Analysis: AEO FB WYNN

Bob Lang and Chris Versace discuss the portfolio's exits of American Eagle Outfitters (AEO) and Facebook (FB) , the discipline guiding exit and entry strategies, their thoughts on Wynn Resorts (WYNN) and much more.

KATHERINE ROSS: Good morning Action Alerts Plus members. I'm Katherine Ross. And I am joined by Bob Lang and Chris Versace. Now, as we clarify our new era for you all. We're going to talk about the AAP portfolio, the exits of Facebook and AEO entry and exit strategies. And we have a few member questions.

But Chris and Bob, I first want to start in on the markets. Chris I'm going to toss to you first. Because honestly, I'm getting a little bit of whiplash here. And I know that you said that it's been kind of indecisive in the market. So, can you break down what you're watching right now?

CHRIS VERSACE: Yeah. So, I mean, the indecisive comment really comes off of the concerns that we've had that have been mounting over the last several weeks. Supply chains, rising input costs. What does that mean for the economy in terms of its speed. As well as earnings expectations for September and the December quarter. As we really push into the September quarter earnings season.

But the other factor that we're seeing really hit the markets today, is the rise in energy costs. When you look at oil prices natural gas prices. They have continued to climb higher. We've been focused on rising input costs like I've said. But this in particular is really starting to spook folks for I think two good reasons.

One, we're coming out of manufacturing blackouts in China. And there's very specific reasons for that tied to the coal market. But when we look at this happening and the continued spread, there are concerns as to whether or not those blackouts might ripple across Europe. Potentially, hamper productivity in the US as well.

And then the second, is remember we're going into the holiday shopping season. Consumer's ability to spend disposable income is always key. In rising gas prices at the pump. They do take a bite out of consumer spending. So, another potential headwind to the economy is what we're seeing emerge. And it's those inflation concerns that are really hitting us today.

KATHERINE ROSS: Well, I'm Bob I'm looking at my finviz chart right now. And I'm seeing a sea of red, which is a stark comparison to the field of green that we had in midday trading yesterday. So, when we're looking to navigate these choppy waters especially using technical analysis. What's the move?

BOB LANG: Well, market volatility is high. It's elevated. And we're in the 20% range. There are some technical conditions out there that look rather ominous right now. The S&P 500 has been trading for the better part of a couple of weeks underneath the 50 day moving average. Which is kind of a good marker of bullishness or bearishness. 50 days being about six weeks of action.

I always go down a little bit further to the 28 day moving average. Which is about a month worth. And what we see here is a market that is struggling to find buyers right now. And when they're struggling to find buyers and prices can't go up. Well, the sellers are going to start coming out.

And when we have higher volatility as we are right now in the 22% to 24% range. Which we currently see the VIX around 23%. You're looking at wider ranges. And the S&P500 for right now is probably trading in about a 250 to 300 point range. 4115 on the downside about 4,400 to the upside. So, about 250 point range.

So, it's not going to feel good to see markets dropping so much. But still be in a range. It's not going to feel great either to see markets bouncing up to that range. And then all of a sudden turning back downward. Like we are today.

Of course, news has been driving market action for the past couple of weeks specifically. Sometimes the news just gets repelled but right now with a lot of uncertainty right now. And things that we talked about yesterday with Fed policy we really don't know when they're going to pivot. We know they're going to pivot at some point in time to be a little bit tighter. But we just don't know when. Today's jobs report is Chris probably talk about the ADP with pretty strong.

KATHERINE ROSS: So, you mean the ADP jobs report. Just so, I'm clear here. Since we're waiting for Friday's actual non-farm payrolls report.

CHRIS VERSACE: Great.

BOB LANG: That's right. Go ahead Chris.

CHRIS VERSACE: Yeah. So, I mean just to pick up what Bob was saying. The ADP report 568,000 jobs

in the month of September. Again private sector jobs. Way better than expected for 25 was the rough consensus. And that's up from 374,000 in August. I think when you peer into it. There are reasons to be hopeful.

The overall strength in the report, be continued growth in leisure hospitality. But when we look at some of those areas, that are really been subject to these supply chain issues. The ability to find labor construction, manufacturing, transportation, and trade. All of them had very, very strong job gains in the month of September compared to August and July.

And I think this could be what everyone was looking for. The notion that when the economic impact payments because of the pandemic fell by the wayside in early September. People would start to enter the job market. What we'll see more not only with Friday's employment report.

But also the October employment data from both ADP. And the October jobs report. But the thing that I get very hopeful about is that finally, we might start to see the supply constraints start to ease as these employment numbers tick higher. So, very excited about that.

