Lemley Yarling Management Co
309 W Johnson St
Madison, WI 53703
Comments on activity in client accounts
30 September 2022
Goodbye September. As we said last post, there was a rally for one day and then Mr. Market was back to inflicting serious pain. We remain fully invested and are now suffering with yearly losses in accounts while still outperforming the major market measures by 10% and more. We believe that high inflation measures are lagging what is actually occurring in the economy. As we wrote last week the talking heads -who several months ago wanted the Fed to raise rates to slow the economy- now posit that the Fed has been too aggressive because stock and bond prices have cratered as interest rates have risen.
The S&P 500, the most widely followed proxy for the U.S. stock market, has returned a negative 21 percent, including dividends, this year through Wednesday, according to FactSet. (The DJIA is off a similar amount and the NASDAQ is down over 30%.) In the same period, the Bloomberg Aggregate Bond Index, the most widely used benchmark for the broad, diversified investment-grade U.S. bond market, has returned a negative 14 percent.
The correction occurring in the fancy stocks is long overdue and may have more to go for the non-earning ones. But many of the major large cap stocks are back to a more reasonable 15x to 25x price earnings multiples having dropped 15% to 25% in just the last two weeks. We don't envision them catapulting higher but we think they will stabilize at these levels. That in turn will affect the value stocks we own that are similarly lower and are more reasonably priced at 10x and less with most paying 4% or greater dividends.
The drop in the prices of stocks across all industries in the last 2 weeks has been enervating. We have used the drop in prices to reduce our too large positions in AT&T and Verizon and moved the proceeds to other issues with similar and greater price drops. We continue to believe both T and VZ are extremely undervalued; but Mr. Market and the talking heads and analysts say otherwise. The drop in many isues in the last few weeks has offered an opportunity to sell and reinvest in similar quality issues with sufficient dividend payouts. T and VZ are in the doghouse and by reapportioning funds to stocks as great or more gain probabilities we expect to recoup our losses and enjoy more immediate profitable returns.
It's always darkest before the dawn-as long as the storm clouds clear.
Florida, the hurricane and home insurance.
What the new British Prime Minister's economic plan may mean.
Negative take: https://www.cnn.com/2022/09/27/business/nightcap-uk-pound-mortgage-rates
Positive (wants more) take: https://www.bloomberg.com/opinion/articles/2022-09-23/liz-truss-s-45-billion-tax-cut-isn-t-radical-enough
Our Take: PM Truss cuts the top tax bracket for the wealthy and corporate tax rate and suggests cuts to social services to pay for it. Ah, supply side trickledown economics has never worked but also will never die.
23 September 2022
Three weeks ago, we were smart. This week-not so much. As we end this very down week we have good news, bad news and good news. The good news is that all our accounts are outperforming the DJIA and S&P 500 by 15% to 20% and the NADAQ by 30%. The bad news is that almost all accounts ae down 0% to minus 5% with the smallest down 10%.
As we said in early September when our accounts were riding high, September wasn't over. This selloff is not unexpected but the rapidity and severity of the downturn is always unpleasant. The Fed has reiterated its intention of raising rates to tame inflation and while the market mavens were begging for the fed to do this for the past several months those same seers are now saying that the rate increases will throw the economy into recession. Also, the gurus seem to have discovered that the Ukraine War is impairing the European economy because of the high cost of natural gas as Russia is playing with supply.
Our guesstimate is that there will be a rally on one day next week from the oversold condition of the markets. The rally will of course fail as those who have wanted to sell awaiting a rally will do so. The markets will then trend lower into mid-October when we think/hope/guess the CPI number will finally show a downward turn and all will be saved. By the by, if our guestimate for October occurs it would be the market action and reaction of pullback and recovery that usually occurs in the September-early October period over the past many years.
