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THE LANCZ LETTER (10/31/17)

“THIRTY YEARS LATER”

“Black Monday” - October 19, 1987 It is always enlightening to find out what your advisor or investment expert was doing at the time. Even though a good percentage of today’s experts were not even in the business then, we found that navigating through a 22 percent one-day drop was definitely a valuable experience. The experience confirmed to me the importance of our primary directive of sticking with your discipline and, in some ways, established the Alan B. Lancz & Associates, Inc. presence on a global scale. Throughout the summer of 1987, we emphasized taking profits, as many stocks had performed so well that they were looking expensive. The advance was so broad that we found little to buy, particularly in the higher quality names, and our blue-chip portfolio began to build cash. Many gave us credit for predicting the crash, but it was just a matter of not finding any bargains in which to redeploy our profit-taking proceeds, so cash built up by late summer to 70 percent, the highest level we ever recommended at the time -- or at any time since. The weeks before the Monday plunge, the markets were acting poorly, so we went out west to visit some media companies in anticipation of potentially placing one or two of them on our buy list, should a sell-off bring them down to more attractive levels.

Little did we know that a major decline on the preceding Friday would lead to a 22 percent plunge the following “Black Monday.” That forced our trip back to our offices on a red-eye flight that night. I remember that on the flight from Los Angeles back to Detroit, I felt good about the new opportunities that would greet me at the offices Tuesday morning. To my surprise, Tuesday we had a call from a banker client in panic mode. When we told him that our cash position would be helpful during times like these, he said we would be foolish to buy now. We were lucky to be in cash and it might save our business, but if you buy now after all the problems are known and everyone is selling, you are setting yourself up for numerous lawsuits, he said. Over the next few days we started buying despite such bleak warnings, especially after seeing the Fed supply liquidity into the system and valuations decline to irrational levels. During the week, we spoke with our mentor, Sir John Templeton, just before he was to fly to New York to do a special taping on “Wall Street Week.” I will never forget what he told me during the height of blood in the streets, in a calm, yet assertive voice: “Alan, I can not tell you that prices over the short term will not go lower, because you are dealing with human emotion during panics like these. But I can tell you that over a six-month period rationality will prevail and the prices you see now will be looked at as great buying opportunities for the long-term investor.” He followed up with a few specific examples of how some select companies were then trading near their net financial assets, leaving the brand name, tangible assets, et cetera, all as a free bonus to those that would buy into this selling. Any doubt we had was reconfirmed after my conversation with Sir John. That was the most important part of the experience to me: Stick to your disciplines and take advantage of those using emotions in their investment decision-making process. By the end of the week, the local newspaper asked me for an interview. I respectfully declined because I wanted to concentrate on what to buy, while keeping clients informed as to what I was doing. We were told that many area investors were worried about their retirement plans and life savings and that we owed it to the community, so we agreed to go in Saturday for a Sunday investment feature. We were positioned as a bull buying into this panic, while they asked a local financial guy his strategy -- and it was to sell all stocks and buy bonds and gold. After reading his advice, I was glad I did the interview. Later that week, I was asked by CNN to appear for an interview, which was surprising because we had never done national television and did not know they were even aware of us. We flew to Chicago to do a show with three experts – one from New York, me representing the Midwest and one gentleman from California. When we arrived at the studio after the limo ride from the airport, my ego was in high gear as I met the show’s producer. He immediately thanked me for taking the time and quickly deflated all the good thoughts of how smart I thought I was with his follow-up statement – “You don’t know how many advisers I had to call before I found someone that was actually buying into all of this!” During the show, I was the last to go on. We were answering the question “IS THIS ANOTHER 1929”? I could hear the first expert’s comments while I rehearsed what I was going to say (why we were buying – the Fed making the right moves, valuations went from too expensive to attractive, et cetera). His answer was “yes” it could be another 1929, and then he elaborated. The second guest was being introduced so I was nervous because my national television debut at the tender age of 29 was on deck. To my dismay, the next expert answered the question with a resounding “no;” I almost went into panic mode. I was the guest that thought it was a buying opportunity, and now this guy was going to steal my thunder. Suddenly, in my national television debut, I would have 2-3 minutes to fill with the same answer as the preceding expert! He followed up his “no” with the statement, which I could hardly believe (but greatly welcomed): “No, this is not another 1929; it will be much worse,” then went on to say that 1929 will look like a financial picnic compared to what was in store for investors in 1987 and beyond. Needless to say, that inspired me because those types of irresponsible comments forced many innocent and unsophisticated investors to panic out of stocks, just before one of the greatest bull markets ever. So, that is what this financial expert was doing 20 years ago. By the way, later this month we will be back in California -- you guessed it -- researching some new investment opportunities.