BOB LANG: Oh, Chris I was going to. I'm sorry I interrupted you. But one of the things that you've been talking about the whole supply chain thing is there's been a lack of employment. People are willing to do their jobs like longshoremen and so forth.

And these are the people who are unloading stuff from those ships that have been backing up in California off the Coast of California. I think you said something to the effect the other day that there's like 70 or 75 ships waiting to dock to unload stuff from overseas. And they're just there just aren't people there. Aren't truckers. There aren't people to unload this stuff. Are you saying that bottleneck is going to open up over the next couple of months?

CHRIS VERSACE: I would say, again we kind of have to parse the data little more. But I think that when we look at trade, manufacturing, and even in transportation. There are reasons to think that those bottlenecks could start to ease. This one month is isn't going to turn it. But I think as we get more people back to work, I think you're right Bob. it it'll break free. And start to improve and start to improve. So, that perhaps we start off 2022 on more normalized supply chains. But we'll see.

KATHERINE ROSS: OK. So, I want to move us into talking about the portfolio. Because you guys did make your first big moves yesterday. And that came with the exiting of the positions in American Eagle and Facebook. Now, I want to start with Facebook.

We did see a little bit of bounce back in the stock after the Facebook whistle blower Francis Hagan. And I'm sorry if I didn't say that correctly. Testified on Capitol Hill yesterday. Chris, walk me through. We talked a little bit about the fundamentals of what you didn't like. But what led to a complete exit of the position?

CHRIS VERSACE: Well, I think as we kind of alluded to yesterday Katherine that there's more mounting concerns forward about Facebook. And it was a relatively small position. The two big factors are going to be how does all of this impact its core business, which is advertising. Advertising related revenue. And the second is how is it going to impact it on the cost structure?

And there seems to be a growing view that some form of compliance and protecting users identity privacy information is going to happen. So, from that perspective, we said look, we've got a monster gain in the stock. I think the last piece was up some 400%. Why risk that here. Let's just book it and move forward. Particularly given since we needed to raise cash which was extremely low ahead of the September quarter earnings season, which I think Bob and I would agree is likely to see a volatile next few weeks.

KATHERINE ROSS: So, Bob are there names or charts that you like the look of right now. Since we just freed up two positions?

BOB LANG: Well, as far as well, going back to Facebook real quick. I think we talked about this one yesterday. Is that it was kind of sitting in a no man's land on the chart. And one thing that I learned a long time ago about technicals and charts is if you logically look at something. And say to yourself would I buy that today?

Be objective and say to yourself was that something that I would buy today? And if the answer is no, then if I'm holding it why am I holding? So, I try to keep things as simple as possible. Because make decisions that are going to have ramifications over a long period of time.

So, if I'm not willing to step up and say that's a buy right now. Then if I'm holding it, the answer is why? And if I have to ask myself, why am I holding something. I haven't been telling myself that I can apply that capital elsewhere. And find something better.

So, as far as better charts are concerned, I'm not seeing a whole lot of really good stuff there Katherine. I looked at scanning in the industrials. Health care stocks look a little bit better than others. Housing stocks look atrocious. So, there's not a lot to choose from out there.

There are some select names that we could take a look at in the tech sector. Some of these names have run extremely hard. Look at an upstart Holdings or something that we talked about a couple of weeks ago. Asana, Affirm. Those sort of names have already had great years in 2021.

And the thing is that people are going to be looking at these names that they've taken profits in already. And seeing that they've run so much and be an opportunity to be a become a source of funds as opposed to a use of funds. So, a source of funds, meaning I'm going to sell it and raise some cash as opposed to sitting around there and waiting for it to run up higher.

KATHERINE ROSS: So, I want to discuss the second exit that you guys made yesterday. Which was a bit jarring. There was confusion concern from members around your exit of AEO. And part of this comes from the fact that the exit came at a loss.

So, I did go through your note. And I want to start with you Chris. Because I understand we talked about this name yesterday. You guys weren't fans then. And we read your note that detailed a little bit more of your plan here. But can you walk me through what really concerned you about the fundamentals here. That led to a complete exit. Instead of a gradual exit.

CHRIS VERSACE: Sure. So, I think there are really. It's two questions, right. The first one is why were we not fans of the business, right. The business in our view is challenged and we walk through that rising cotton prices, which I think Bob you and I talked earlier today. They stocked out yesterday in terms of a high limit. So, they continue to chug higher a huge headwind.

