $2.59 billion in the period, also falling short of Street forecasts. Fourteen analysts surveyed by Zacks expected $2.61 billion.
For the year, the company reported profit of $165.7 million, or $3.26 per share. Revenue was reported as $10.23 billion.
United Natural expects full-year earnings in the range of $3.48 to $3.58 per share, with revenue in the range of $11.1 billion to $11.3 billion.
United Natural shares have fallen 31 percent since the beginning of the year. In the final minutes of trading on Thursday, shares hit $33.85, a fall of 19 percent in the last 12 months.
Shares of AT&T Inc. are up 1.4% in premarket trading Friday after UBS analyst John Hodulik upgraded the stock to buy from neutral, citing a valuation that's near an all-time low and the widest valuation gap relative to Verizon Communications Inc. . "Wireless remains the key and should post solid growth," Hodulik wrote. "Improving ARPU [average revenue per user] trends across the industry (and limited iPhone promos) attest to the benign competitive environment." He sees room for AT&T and Verizon to benefit from the rise of 5G "given other carriers' inability to invest in 5G at competitive levels." Hodulik raised his price target to $38 from $33.
Skechers USA Inc. was downgraded to market perform from outperform at Cowen based on the company's growing inventory and foreign exchange pressures. Cowen cut its price target to $28 from $32. Skechers shares are down 3.1% in Thursday premarket trading. Skechers' inventory level grew 23% in the second quarter, according to analysts led by John Kernan. "Our concerns include: 1) gross margin is at risk given a moderating U.S. wholesale business; 2) a less robust product cycle; 3) potential for FX transactional headwinds - recall that SKX does not hedge its exposure; and 4) elevated inventory levels," the note said. Analysts estimate that foreign exchange exposure could create a 3.3% to 4.3% sales headwind, and earnings per share impact of 13-to-18 cents. ComScore data also shows that desktop and mobile traffic to Skechers is "among the most depressed for our entire coverage list over during the last three months." Skechers shares have sunk 26.4% for the year so far while the S&P 500 index has gained 8.8% for the period.
Fashion and beauty retailer L Brands Inc. said last week it will close all 23 of its Henri Bendel stores and the brand's e-commerce platform — a move that makes the stock less risky, according to Bank of America Merrill Lynch.
Bank of America's Lorraine Hutchinson upgraded L Brands from Underperform to Neutral with a price target lifted from $26 to $33.
Read more https://www.benzinga.com/analyst-ratings/analyst-color/18/09/12369766/henri-brendel-closure-wins-l-brands-an-upgrade-from-ban
Goldman Sachs has formulated a way to identify stocks that are both inexpensive and investing in future growth opportunities.
To that end, the firm has identified 12 companies it expects to outperform for value investors, even in a market where growth stocks have been so dominant.
By many metrics, the stock market is among its most expensive in history.
But Goldman Sachs finds that, from one perspective, it's actually quite average.
The gauge in question is free-cash-flow (FCF) yield, which measures a company's FCF relative to its market value. Generally, the lower it is, the more attractive investment opportunities are. And right now, it's sitting comfortably in the 56th percentile compared with history, according to Goldman data.
But it's not that simple. This discrepancy exists only because capital expenditures, or capex, as a share of cash flow from operations (CFO) are historically low, Goldman says.
"Every dollar of CFO not spent on capex is accretive to FCF," Goldman says. "Firms with high FCF yield often appear attractively valued simply because they have slashed capex."
What investors should do is adjust FCF yield to incorporate how much a company is investing in both growth capex and research and development, says David Kostin, the firm's chief US equity strategist. Then, once they have a firm handle on adjusted FCF yield, they can make informed stock picks.
This is particularly useful for value investors, or those seeking bargains in the market. It helps them avoid so-called value traps — the term used for companies that are cheap simply because they're bad.
In the end, adjusted FCF yield is intended to identify good companies whose stocks also meet the traditional definition of value.
Luckily for value investors, Goldman maintains a basket of high adjusted FCF yield companies. The firm's top 2 picks (trumpets please)
2. Western Digital
Industry: Information technology
Market cap: $17 billion
Adjusted FCF yield: 27%
Source: Goldman Sachs
1. Ford Motor
Industry: Consumer discretionary
Market cap: $37 billion
Adjusted FCF yield: 31%
Source: Goldman Sachs
14 September 2018
During the week we added Skechers when it dropped 10% on an analyst downgrade. The shares trade at 15 times earnings; and sales and earnings have been growing nicely over the past five years. SKX sells at one times sales while Nike, Adidas and Under Armour are priced at more than 5 times, 2 times and 1.5 times sales respectively. SKX also has a net $5 per share on hand and is down 40% from its 12 month high
L Brands jumped on news (L Brands will close all of its Henri Bendel stores as well as shut down the brand's website in January. The handbag maker has been in business for 123 years and was bought by the Victoria's Secret parent in 1985.) And we sold a portion of our position to reduce. We began buying LB at $32 (down from $63) and added shares at $28 and $26. With the move back up to $28.80 many accounts were even on the overall purchases and the rest were down $1 or less per share. Since we have added more retailers we want to keep positions in each relatively equal
Our concentration on retailers at this time is because they are under the usual autumn selling pressure and we believe sales number for most will be better than expected.