4 Undervalued Stocks in an Overpriced Market Contrarian manager Alan Lancz has an eye for bargains. He likes Fitbit, Crocs, Occidental, and Twitter. Three weeks ago, Amazon.com ascended to $1,000 a share, rarefied air for even this tech titan, only to lose its footing earlier this month as a surprise rotation out of tech stocks shook the major benchmarks. Alan Lancz was not among those selling the megacap tech names.

As a disciple of the famed contrarian investor Sir John Templeton, Lancz, founder and president of the Toledo, Ohio-based investment advisory firm Alan B. Lancz & Associates, is not afraid to go against the flow. He takes profits when euphoria overtakes a stock and looks for beaten-down bargains. But while he thinks the broader technology sector is looking a bit frothy, he isn’t ready to cull his positions in megcap stocks like Facebook (ticker: FB), Amazon.com (AMZN), Apple (AAPL), and Google parent Alphabet (GOOGL)—at least not yet.

“Investing is like a pendulum,” Lancz says. “It doesn’t swing from undervalued to fairly valued. When things go well for a company, it swings from undervalued to fairly valued to overvalued. Instead of automatically selling, we are monitoring things closely.” That’s not to say Lancz, 58, doesn’t see cause for caution about U.S. stocks. With the Dow Jones Industrial Average and the Standard & Poor’s 500 index at or near their all-time highs, he’s recommending that investors build cash positions.

Still, Lancz says, the current environment isn’t a repeat of 2007, when he suggested aggressive selling a few months before the S&P 500 hit a new high and proceeded to lose half its value. He sees select opportunities, such as the beaten-down shares of Fitbit (FIT) and Crocs(CROX), and he’s recently bought shares of Occidental Petroleum (OXY). In business since 1982, Lancz manages $200 million in assets for high-net-worth clients. His stock-picking methodology is fairly simple: Look for underappreciated or oversold

names with strong management, good cash flow, and the potential for upside three or four times bigger than the downside risk, based on his analysis. This straightforward approach led Lancz to buy Facebook in the low teens, when it was out of favor. The stock recently traded over $150. In December, he recommended power generator Calpine (CPN) and watched it surge more than 30% in May when the company was reported to be exploring a sale. CenturyLink (CTL) had fallen 31% last year when he labeled the stock a top pick for 2017, a call that was echoed last month by Corvex Management’s Keith Meister at the Sohn Investment Conference.

Then there’s his turnabout on Apple. After suggesting that clients sell the tech titan in September 2012 when the stock had hit a split-adjusted $100, Lancz reversed course some six months later, after the shares fell 40%. Recently, the stock fetched $144 a share. Lancz recently talked with Barrons.com about his view of the market, why he’s begun looking at energy stocks, and his affection for big-cap European drug makers. Below are some excerpts from our conversation.

Q: Were you nervous about the Nasdaq’s recent two-day selloff?

A: Pullbacks are healthy for the overall market. Due to the large amounts of cash sitting on the sidelines, the selloff was short lived—a

two-day drop of 2% and not a 10% multiweek correction. A correction will occur when the pendulum has truly swung to the extreme, and

by then we will hopefully have reduced our positions.

Q: What’s your view on the tech sector in general?