Entering this month, we have used the September pullback to become fully invested at least to year end. The fancy stocks are down 50% and more from their highs and probably have more to drop. But the major component stocks of the S&P except Apple (META, AMZN, GOOG, MSFT, NOW, CRM, ADBE ORCL) are down 30% and greater; the much-loved chip stocks (NVDA, MRVL, AMD, MU) have been cut in half. Even the oil stocks, which are still up for the year, are 25% and more off their highs with oil down from $120 to under $80 and gasoline below the price it began the year. Commodity prices, with a few exceptions, are trending lower. The only major (30% to 40% depending on who is talking) component of the CPI that isn't trending downward is the rent equivalent component which is determined by apartment rents and housing prices. With 6.5% mortgage rates, existing home prices are surely not going to keep rising. New home construction will also slow. Apartment rents are rising on this year's leases but that component - which is the reason the CPI hasn't begun retreating - is a very lagging indicator (it telling us of rent increases 3-6 months ago. The pop in apartment rents may very well be a one-year anomaly- giving the number of apartments currently under construction that will come on line over the next few years.
All that being said, it is still disconcerting to see our portfolio values retreat as no uptick computer sell programs place extra pressure on already weak markets being forced down by margin selling. And ETF selling indiscriminately affects individual sock components stocks of merit. But indiscriminate selling also provides opportunity and we have used that selling to acquire good stocks at great prices with wonderful yields. Our accounts now on average over 4%.
We currently own and will continue to own (except for tax loss selling/switching in certain accounts):
AT&T (7X and 6.9%), Verizon (7X and 6.6%), Glaxo (8X and 6.3%), Walgreens (6Xand 5.8%), Dow (6X and 6.4%), Newell Rubbermaid (10X and 6.2%), IBM (5.4% and 13X), Intel 5% and 12X), CitiGroup (4.6% and 4.6%), Energizer (8X and 4.4%), Paramount (8X and 4.8%), Ford (6X and 4.7%), Organon- women's health (4.3% and 5X), Hewlett Packard Enterprises (6X and 4%), Cisco (11X and 3.7%), Pfizer ( 8X and 3.6%), AMX Networks (3X and 0%), Kohl's (8X and 7.6%), The Gap (pennies and 7%), Macy's (4X and 4%), Under Armour ( 8X and 0%), The Container Store ( 5X and 0%), Ralph Lauren ( 10X and 3%), Best Buy (11x and 5%), JP Morgan ( 10X and 3.6%), BankAmerica (10X and 2.7%), Tapestry -Kate Spade and Coach (7X and 4%), Nordstrom (7X and 4.2%).
16 September 2022
Mr. Market served a slice of humble pie this week. Well, we were sailing along, happy as a clam (origin of term: https://www.phrases.org.uk/meanings/as-happy-as-a-clam.html) when wham:
Inflation rose more than expected in August even as prices moderated from four-decade highs reached earlier this year.
The Consumer Price Index (CPI) in August reflected an 8.3% increase over last year and 0.1% increase over the prior month. Economists had expected prices to rise 8.1% over last year and fall 0.1% over last month, according to estimates from Bloomberg.
On a "core" basis, which strips out the volatile food and energy components of the report, prices rose 6.3% over last year and 0.6% over the prior month in August. Expectations were for a 6.1% annual increase and 0.3% monthly increase in core CPI.
That report of a 1 tenth of one percent difference caused a 1400-point drop in the DJIA. Everything was down on Tuesday which suggested computer generated selling rather than a rational reaction to a number which may or may not be meaningful. But we are in September and September usually is a downer and this year will certainly enhance the reputation of this most difficult month.
On Friday Fed Ex preannounced dismal news and the markets reacted negatively after the new CEO suggested the world economy is in recession. Obviously, China's economy – which continues its Covid lockdowns- has been affected and the Ukraine War has harmed Europe's economy. The jury is out on the U.S. and we remain positive both on the economy and our holdings.
We continue to be fully invested. We used the sell off this week to eliminate several of our non-dividend stocks while adding the proceeds of those sales to companies paying 5% or greater. By the middle of October, we hope to have portfolios yielding close to 5% on average.