We also halved our position in Western Digital as it continued its price drop. Chip stocks are either loved ☺ or hated ☹ and at this time WDC, Seagate and Micron are in the dog house. With the realized loss on the half we sold we need a price of $85 (now at $56 to be even and $105 to make decent money for our travails. Given that WDC traded at $106 in April (see below) that result is not without some possibility. The shares are priced at 4 times earnings and yield 3.6%. At $100 the shares would be priced at 10 times earnings. For comparison purposes AMD trades at 80 times; Nvidia at 40 times; and Intel at 10 times.
From Business Insider: https://www.businessinsider.com/morgan-stanley-8-industrial-stock-picks-for-the-future-2018-9#caterpillar-3
Morgan Stanley is the most bearish firm on Wall Street when it comes to equities, but that doesn't mean the firm thinks the market is devoid of money-making opportunities.
The firm is bullish on the industrial sector and has identified eight stocks it thinks will outperform the broader market going forward.
Morgan Stanley is the most bearish firm on Wall Street right now when it comes to stocks.
Over the past few weeks, it has made no bones about what it calls a "rolling bear market" — or the type of long, drawn-out pullback that infects sectors one by one.
The firm has been particularly pointed in its comments about tech, which has led major indexes to record highs but is now seen by Morgan Stanley as vulnerable to a sharp sell-off.
But this doesn't necessarily mean the firm thinks all areas of the stock market should be off-limits. It just means investors need to take a deep breath and look at industries that are depressed, underappreciated, or both.
In the eyes of the equity strategists at Morgan Stanley, the industrial sector fits this to a tee. The firm argues that industrials possess the appealing combination of attractive valuation and future profit upside.
On the valuation front, industrials have become cheap relative to the broader market, even after a massive spike following the 2016 election. This dynamic is shown in the chart below.
Here are the firm's single-stock picks, which may help you ride the predicted wave higher …..
Wonder of Wonders one of the stocks is – hold your breath- FORD.
Market cap: $37 billion
Price target: $15
Rationale: "F represents a cheap call option on restructuring, trucks, data, and SOTP potential."
Source: Morgan Stanley
Most Large accounts have 40% or more cash and even small accounts (which have performed much better than the larger accounts this year) have room to add.
Jim Cramer is the new market guru for the common man. His recommendations on CNBC often move stocks. Since he mentions so many stocks every week folks often forget his buy and sell pronouncements. Since he talks to many folks on the street he is in touch with the trends and for that he is valuable. Unfortunately some of his thoughts on individual stocks change more rapidly that his comments on said stocks in the media.
For example- in keeping with the streets buy'em when rising and sell'em when falling here is Cramer on March 2018 with Western Digital priced at $106
Western Digital Corp. jumped higher Friday, closing higher by 4.13% at $106.45. Shares also hit a new 52-week high in the session.
So why's the stock rallying? Baird analyst Tristan Gerra upgraded the stock to outperform from neutral and raised his price target to $135 from $93. This was a "very large price target" increase, TheStreet's Jim Cramer said on CNBC's "Stop Trading" segment.
Western Digital makes flash storage and hard drives, Cramer said. He told viewers that when he recently spoke with HP Inc. CEO Dion Weisler, he wanted to hear an update on flash prices, or NAND.
Weisler said that DRAM prices remain elevated, something that continues to benefit Micron Technology, Inc.. However, he wouldn't commit to saying that NAND prices will significantly weaken and that bodes well for Western Digital.
Like Weisler, Gerra's observations show a significant increase in DRAM prices, but the reduction in flash pricing was weaker than expectations. His $135 price target implies more than 27% upside to current levels.
"Flash prices are still elevated," said Cramer. As a result, the stock "could easily trade" to the analyst's price target, he concluded.
And-- Cramer on September 5,2018 WDC priced at $58
On CNBC's "Mad Money Lightning Round", Jim Cramer said he sold his charitable trust fund's position in Western Digital Corp (NASDAQ: WDC) in the $90s and $80s. He feels the numbers have to come down and only then the stock is going to bottom.
