Lemley Yarling Management Co
309 W Johnson Street
Madison, WI 53703
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ORGANIC FARM FOR SALE, 95 ACRES
Beautiful Horse Farm, Excellent Hunting Land, Perfect for Home-Based Entrepreneurs
28 September 2020
Now that stocks are in a correction period, we have been adding to accounts. We think the Repubs and Dems will reach accord on a new stimulus in the next few weeks; both parties need it for the election ads. The fact that Congress reached agreement on the continuing resolution to fund the government through January is a positive.
The cable news talking heads are having a field day with Trump's 'I will wait and see' and 'absentee voting cheating'. Trump will leave if he loses; he is just trying to control the daily news feed.
We currently own:
IBM, AT&T, Intel, Cisco, Western Digital, Viacom, The Major Bank ETF, The regional Bank ETF, Wells Fargo, Hexcel, NCR, Walgreen, Rite Aid, Albertson's, Sprouts Food Markets, Carpenter Specialty Steel, U.S. Steel, Hewlett Packard Enterprises, GE, Ford, The major Oil ETF, Marathon Petroleum, Parsley Energy, Abercrombie, American Eagle, Bed Bath and Tapestry.
We are pretty much all in now so we will vote our absentee ballot this weekend; mail it on Monday; and enjoy the debate next week and the autumn colors which are vibrant this year in the land of milk and honey.
We own Hexcel as a proxy for Boeing because 50% of their business is with BA. So, the news of FAA approval in November should be good for HXL too.
Boeing's 737 MAX on the path to return
It's looking more likely that Boeing's grounded 737 MAX will be flying again by the end of the year. Reuters reported on Friday that Europe's top aviation safety regulator sees the plane returning to the air in November and reentering service soon after.
"For the first time in a year and a half, I can say there's an end in sight to work on the MAX," said Patrick Ky, executive director of the European Aviation Safety Agency (EASA). The agency will lift its technical ban following the U.S. Federal Aviation Administration (FAA) doing the same, which will likely happen in November. All but one issue that EASA and the FAA disagreed on has been resolved.
Rite Aid shares fell as stronger-than-expected fiscal second-quarter sales and upbeat guidance amid ongoing demand for prescriptions fails to assuage investors.
Why Carpenter is lagging but is a better play on oil and aerospace than buying airlines or oil:
Carpenter Technology Corporation's (Carpenter) Ba3 CFR considers the company's strong position in the specialty metals markets as a producer of high strength, high temperature, corrosion resistant alloys. The company's, technological capabilities, which allow it to provide necessary products such as special alloys and titanium products for demanding end use industries such as aerospace, oil & gas drilling - particularly directional drilling - and medical applications are also acknowledged. These attributes position the company to achieve stronger performance in the markets served, although the duration of recovery time remains uncertain and is expected to be extended in the aerospace and transportation segments.
Carpenter participates in the following market segments: Aerospace and Defense, Medical, Transportation, Energy, and Industrial and Consumer. In the Aerospace and Defense segment, with respect to product mix within that segment, approximately 40% is engines, 20% fasteners, 30% structural and 10% defense although these percentages can fluctuate depending on build rates. Carpenter's substantial exposure to the aerospace and defense sector (roughly 59% of
revenues excluding surcharges and automotive roughly 6% of revenues net of surcharges makes the company vulnerable to the material drop in build and production rates as well as the decline in drilling activity across these industries given the severe deterioration in key end markets with only slow and erratic recovery expected. Read More:
Sprouts Farmers Markets.
SFM is currently sporting a Zacks Rank of #1 (Strong Buy), as well as an A grade for Value. The stock has a Forward P/E ratio of 11.42. This compares to its industry's average Forward P/E of 15.48. Over the past year, SFM's Forward P/E has been as high as 17.93 and as low as 10.28, with a median of 15.52.
Investors should also note that SFM holds a PEG ratio of 1.24. This popular figure is similar to the widely-used P/E ratio, but the PEG ratio also considers a company's expected EPS growth rate. SFM's industry has an average PEG of 1.70 right now. Over the last 12 months, SFM's PEG has been as high as 4.78 and as low as 1.21, with a median of 2.21.