A: On a broad basis, the sector is starting to look overvalued. Yes, it could climb higher due to momentum and the large amount of cash

that is now sitting on the sidelines. You can certainly make an argument that Apple and Amazon are fairly valued at recent prices. Still, to

us, the broad sector is showing more risk than reward, though we have found select opportunities.

Q: Let’s turn to the broader market. What’s your outlook for the S&P 500?

A: We’re getting a little bit more cautious on U.S. stocks, what with the difficulty President Trump has had progressing with his agenda,

and with rising interest rates. For the stock market to keep rising as it has been, things will have to fall into place just so, and I don’t see

that happening. So, we’ve started taking profits and raising cash levels. We are still finding pockets of opportunity, but we would be

cautious about chasing some of the iconic highflying names.

Q: How much cash do you recommend investors hold right now?

A: Our average recommendation is in the area of 10% to 15% in cash. We have just started building up cash positions, so we are not there

yet. If the market rallies over the summer, our recommendation is to be at the high end of that range. If the market declines and we find

bargains, then we will be at the low end of that range, in general.

Q: What allocation do you recommend for other asset classes?

A: We recommend a similar allocation—10% to 15%—in fixed income, namely munis and select corporate bonds. The balance of the

portfolio should be in equities. It’s worth noting that our exposure to international stocks is higher than it has been in a number of years.

Q: Why?

A: We started looking at Europe last summer. Valuations were much lower for some big firms compared to their U.S. counterparts,

despite stronger growth prospects, which meant a better risk-reward outlook. As other investors caught on to the trend, international

stocks, particularly European ones, outperformed the U.S. I see that outperformance continuing at least through the balance of 2017, and

perhaps into next year.

Q: What is your best international stock pick?

A: We like health care. I think many of the European pharmaceutical stocks fetch lower valuations than their U.S. peers and the

companies offer as good, if not better growth prospects. Our latest purchases were Switzerland’s Roche Holding (RHHBY) and the

British drugmaker GlaxoSmithKline (GSK). Both stocks have moved higher since then, so we recommend only buying into weakness.

Q: Is the political turmoil in Europe cause for concern?

A: A lot of that is already in valuations.

Q: Are you still underweight energy stocks?

A: We’ve started looking at energy for the first time in a while. We bought Occidental Petroleum earlier this month in the high $50s. The

shares, which traded near $100 roughly three years ago, are down a good deal and could move lower still, so we are slowly accumulating

a position. It’s a speculative play. The stock pays a nearly 5% dividend, and if the shares keep falling, it could be a takeout target.

Q: What else are you buying?

A: There are other names that have fallen in value by half or more to what we think are attractive levels, including Fitbit and Crocs. Both

stocks are speculative plays in the $5 a share to $8 a share range with good turnaround potential. Because the megacap tech names were

so in favor for much of 2017, some of these smaller companies fell between the cracks, but are starting to offer opportunities. The small-

cap-focused Russell 2000 is only up 5% for the year, while the Nasdaq has climbed 16%. So we are starting to pick up some companies

in this area.

Q: Twitter (TWTR) is another name you’ve accumulated of late. Why?

A: It’s another good example of an out-of-favor name that could offer more opportunity than chasing after a megacap like Apple. Now is

the time to accumulate Twitter on weakness. The assets are there, but the company needs to monetize them. Also, with President Trump

using Twitter so often, it has refocused attention on the company.

Q: Which stocks are you selling?

A: We’ve begun taking partial profits in some of the financials, some of the smaller tech companies, and even some of the internationals.

These are big positions that have done very well, and it is part of our push to raise our cash position.

We are also selling iRobot (IRBT). We have purchased the shares over the past few years, when the stock has been in the $30s, and the

share price recently climbed above $100. The stock has hit on all cylinders, but expectations went so high that it makes sense to take

some profits. It is a good company, but I would not chase the stock at these levels.

Q: Thank you for your time.

Note: This interview was first distributed on www.barrons.com on June 20, 2017

Biotech Bargain

Biotech firm United Therapeutics is down 40% over the past year but has a strong balance sheet. Now could be a good entry point for some investors.