The Doom and Gloomsters are out in force and the media of course always like to emphasize the negative because catastrophe sells while positive stories don't.
We currently own:
GSK (Glaxo -drugs- down because fear of lawsuits), Verizon, AT&T, Dow, Kohl's and The Gap (better than quarterly results). All yield 6% plus and have the potential to gain 20%.
IBM (better than), Intel, Walgreen's and Newell yield or 5% and also have significant appreciation possibilities over time.
CitiGroup (better than), Cisco (better than), BP (better than), Huntington Banks (better than), Energizer, Organon (women's health), Paramount CBS, Ford (better than), Best Buy and Nordstrom all return 4% plus.
In the 3.5% + category are Hewlett Packard Enterprises (better than), Pfizer (better than), Comcast, Ralph Lauren and Macy's (better than).
No dividend stocks with 50% and greater appreciation potential are AMC Networks at $22 down from $32 last month and priced at 4X earnings, American Eagle paused their dividend, Under Armour is on an all-time low and The Container Store is priced at 5X improved earnings. TCS market price suffers from its small capitalization of $300 million with insiders owning 40% -too small for any billion-dollar fund or institution to consider.
Until next week, enjoy the Vernal Equinox.
Soaring mortgage rates pass 6% for first time since 2008 amid Fed campaign to slow inflation.
Ford: Equity Market value $50 billion. Bottom line earnings $8 billion. Ford targets 600,000 EVs by Late 2023 out of
4 million total cars sold.
Rivian EV auto/truck company with 100000 orders from part owner Amazon. Equity market value $35 billion. No earnings, lost $7 billion. Rivian, employs 6,300 people — nearly twice as many as it did under Mitsubishi — and is aiming to produce 25,000 trucks, SUVs and vans this year. Its explosive and sometimes rocky growth will help determine how well one of the nation's most important manufacturing sectors transitions to a new era of technology and global competition.
GM: Equity market value $60 billion. Earnings $8 billion. GM plans to deliver 400,000 EVs thru 2023 (6 million total vehicles).
A GM spokesperson told Fortune that its four planned U.S.-based battery plants will expand capacity in North America to "build 1 million EVs by the end of 2025, as well as an additional 1 million units of capacity in China.
Tesla: Equity market value $900 billion. Earnings $ 9 Billion Much more than we envisioned but priced at 20X Ford and GM earnings. Expects to sell 2 million EVs in 2023.
Good on him!!!!
A half century after founding the outdoor apparel maker Patagonia, Yvon Chouinard, the eccentric rock climber who became a reluctant billionaire with his unconventional spin on capitalism, has given the company away.
Rather than selling the company or taking it public, Mr. Chouinard, his wife and two adult children have transferred their ownership of Patagonia, valued at about $3 billion, to a specially designed trust and a nonprofit organization. They were created to preserve the company's independence and ensure that all of its profits — some $100 million a year — are used to combat climate change and protect undeveloped land around the globe.
10 September 2022
Mr. Market was kind to us this week and we thank him very much. But there are still four weeks remaining for the usual early autumn market contretemps and so we remain cautious but committed to our view that after this period our stocks will benefit.
While the Fed continues to raise rates to temper inflation, almost all the measures in the CPI have pulled back except housing costs which are measured by housing equivalent rent increases. Since rents are a significant (30% plus-we see different percent figures), the raising of rents by landlords has become a self-fulfilling prophesy. Landlords say they have to raise rents because of inflation- inflation that they are causing by raising rents. Apartment buildings constructed years ago have fixed costs that are not changing but the oversized inflation number is allowing landlords a chance to catch up (gouge) the rents by blaming the inflation for which they are responsible.
During the week we added to portfolios further reducing our available cash. We have concentrated on dividend value issues. We purchased Comcast (3%), Glaxo (4.5%), Dow (5%), Hewlett Packard (3.5%), the major Bank ETF (3.5%), the Domestic Oil ETf (3.5%). Kohl's (6%), Paramount CBS (4%), and Walgreens (5%). Some of these we owned this summer and sold when we went to cash or for tax losses and luckily, we have repurchased 10% lower.