Finally, we should also recognize that SFM has a P/CF ratio of 5.66. This figure highlights a company's operating cash flow and can be used to find firms that are undervalued when considering their impressive cash outlook. This company's current P/CF looks solid when compared to its industry's average P/CF of 8.44. SFM's P/CF has been as high as 7.93 and as low as 4.44, with a median of 6.83, all within the past year.
These are just a handful of the figures considered in Sprouts Farmers' great Value grade. Still, they help show that the stock is likely being undervalued at the moment. Add this to the strength of its earnings outlook, and we can clearly see that SFM is an impressive value stock right now.
Cloud computing: Understanding what the cloud is and what it does.
18 September 2020
Today is quadruple witching ( https://www.marketwatch.com/story/what-will-quad-witching-mean-for-the-stock-market-trade-on-friday-11600371672 ) which affected market action yesterday and will affect action today and Monday. So, Tuesday may offer a better indication of market direction.
We have continued to buy so called recovery stocks as we believe Congress will pass a new Covid package (both Repubs and Dems -not to mention many folks- need it. We have spent most of our available dollars since we think the 20% and greater pullback in many of the overpriced tech stocks is warranted and that a move into left behind stocks is in the cards.
We currently own:
Tech- IBM, Apple, Intel Cisco, Western Digital and a small amount of CLOU- a cloud centered ETF.
Banks- we sold KBE and own Wells Fargo, Wintrust and Citigroup.
Industrial: Hexcel, Carpenter Tech (steel), Nucor (steel), NCR, GE, Ford, U.S. Steel and Hewlett Pack Enter.
Grocery/Drugstore: Albertson's, Sprouts and Walgreens Boots.
Retail: Starbucks, Abercrombie, American Eagle, Nordstrom and The Gap.
Miscellaneous: Boyd (gambling casinos) Lyft (people's taxi)
Utilities/Entertainment: AT&T, Excel Energy.
Happy Fall, the season not the market.
Snowflakes in September:
The aptly named Snowflake on Tuesday afternoon priced an offering of 28 million shares at $120 a share, according to a person familiar with the situation, above the recently increased target range of $100 to $110 a share.
It's a clear demonstration of continued strong investor interest in both cloud-based software stocks and companies with very high top-line growth rates. The original price talk range on the offer was $75 to $85 a share.
With 277.3 million shares outstanding after the offering, the deal values Snowflake at $33,3 billion,
Snowflake, based in San Mateo, Calif., has been generating stunning growth, with revenue of $242 million for the six months through July 31, up 133% from the comparable year-earlier period, following 174% growth in the January 2020 fiscal year.
Snowflake raised $1.4 billion in venture capital from a group that includes Sutter Hill Ventures, Sequoia Capital, Redpoint Ventures, Iconiq Strategic Partners, and Altimeter Partners. CEO Frank Slootman, a former CEO at both ServiceNow and Data Domain, holds 15.2 million shares, a 5.9% stake worth about $1.8 billion. The company was valued at $12.4 billion in a private round earlier this year.
Concurrent to the offering, both Salesforce Ventures, an arm of Salesforce.com (ticker: CRM), and Berkshire Hathaway (BRKA) have agreed to buy $250 million of the company's stock in a private placement at the IPO price. Berkshire also agreed to buy another 4,042,043 shares from a current stockholder in a secondary transaction, also at the offering price. That puts Berkshire's total stake at $735 million.
The NASDAQ 100 is down 14% from its high and weaker today. The IPO offering of Snowflake stock to the public markets and the hyperbolic market reaction to that IPO should act as a wakeup call for many market participants. While several of the CNBC TV gurus were euphoric about the potential for this IPO, the huge price pop in the shares from the IPO price of $120 to over $300 in the first hour of trading was nuts! There are plenty of attractive stocks but at $80 billion market cap with forecast $500 million in sales for the year-even if sales are doubling in a year- the market value for Snowflake is a reminder of March 2000 and Dotcom stocks.