We were also obviously concerned with all the comments that we've been getting about supply chains and the ability to get product. That's especially challenging for a retailer going into the holiday shopping season. So, we saw a lot of potential margin pressure. A lot of downside potential revenue risk.

So, not fans of it. So, when we sat back. And we said geez. This position is down 26%. What is it going to take to make us break even. When do we see that? Is that any time in the horizon? Or do we see a lot more pain as these factors that we're concerned about hit.

So, a very careful decision was weighed between the potential reward to be had in the near term versus the additional downside risk. And I think that's the ultimate reason as to why we said we're better off exiting the position. Which candidly maybe it shouldn't have been rated to one. Or some other positions we'll talk about that there might be some concerns about that. But we thought it was a prudent action to take for subscribers to stop the bleeding.

KATHERINE ROSS: Bob when you were looking at the chart. What kind of red flags were you seeing? I mean eventually we're going to get to the point where I'm just throwing the charts up on the screen so, members can see. But we're not there yet. So, can you walk me through what was concerning from a technical standpoint?

BOB LANG: Well, I'm a trend follower. I follow the momentum. And follow the money that's going after. Or stocks are being removed from stocks. And this one in particular American Eagle had made a series of lower highs and lower lows. And that by definition is in a downtrend.

It made a jump below the 50 day moving average. A couple of months ago. I put this chart out there for all the subscribers. And you can see it was arching Downward. And making just continually making lower highs and lower lows.

And at some point in time you know it's going to stop. Is going to stop going down. It can only go to. Obviously, it can only go to 0. If that's the case. But the point is that once it broke a certain level. And it was about the 29 or $30 level I want to say.

You've got to raise the white flag. And say look you know what, I was wrong. And it's OK to be wrong. And it's not OK to stay wrong. And I'm OK to be wrong and admit that. You know what it wasn't the right trade. It wasn't the right position to be in.

So, we went ahead and pulled the trigger for the subscribers yesterday. And said look you know what, the stock may bounce. Sure. We may recover a little bit of our loss. But as Chris said it was already down 26%.

So, when you think about being down 26% on your money. You need a 50% move. 50% move to get back to even. And so that stock going to move back to 40 bucks or something like that to. Again it might. But I think the prudence that we are trying to establish with some credibility in the portfolio and the discipline says that. You know what, maybe there are some other names out there that we could do better on American Eagle.

So, far as the technicals were concerned they were atrocious. And again, I'd much like Facebook I have to look at the stock and say is that something I would buy right now? And if the answer is no. Why am I holding it.

CHRIS VERSACE: But Bob, you just raised indirectly a fantastic point that I want to hit on. Which is that because of the dual strategy that we're employing. We're marrying fundamentals and technicals. When something like that starts to slide. We will be well aware of what the downside technical risks are. And we'll be able to hopefully nip it in the bud a little sooner. So, that we're not drifting as low and weighing as much on the portfolio's returns.

As you talked about the other day, preserving capital risk management. It's all part of running a sound portfolio strategy. And I think as we both learned in the past. No matter how much we might want something to move higher. The act of willing it higher never works.

BOB LANG: What somebody once told me years ago. That buy and hold has been replaced by hope and pray. So, if you

[LAUGHTER]

I'd like to. I'd like to think a little bit of comedy in there. But still what I mean when you get into a position where a stock is moving against you, you start hoping and praying that it moves. And that's no way to invest. Because all you're going to lose is opportunity costs and time.

So, I think it the prudent thing to do was to cut it out of the portfolio. Move on. Find some new ideas. And listen, I have 100% trust in Chris to find some great ideas. And I really he's brilliant at what he does. And hopefully, matching up with the technicals as I see them we'll be able to put some new ideas out there and replace that loss that we have our subscribers had with AEO.

KATHERINE ROSS: So, let's take this for more of an investing education aspect. I appreciate what you guys have said about AEO. But one thing that was brought up to me time and time again from members yesterday. Was the fact that this it was an abrupt exit for them. A full exit of a position. Especially, one that comes at a loss.

So, when we're talking about exit strategies. And Chris I want to go to you first here. When we're talking about exit strategies. How can our members start to not copy the portfolio moves exactly because everyone does their own research. But how can they prepare to exit a name like a AEO?

CHRIS VERSACE: Well, I would. Before I answer that. I would just categorize. I would say that move while some might view is extreme. I think it was portfolio triage. At its core. But is that what we're going to do. All the time? Certainly not.