During the week we sent the full text of the following remarks to our clients who receive our weekly emails. The article is behind a paywall and so we are only presenting a partial article for informational purposes only. Our point in suggesting this article is not that we agree with all the thoughts presented but we do think the author has a point. It isn't different this time and there will be a gut wrenching correction. Predicting corrections is not difficult. The when of the occurrence is the hard part. It is difficult to place greed to the side as markets are rising and we are as subject to that vice as are most investors and traders.
Marko Kolanovic, JPMorgan's global head of quantitative and derivatives strategy, wrote in a client note.
"The main attribute of the next crisis will likely be severe liquidity disruptions resulting from market developments since the last crisis,"
So how exactly does the market's liquidity conundrum differ from the mortgage-driven meltdown 10 years ago? …
1. The shift from active investing to passive strategies:
JPMorgan notes that the market for exchange-traded funds has swelled to $5 trillion globally, up from $800 billion in 2008…
"The ~$2 trillion rotation from active and value to passive and momentum strategies since the last crisis eliminated a large pool of assets that would be standing ready to buy cheap public securities and backstop a market disruption," Kolanovic said.
2. The increasing amount of assets managed by strategies that sell on "autopilot"
So-called passive investment vehicles pose a problem to market efficiency, since they often operate in price-insensitive fashion. …
3. Changing market-making trends:
Kolanovic argues the increased reliance on programmatic market makers has increased the risk of widespread disruptions. He says it's affected the depth of major indexes …
4. Miscalculation of portfolio risk:
Throughout history, bonds have been viewed as a safe hedge against equity-market weakness. …
But Kolanovic says this dynamic is fading because of low interest rates and massive central-bank balance sheets, which combine to make bonds less appealing by comparison.
5. Private assets carry great liquidity risk:
Kolanovic notes that the money allocated to public equity has declined over the past 20 years, while holdings of private assets have increased…
6. Exorbitant valuations:
This is perhaps the most straightforward of Kolanovic's arguments. Simply put, valuations are historically extended…
7. The rise of protectionism and trade wars: …. and the worst social tensions since 1968 …
In the end, if severe turmoil hits, all bets will be off — and it's bound to extend far further than markets.
OUR THOUGHTS ON THE ABOVE:
1. We would question the thesis that Junk bond fund investors are more sophisticated. Many may just be seeking yield
2. The data he is using is history. In the last 25 years it is only the last ten where individuals couldn't stay in CDs and get a 6% return. So those folks have had to move their money to afford to live.
3. Junk bonds have performed reasonably in past downturns but there are many more issuers now and there are many more (my guess) unsophisticated investors who may sell (causing more selling as funds have to sell to meet redemptions) when their fund prices drop by 10%- which the funds will
4. As always, it is anyone's guess when the major correction occurs. We've been wrong for the past two years. We called it in 1987 and still got killed. We were timely in 2000 and profited in 2001 and called it in 2008 but got back in too early.
5. The 6 trillion in ETFs investors have never had more than one down month in the last 7 years. What happens when they experience two or three down months in a row. Past experience - with my clients -suggests that three down months in a row will create a rush to the exits. That happened in 2008 and there was much much less money in ETFs.
6. Right now the bulls are winning.
In case you forgot or were too young:
7 September 2018
We've given back part of our gains for the year but markets are that time when a further pullback in underperforming stocks can be expected. We own at value prices and are comfortable holding.
We currently own:
AT&T— 9 times earnings; 6.2% yield
Ford — 7 times earnings; 6.5% yield
GE — 13 times earnings; 3.9% yield
Abercrombie — 20 times earnings; 4% yield
Western Digital — 5 times earnings; 3.5% yield
Newell Cos — 9 times earnings; 4.3% yield
Michael's Stores — 7 times earnings: no dividend
Chico's — 13 times earnings 4% yield
L Brands — 10 times earnings; 9% yield
Value remains an old man's idea. Better to own Tesla that has never made a dime and may make money in a few years if it survives bankruptcy than own Ford or GM that make billions every year and pay shareholders 6% and 5% respectively.
Wisdom Tree Floating Rate Treasury ETF-1.8% yield
IShares Mar 2020 Maturity Corporate bond ETF- 2.1%
Most large accounts are 50% cash or short term ETFs.