For comparison, IBM' equity is priced at $110 billion in the marketplace. It has $14 billion in cash and $70 billion in debt. Interest cost for that debt last year was only $1 billion (1.4%). Net income last year was $10 billion. It is true that income has been flat over the last five years but it is also true that Cloud revenues have grown from $4 billion to $24 billion over the last 5 years.
The suggested reason for the price of Snowflake is that revenues in the first half of 2020 rose 137% to $250 million. Assuming SNOW does the same in the second half it will have revenues of $500 million. If it doubles it revenues every year for 5.5 years it will have revenues of $24 billion -what IBM has now after growing (I'm too old to remember how to figure rate of return) revenues from $4 billion to $24 billion over the last 5 years.
Furthermore, IBM is third behind Microsoft and Amazon in cloud revenue but rarely gets mentioned. Cloud revenues are now 20% of IBM's business. See:
IBM Highlights for the second quarter include:
GAAP EPS from continuing operations of $1.52
Operating (non-GAAP) EPS of $2.18
Revenue of $18.1 billion, down 5.4 percent (down 1.9 percent adjusting for divested businesses and currency)
-- Cloud & Cognitive Software revenue up 3 percent (up 5 percent adjusting for currency)
-- Systems revenue up 6 percent
Total cloud revenue of $6.3 billion, up 30 percent (up 34 percent adjusting for divested businesses and currency)
-- Total cloud revenue of $23.5 billion over the last 12 months, up 20 percent (up 23 percent adjusting for divested businesses and currency)
Red Hat revenue up 17 percent (up 18 percent adjusting for currency), normalized for historical comparability
GAAP gross profit margin of 48 percent, up 100 basis points; Operating (non-GAAP) gross profit margin of 49 percent up 160 basis points
Net cash from operating activities of $15.1 billion and free cash flow of $11.5 billion, over the last 12 months
Intel Versus Nvidia
Nvidia has a market cap of $320 billion. It is spending $40 billion to buy ARM a British CPU manufacturer. NVDA will have revenues this year of $14 billion and ARM has revenues of $2 billion. Intel a chip and CPU fabricator has revenues of $70 billion and a market cap of $215 billion.
NVDA's revenues have doubled over the last 5 years while Intel's have risen 50%. Net income for NVDA has quadrupled to $3 billion while Intel's has doubled to $22 billion.
NVDA sells at 60 times earnings; Intel at 10 times earnings.
11 September 2020
New US jobless claims for the week that ended Saturday totaled 884,000, the Labor Department said Thursday.
That came in above the consensus economist estimate of 850,000.
Continuing claims, the aggregate total of people receiving unemployment benefits, totaled 13.3 million for the week that ended August 29. That was also higher than economist forecasts.
Markets dropped; then rallied; then dropped this week led by the NADAQ which finished lower on the week adding to last Thursday's collapse. Tech stock P/Es and price to sales ratios are too high; have been too high for a long time; yet have continued to climb as they have become the only game in town.
We tried trading Apple and the XLK and QQEW this week but didn't have the stomach to continue and ended with a scratch overall. We would rather own Walgreen Boots at 7 times earnings with a 5% yield or AT&T at 8 times earnings with a 7% yield. Can't change the age spots on an old man.
This week we looked at Apple's financial numbers over the last five years. Net Income in 2015 was $72 billion. Net income in 2019 was $67 billion. Net income dropped yet the share price rose from $35 to $115. In 2015 Apple had cash on hand of $43 billion and in 2019 that cash had risen to $100 billion. But long-term debt rose from $53 billion to $91 billion so the net cash gain was $17 billion not $60 billion. Most of the cash spent went to share repurchases which lowered shares outstanding by 20%. Since earnings per share increased from $2.30 to $2.60 but net income actually dropped, it's obvious that the EPS gain can be attributed to shrinking shares outstanding not real earnings growth. Apple's earnings this year are expected to be $3.20 and $3.60 next year but we can't determine how much will be from share buybacks shrinking shares outstanding as opposed to real growth. And we would point out that in years of significant iPhone introductions net income has risen as much as 15% only to drop in the succeeding year.