VITO J. RACANELLI July 2, 2016

Though the shares of mid-cap biotechnology firm United Therapeutics (UTHR) rose more than 10% last week, they remain down by 40% over the past year or so, to Friday’s $109 from a high of $190 in spring 2015. Some of that is deserved, as there are patent challenges to its products, which might reduce heretofore stellar double-digit percentage growth.

Nevertheless, both sales and earnings per share are still likely to be strong relative to peers and the broad market. This could represent a good entry point for a long-term-oriented investor looking for a well-managed biotech with a strong balance sheet and track record. The shares could bounce 20% to 30% from here.

The Silver Spring, Md.–based company specializes in products that combat serious cardiopulmonary diseases, such as pulmonary arterial hypertension, or PAH. Four products—Remodulin, Tyvaso, Adcirca, and Orenitram—make up nearly 100% of sales and are sold around the world.

Among the challenges, United Therapeutics recently settled patent litigation that allows Novartis (NVS) and Teva Pharamaceutical Industries (TEVA) to launch generic versions of Remodulin in 2018.

These disappointments have diminished investor and analyst enthusiasm. Consensus earnings-per-share numbers were cut 25% since mid-2015. However, the stock-price drop more than discounts the challenges, says Alan Lancz, president of the eponymous investment advisor, which has been buying shares recently for clients. “The patent issue is exaggerated. There isn’t going to be the feared patent cliff,” Lancz avers. And the company isn’t as sensitive to that as the bears would have it, he adds.

For the entire article, please visit www.ablonline.com

What ever happened to “Tech Wreck”? Reprinted from LanczGlobal.com Member’s Only Sector Spotlight (11/8/99)

The euphoria around technology stocks is growing to levels that should be a cause of concern to most investors. We have discovered from experience that when investors favor a sector so much that it falls under the “must have at any price scenario”, then it is a good time to take some profits. Nearly twice the mutual fund dollars are going into technology funds this week than the first week of October. It seems to be a given now to get growth you have to buy technology related stocks, particularly with the growth prospects of the internet. Many novice investors feel that this out-performance of technology is commonplace, but just three years ago technology companies traded at a 19% discount to non-technology peers. Currently with shares in higher and higher demand such an occurrence (of trading at a discount) seems unthinkable. We are advocates of technology and feel technology will continue to be a vital catalyst for global economic growth. But some of the extreme valuations force us to take some profits and be extremely selective with any new purchases here. The internet craze reminds us of the early tech craze of 1982-1983, when a host of PC companies went public...of which Apple Computer was the only one that survived. To put it simply, tech stocks do go down and we would rather take some profits now when prices are hitting new highs than try to get out the door when everyone else decides that tech prices are too high. Last Friday’s Microsoft ruling is taken as a “nonevent” by Wall Street and this confirms our thoughts that investors are looking at everything in tech through rose colored glasses. Last week we met with several fellow money managers in San Francisco and one conversation perfectly illustrates the IPO internet craze. The firm manages $11B institutionally and has recently established retail mutual funds for the general public. They were bragging about their emerging growth fund being up 50% last month alone. It turns out that this new fund with only $8M in assets was the beneficiary of many of the “hot” IPO’s of late causing such a small fund to soar in price. Even though this was not an IPO fund, this institution discovered the best way to get a bang for their IPO dollar was to put a good part of the firm’s allocation into this new fund. This is definitely a sign of the beginning of a craze. How all this will shake out is not known, but the high-quality leaders should continue to do well. The vast majority of the internet IPO’s will probably experience the same fate as Atari and Commodore of the early 1980’s. The early sign of this is that the first internet grocery IPO, Peapod, Inc., has recently announced that it may not have enough money to continue operations through next year. If internet euphoria begins to dry up, so will the cash that is funding all of these speculative deals. That will lead to only one possible outcome for many speculative internet IPO’s at today’s excessive valuations.