We have always employed value investing- having been indoctrinated by the ‘old stockbroker". To us it is a simple way that employs common sense. If a person has a million dollars and want to invest the money to provide a livable income from day one, he would choose value investing. He would invest in a company that has $1 million in sales and earnings of $100,000 that is growing its sales and earnings at 5% a year. So, after investing the million dollars the person would have $100,000 a year (growing at 5%) of income. Now he may only take a $50,000 a year dividend and reinvest the remaining $50,000 in the business. Thus his income would be 5% of the money invested.
Or, that person with the million dollars could choose growth investing and find a company with a wonderful product that is just beginning to sell that product. He could buy that company for $1 million that has revenues of $10,000 and is losing money but is growing revenues at 50% a year and will be earning money -he doesn't know how much- in 5 to 10 years' time.
Those are the 2 approaches investing. The value approach is more conservative but in time of stress it usually has more limited downside risk while in time of exuberance it trails the go-go stocks (a 1960s term) in appreciation.
Eventually growth stocks -that survive- become value stocks (IBM, Apple, Microsoft, QUALCOMM) and the ones that don't become reminders of the perils of seeking outsized returns from seemingly can't miss ideas. Value stocks sometimes run their course (Eastman Kodak is an example of a growth stock that became a value stock and then disappeared; so too did Xerox, Digital Equipment et al.) And value stocks might reinvent themselves – like the telephone companies that went from land lines to wireless and streaming to -in some cases -obscurity. IBM has gone from massive full house computers to the cloud as has Microsoft from only software for personal computers to myriad offerings and also the cloud. Apple went from computers to the iPhone to services. Disney went from movies to theme parks to cruise ships to streaming.
And off course, there are also the gamblers who chose meme stocks or bitcoin and/or options and futures and roll the dice.
Finally, we want to readdress the Verizon, AT&T, T Mobile investment theme. The market gurus and analysts have decided that VZ and T are has-beens while TMUS has eaten their lunch. As we wrote last week, T Mobile has grown its subscribers in large part because it was able to acquire Sprint and its 40 million subscribers. AT&T and VZ were obviously prevented from bidding for S. Supposedly TMUS has the widest 5 G network and that is a plus. But VZ and T have relatively the same number of postpaid and 3rd party subscribers. T and VZ sell at 10 times earnings and pay 6% dividends, grow their earnings at 2% to 5% and raise their dividends regularly. TMUS pays no dividend and is priced at 60 times earnings. Analysts are recommending TMUS because they expect earnings to increase from $2 to $12 over the next five years. But that earnings growth won't be from internal earning's growth but rather from the repurchase of 40% of the shares outstanding. Analysts are predicting another 20% increase in the TMUS share price over the next year but not 20% a year ad infinitum. If T and VZ go back to the prices they were at in May- and they will within the next year -they will also increase in value 20% plus all the while paying a 6% dividend based on the current price.
Why are some folks making such a fuss about books in school available to children when all of these kids have phones that access the internet each day where they can read/watch whatever they wish. Please, this is 2022 not 1937.
And why is cancelling $500 billion in student debt (thanks Joe Biden, boo Republicans) any different than giving a $1 trillion plus tax cut to high income folks (thanks George Bush). Both are meant to help the economy.
There is currently a brouhaha in the Catholic Church over the Latin versus the vernacular (local dialect mass). Back in the last century Pope John the XXIII and the Vatican Council (like a constitutional convention) changed the rule so that the mass, the central worship of Catholics, should be said in native languages instead of Latin. The thinking was that it might be good for folks to understand the words being said during the mass. Originally all religious writings and ceremonies were in Latin. Latin was the language of the upper class. (Actually, in colonial times in America, Harvard and other colleges conducted all their studies in Latin or Greek. Maybe that's where the phrase,' it's all Greek to me', came from).