L Brands (L Brands, through Victoria's Secret, PINK, Bath & Body Works, La Senza and Henri Bendel, is an international company. The company operates 3,084 company-owned specialty stores in the United States, Canada, the United Kingdom and Greater China, and its brands are sold in more than 800 additional franchised locations worldwide. The company's products are also available online at www.VictoriasSecret.com, www.BathandBodyWorks.com, www.HenriBendel.com and www.LaSenza.com. )
L Brands, Inc. LB, +2.00% reported net sales of $856.3 million for the four weeks ended Sept. 1, 2018, compared to net sales of $842.1 million for the four weeks ended Aug. 26, 2017. Comparable sales increased 1 percent for the four weeks ended Sept. 1, 2018, compared to the four weeks ended Sept. 2, 2017.
The company reported net sales of $6.466 billion for the 30 weeks ended Sept. 1, 2018, compared to net sales of $6.034 billion for the 30 weeks ended Aug. 26, 2017. Comparable sales increased 2 percent for the 30 weeks ended Sept. 1, 2018, compared to the 30 weeks ended Sept. 2, 2017.
History rhymes —
The New Mortgage Kings: They're Not Banks
Less-regulated lenders bounce back; little-known Freedom issues more home loans than Citigroup
By Christina Rexrode and AnnaMaria Andriotis
One afternoon this spring, a dozen or so employees lined up in front of Freedom Mortgage's office in Mount Laurel, N.J., to get their picture taken. Clutching helium balloons shaped like dollar signs, they were being honored for the number of mortgages they had sold.
Freedom is nowhere near the size of behemoths like Citigroup Inc. or Bank of America Corp.; yet last year it originated more mortgages than either of them, some $51.1 billion, according to industry research group Inside Mortgage Finance. It is now the 11th-largest mortgage lender in the U.S., up from No. 78 in 2012.
Its rise points to a bigger shift in the home-lending business to specialized mortgage lenders that fall outside the banking sector. Such nonbanks, critically wounded in the housing crisis, have re-emerged to become the market's dominant players, with 52% of U.S. mortgage originations, up from 9% in 2009.
Six of the 10 biggest U.S. mortgage lenders today are nonbanks, according to the research group.
They symbolize both the healthy reinvention of a mortgage market brought to its knees a decade ago—and how the growth in that market almost exclusively has been in its less-regulated corner.
Since the crisis, banks have pulled away from mass-market mortgages to focus on wealthier consumers. Today, nonbanks like Freedom often represent the only route for first-time buyers and moderate-income families to get a mortgage.
Postcrisis regulations curb bank and nonbank lenders alike from making the "liar loans" that wiped out many lenders and forced a wave of foreclosures during the crisis. What worries some industry participants is that little has changed about nonbank lenders' structure.
Their capital levels aren't as heavily regulated as banks, and they don't have deposits or other substantive business lines. Instead they usually take short-term loans from banks to fund their lending. If the housing market sours, banks could cut off their funding—which doomed some nonbanks in the last crisis. In that scenario, first-time buyers or borrowers with little savings would be the first to get locked out of the mortgage market.
"As long as the good times roll on, it's fine," said Ed Pinto, co-director of the Center on Housing Markets and Finance at the American Enterprise Institute. "But all I can say is, we're in a boom, and you cannot keep going up like this forever."
Already, cracks are starting to show. Despite good economic news, home sales are slowing because of sky-high prices, and refinancings are drying up as interest rates rise. Many of the biggest nonbanks today didn't exist a decade ago, which makes some industry participants wonder how well they would navigate a new crisis. Read more @
Who knew Goldman followed Rite Aid. The shares are priced like a perpetual option.
After a failed merger with Walgreens Boots Alliance Inc. (NASDAQ: WBA) and the termination of a merger agreement with Albertsons, one Wall Street analyst says Rite Aid Corporation (NYSE: RAD) is now in an extremely difficult competitive position and will likely continue to struggle in the market.
Goldman Sachs analyst Robert Jones resumed coverage of Rite Aid with a Sell rating and $1 price target.
A standalone Rite Aid simply doesn't have the resources to effectively compete, Jones said.
"We expect RAD's smaller footprint will hamper it from participating in the continued growth of preferred/narrow networks in Part D and commercial plans, where store breadth is essential to getting in network and pricing competitively," Jones wrote in a note.
He said this trend has already been playing out in recent years. Since 2013 Rite Aid's same-store prescription growth has been roughly flat. In that same time, Walgreens and CVS Health Corp (NYSE: CVS) have been growing same-store prescriptions by 4.5 percent and 3.9 percent, respectively.
The only silver lining for Rite Aid investors is that the stock trades at a slight forward EV/EBITDA multiple discounts to its peers. However, Jones said that discount is justified given Rite Aid's relatively weak revenue and margin growth profile.
For now, Goldman doesn't see a light at the end of the tunnel. Jones said EBITDA declines have continued since Rite Aid's asset sales in late 2017 and he sees no indication that trend will reverse any time soon. Read more @
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