Bloomberg Open Exchange with Carol Massar (1/30/09) Q: What tipped you off that you were seeing greed within the financial

community? A: In the financials, what we saw was that they kept on increasing their earnings, but it was how they were increasing their earnings. They were doing it by excess leverage and increasing their dividends. Unfortunately, that made a lot of conservative investors get in thinking it was almost like a utility or a safe investment when actually they were taking more and more risk, and that is how bubbles are formed. As more and more people make money in those areas, more money flows to those areas and those financial companies don’t want to stop the push of new money.

Q: Have you changed your strategy at this point and how?

A: Actually, we have Carol. What we are doing now is a lot of the things we warned about a year or eighteen months ago are starting to look appealing just from a valuation standpoint. A year ago we were warning about Google and Apple at $700 and $200 respectively, or even the emerging markets which had an incredible run for five or six years. Google when it gets down under $300 or Apple in the $80-90 or lesser area; whenever you have that panic selling, it’s a good time to start nibbling on quality.

Q: Alan, I totally get that in terms of the valuation plays, but if the

fundamentals don’t support stocks doing better, the environment doing better,

the economy doing better; you still have to be very careful in terms of these

plays, right?

A: Exactly. I think that’s where you have to go with the quality. You have winners and losers and the market is starting to differentiate this. Apple had great earnings last week and they are taking advantage of their weaker competitors, and that’s what you want. If they can survive now in a bad economic environment, they’ll just be that much stronger when we get out of this.

Q: In terms of the economy and the economic outlook, do you think everyone is just way too upbeat at this point. Many are

expecting a recovery in the second half.

A: Consensus is a recovery in the second half, and again, consensus will be wrong. This is a global systemic financial crisis. If it took us two and a half years to get out of the tech/telecom bubble at the start of this decade, I think this will be a long drawn out process. I think we are making the right steps finally, and I think what’s protracted this problem is a procrastination and the problems of ignoring subprime and the ripple effects that many people besides ourselves warned about.

Q: And in terms of strategy, you think this though is an opportunity for some investors to pick up some of those really badly

beaten down stocks that really have a good outlook. You mentioned Apple earlier, another one you like is Suncor energy down

about 60% in the past year. Why do you like it, why does this name stand out for you?

A: Just incredible reserves with oil sands in Canada. Right now, with energy down so much and Goldman talking about $20 a barrel oil where six months ago they were talking about $200 a barrel oil. I think it is a great opportunity and eventually when the economy does recover, oil prices will go up and they have a great reserve that doesn’t have the geo-political risk that Russia and other areas…Whenever you get this consensus opinion where everyone is bailing out of something and buying Treasuries, the time to buy Treasuries was a year ago and the time to buy energy is now, not a year ago.

Q: You mentioned treasuries, typically a safe haven with lots of new issues as the government looks to finance all of their

bailouts that they are doing. Are Treasuries also a way to go at this point?

A: No, I think just the opposite. A lot of people with flight to quality, they are going into Treasuries. Yields are at historic lows, and I think more people will lose money in Treasury bonds over the next ten years than any time in history.

Q: We talked earlier about how you avoided the whole financial mess, you stayed out of financials. Good call. What about

financials are you buying now?

A: In November, we put Goldman Sachs and J.P. Morgan at $52 and around $21 on our buy list on LanczGlobal.com and those are the two areas that we’ve gotten into in the financial area. Last week, J.P. Morgan went into the teens and we bought more. I think what you are going to see in this market are 20-30% moves in both directions as opposed to last year when it was primarily down. So when you get those types of moves, take what the market gives you and take some profits. If you get a 30% move in a market like this take the profits and stick with high quality. You have to be selective, don’t just go across the board in an ETF.

The information presented has been obtained from sources believed to be reliable, but its accuracy - and that of the opinions based thereon - is not guaranteed. Any statements nonfactual in nature constitute current opinion and are subject to change. LanczGlobal, LLC., or individuals associated with the company may have positions in securities or commodities referred to herein. Neither information nor opinions shall be construed to be or constitute an offer to sell or a solicitation of an offer to buy any securities or commodities mentioned herein. Past performance does not guarantee future results.