In the 16th century Thomas Moore and his king, the very spiritual (not) Henry VIII burned folks at the stake for heresy if they read a bible in English. Now Catholics are going through a reverse time when some folks (conservative Catholics who seem to blame the sexual revolution on the removal of the Latin Mass) want the Church to return to Latin over the objection of the current pope, Francis, who according to Catholic teaching was picked by the Holy Spirit. Go figure.
As Marx wrote, "Religion is the opium of the people." We aren't sure whether he said that in Latin..
It's reminds of Democrats supporting the FBI now as Trumpsters condemn it. Back in the 1960s it was the reverse. What goes around comes around-- not always logically.
Labor Day Week-End 2022
August nonfarm payrolls grew ahead of expectations at 315,000 versus 318,000 consensus estimate from Dow Jones. Still strong number. The unemployment rate increased to 3.7% from 3.5% due to a nice bump in the labor force participation rate, 62.4% from 62.1% in the prior month, meaning more people are coming back into the workforce and that's a great thing. Importantly wage growth is starting to moderate too. Month over month average hourly earnings up 0.3% versus 0.5% in the month before and 0.4% expected.
From: Jim Cramer daily post
Today, Friday. was a low volume but volatile day as light holiday trading allowed the big boys and girls to play their computer games and the major measure jumped up 1% then down 1% to end the day, week, and summer on a down note.
With our large cash position heading into September, we were able to avoid much damage in the 3% down day on August 26 and several multiple 1% down days that occurred the last two weeks of August. On September 1 we were 90% cash in many accounts. We decided to commit to issues that had dropped 10% to 20% or more in just the last 2 weeks. We know September is a down month in most market calendars but the values and dividend yields were just too enticing. We bought in reasonable amounts and most accounts remain 40% cash- or greater- giving us room to add in this most uncertain month.
In smaller accounts we have repurchased at yearly lows and 10% to 20% lower than our sale prices a few weeks ago:
Abercrombie (worse than earnings), Macy's (3.6% and better than earnings), The Gap (6.5% better), The Container Store (better), Nordstrom (4.5% worse), Hain (worse), Under Armour(worse)and AMC Networks (worse but till at 5X)
We also own those issues in our larger accounts as well as:
IBM (5%); Cisco (3.5%); Hewlett Packard Enterprises (3.5%); CitiGroup (3.5%); Huntington Bank (3.5%); Carpenter Steel; Organon (4%- women's health products); and Energizer Batteries (4.3%). All of these issues bested analysts' estimates in their recent quarterly reports yet sold off in the last 2-week reversal of the summer rally.
Issues that reported worse than earnings that we have repurchased. are:
Western, Digital (on a multi-year low as chip stocks collapse and priced at 8 X); Intel (4%, the chip stock analysts hate); and Dow Chemical (5%).
Stocks we are trading in small amounts in large accounts are Ralph Lauren, Best Buy, Twilio, Zoom and Roku.
We sold CLOU and FCLD-both cloud ETFs- at losses and repurchased Wisdom Tree Cloud ETF.
Finally, we reduced or eliminated our holdings in Verizon and AT&T. Both yield 6%. In some cases, we sold for tax losses and in other for funds to diversify into multiple issues that had dropped as much or more than VZ and T. We overinvested in these 2 issues ignoring that we can't best The Street and Mr. Market. Analysts have a love for T-Mobile and a distaste for T and VZ even though all three have the same number of subscribers. And, a large part of the growth for T-Mobile came from its acquisition of Sprint. T and VZ would not have been allowed to acquire Sprint for anti-trust reasons. We may raise our positions in these two later in the month/year as the 6% yield and multiyear lows make both attractive in reasonable quantities.
Our accounts (except for some of the smallest which because of their size remain more concentrated and thus more volatile) remain positive for the year while the major market measures are down 15% to 25% for both the year and 18 months. For this we are thankful- and lucky. Our quick moves to cash have rescued us many times over the past 3 years.
"People make their own history but not in conditions of their own making". Karl Marx
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