Our superficial analysis isn't going to impress or rather depress the myriad Apple bulls (of 38 analysts, 33 have a buy recommendation) but they do lend perspective to the irrational rationality behind many of the market high flyers. And at least Apple has real and substantial earnings and sales and a lot of cash on hand unlike Shopify and Tesla, and Teledoc and DocuSign et al.
At week end we owned: The Equal Weight Bank ETF (KBE), Wells Fargo, Pfizer, Intel, Cisco, Western Digital, Hexcel, Walgreen Boots, Excel Energy, AT&T, AMC Entertainment, NCR, Carpenter Tech, Albertsons Grocery, Abercrombie, American Eagle, Bed Bath, Macy's, Hewlett Packard Enterprises, GE and Ford. Our cash position is much reduced because we expect some tech money to move to value over the next few months.
Pfizer Analyst Vamil Divan reiterated a Buy rating and $43 price target on the stock Tuesday, ahead of the company's investor day next week, arguing that the market isn't giving Pfizer (ticker: PFE) enough credit for its drug pipeline.
Of course, Covid will be front and center. Divan writes that "updates on the timing of any potential interim analyses, plans for potential regulatory submission and how the company will navigate the unique challenges related to distributing the vaccine will also be closely watched." He has been impressed with Pfizer's progress on the vaccine, but notes that, while a successful inoculation would be a billion-dollar business in the next couple of years, it would ultimately taper off, "limiting the impact we believe the vaccine can have on helping Pfizer navigate the time period beyond 2025 when the company will be facing a number of important patent expirations."
American Eagle Outfitters Inc. shares jumped Wednesday after the clothing and accessories retailer reported narrower-than-expected second-quarter losses and sales that beat expectations. Net losses totaled $13.8 million, or a loss of 8 cents per share, after net income of $65.0 million, or 38 cents per share, last year. Adjusted losses of 3 cents per share exclude COVID-19 expenses and restructuring charges. Revenue of $883.5 million was down from $1.04 billion last year. The FactSet consensus was for a loss of 18 cents per share and sales of $823.0 million. American Eagle's underwear and loungewear brand Aerie reported sales growth 32% and a record margin increase. Aerie digital sales more than doubled, up 113%, and overall digital demand grew 48%. Inventory fell 21% to $421 million. American Eagle has deferred its first-quarter dividend, which will be payable on April 23, 2021 to stockholders of record at the close of business on April 9, 2021.
Bed Bath & Beyond gained Thursday, helped by a bullish endorsement from Wedbush, which argues that the market's skepticism about the home-goods retailer's turnaround is unwarranted.
Analyst Seth Basham reiterated an Outperform rating on Bed Bath (ticker: BBBY) and raised his price target to $18 from $15. He also added the shares to his firm's Best Ideas list.
Basham notes that the company has seen positive same-store sales in recent months, which could mean it's "on the cusp of a dramatic improvement in profitability": It looks like it will generate at least $700 million in Ebitda (earnings before interest, taxes, depreciation, and amortization) in two to three years, by his calculus. Yet "clearly, many do not believe in this potential transformation," attributing the comp rise to coronavirus-related demand and viewing its antiquated store base as "irrelevant in the eyes of consumers and is simply a melting ice cube."
He sees it differently. Basham thinks Bed Bath has a clear path to delivering $850 million in Ebitda by 2022 by adopting certain strategies.
Abercrombie & Fitch second-quarter digital revenue climbed 56%, helping drive earnings beyond what analysts expected. The clothing retailer reported stronger-than-expected fiscal-second-quarter earnings, as soaring digital sales helped lessen the blow of the coronavirus pandemic.
Abercrombie shares recently traded at $12.05, up 8.3%. They had slumped 36% year to date through Wednesday.
In the quarter ended Aug. 1, Abercrombie earned $5.5 million, or 9 cents a share, swinging from a loss of $31.1 million, or 48 cents, in the year-earlier quarter.
Adjusted earnings per share registered 23 cents, compared with analysts' consensus projection of an 83-cent loss, according to a FactSet survey.
Revenue totaled $698.3 million, down 17% from $841.1 million in the year-ago quarter but topping the FactSet analyst consensus of $658 million.
"By managing to the tough current environment and our daily demand trends, we were able to grow our highly penetrated digital revenue base by 56% year-over-year to $386 million, expand our gross-profit rate by [1.4 percentage] points and leverage operating expense, resulting in robust operating-margin improvement," Chief Executive Fran Horowitz said in a statement.
"We ended the quarter with approximately $1.1 billion of liquidity, reflecting $187 million of operating cash flow generated in the second quarter."
Read more: https://www.thestreet.com/investing/abercrombie-earnings-exceed-estimates-on-back-of-online-revenue?puc=yahoo&cm_ven=YAHOO&yptr=yahoo
A record 28 million options contracts have changed hands on an average day this year, up 45% from 2019, according to Options Clearing Corp. data. One investor factoring heavily into the activity is SoftBank Group Corp. The Japanese conglomerate bought options tied to around $50 billion of individual tech stock, The Wall Street Journal reported last week.
Options carry risks, especially with more-complicated strategies that go by colorful names such as Iron Condor. But straightforward bets against a stock, called a put, limit the downside when trades go south unlike shorting a stock that continuously rises. Read More:
4 September 2020
"A foolish consistency is the hobgoblin of little minds, adored by little statesmen and philosophers and divines. With consistency a great soul has simply nothing to do. He may as well concern himself with his shadow on the wall. Speak what you think now in hard words, and to-morrow speak what to-morrow thinks in hard words again, though it contradict everything you said to-day. — 'Ah, so you shall be sure to be misunderstood.' — Is it so bad, then, to be misunderstood? Pythagoras was misunderstood, and Socrates, and Jesus, and Luther, and Copernicus, and Galileo, and Newton, and every pure and wise spirit that ever took flesh. To be great is to be misunderstood."
Investors watching the vertigo-inducing rise—and this week's fall—of technology stocks are buzzing about a single trade, a giant but shadowy bet on Silicon Valley big enough to pull the market up with it.
The investor behind that trade, according to people familiar with the matter, is Japan's SoftBank Group Corp., which bought options tied to around $50 billion worth of individual tech stocks. Investors and analysts, aware of the activity but in the dark as to who is behind it, say it has turbocharged the tech sector, whose sheer size drives broader market moves.
A SoftBank spokesperson declined to comment.
And then some big players must have decided it was time to get off the crazy train and many of the happy high flyers gave back 15% and more in the two-day end of the week retrenchment. In many cases that retrenchment only retraced gains made on Monday and Tuesday so no, the correction is not here. What occurs next week and beyond will tell the tale.
If this week's Thursday and Friday action continues the Congress and Trumpster may decide a stimulus package will fill the bill. If we head higher next week then...
In a few active accounts we tried to trade the bubble- should have known it was a top when we joined- and we were profitable Monday and Tuesday and Wednesday and then gave it all back and more on Thursday and Friday. Sic transit Gloria.
In many accounts we have been profitably trading Abercrombie, Macy's, American Eagle and Bed Bath. We did buy Cisco and KBWB on Thursday and then sold on Friday for a scratch when the rally failed Friday and we wanted more cash. We keep trying. Eventually money will move to value; we hope we are still alive.
At the end of business Friday, we owned:
Intel: 10X with a 2.8% yield
Walgreen Boots: 8X with a 5% yield
AT&T: 8X with a 6% yield
Pfizer: 12X with a 4% yield
Hewlett Packard Enterprises: 7x 5% yield
AMC Networks: 5X with no divd
Carpenter Tech: loss with no divd down from $50 in January
Albertson's Grocery: 6X with no divd
American Eagle: loss no divd and earnings next week.
Bed Bath: loss no divd
Hewlett Packard Enterprises: 7x 5% yield
General Electric: loss no divd.
Cash 50% and more.
And the beat goes on.
"Just the place for a Snark! I have said it twice:
That alone should encourage the crew.
Just the place for a Snark! I have said it thrice:
What I tell you three times is true."
Lewis Carroll: https://en.wikiquote.org/wiki/The_Hunting_of_the_Snark
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