When we look at what we've done in Trifecta, Stocks under 10. And elsewhere in our careers. We tend to ease into positions, right. And then we also tend to ease out of positions. And that can be to as is some like to say ring the register. And book some gains. But we tend to baby step out in portions.

And sometimes it could be again and to lock in monster gains. It could also be as the stock is approaching our price target. As that risk to reward that I alluded to earlier starts to balance out.

And so, we might do some trimming. We certainly have the one, two, three rating system that we're going to continue to use. One of the first signals will be downgrading a stock from a one where it's buying now to a two where we would buy it on weakness. For example. So, maybe looking for a pullback.

So, we plan on using that system just like we have in Stocks under 10, Trifecta. And members are used to seeing in AAP. We're going to continue to do that. I think we're going to be very prudent and disciplined about it.

And for example, just looking at the current portfolio. There are some things that we're uncovering that I think we need to address. For example, when we take a look at Wynn the cost basis is around 122. The target is 110. And current share prices around 85. But it's ranked to 1. So, there's some disconnect there between the cost basis and the price target. Not really sure what happened but it's something we're going to address.

We take a look at Wells Fargo. Still rated a one but it's right on top of its price target and it's 4.67% of the portfolio's assets. So, that's an example that we would probably look for us to downgrade it to a 2. And maybe trim that position size back.

So, that's the strategy I think that subscribers are going to see more and more of. Bob, do you want to add anything to that?

BOB LANG: No I agree with that. And again it goes back to our discipline that we practice with Trifecta and being prudent and practical for the subscribers. And again we don't want to get heavy over our skis. But also we also have to be realistic and realize. Look at that Wynn position right now. It have to be up 50% to get back even. 50% gain. Think about that for a minute.

And how many stocks do you know of can go up 50% in a short period of time. In a long period of time as well too. It's just not common. And that would only just get to you back to break even. So, I think something like that is we definitely have to review each position in the portfolio carefully. And see if we're in that situation.

CHRIS VERSACE: I agree with that, Bob. I think just to compare contrast AEO and Wynn if I could. AEO when you look at that there is clear pressure on the business, right. Contrast with Wynn that. We look at the ADP report this morning. Leisure hospitality jobs were very strong. We believe people are going to go back to Vegas. We can look at the rebounding numbers out of Macau right.

We can see bluer skies ahead. Perhaps we can recover some of that sharp loss. And we can be prudent there. I think the opposite is the case for AEO. So, again just comparing and contrasting why one but not the other?

KATHERINE ROSS: So, I want to hit on something that Bob just said. He mentioned discipline and every AAP member has a very long history with that term. So, I want to focus in on that. And I want to open this conversation up a little bit more. Because we've been talking on and off about options education.

And I think the members are a little confused about the priorities of the portfolio. So, I just want to clarify with you guys. We are still focused on long term investments here, right? And Chris, that's something you're focused on.

CHRIS VERSACE: I can only say this clearly Katherine, 100%. So, it's something that Bob and I have both. When you look at the portfolios again people can go look at Stocks under 10 ,Trifecta. The positions that we take are not 1 month orientated. They are 6, 12 in some cases 18 months looking for the payoff, right. And we'll review time horizons, based on what's happening in the marketplace.

But I think the confusion is that we are or Bob is. Not me. Bob is going to do a lot of education on options. That I think is going to prove very insightful to subscribers. He's going to teach them how to protect themselves using different tools whether or not we enter we introduce some active trade or something like that.

I don't think there are. Again let me be clear. Any plans to do that. There are no plans at the current time to do anything like that. So, the investing strategy that AAP subscribers have been used to will continue.

KATHERINE ROSS: So, Bob I just want to make this 100% clear. Based off of what Chris just said. We're adding options as a tool in our members tool belts. We're not acting on them ourselves. Or I mean I should say. I'm just the anchor here. You guys are not acting on them yourselves.

CHRIS VERSACE: Right.

BOB LANG: Let me be 100% clear. No. We won't be introducing options trades at all in the AAP. And Chris is 100%, right. And we were going to be 100% focused on stock investments right now. I'm only talking about introducing an educational piece about options.

I've had an overwhelming amount of interest from people so far just within the last week or so. Of people asking. Oh, I'm interested in learning about options. And so that's perfect. Because these are things that tools that you can use on your own.

And again, these aren't these aren't things that we're going to apply to Action Alerts Plus positions at all. So, that suffice to say if some people want to learn more, go outside the box right now. And learn about options trading. Well, that's what I'm there for. Because that's what I do. I regularly do it on a regular basis every single day. And have been doing it for a long time. I wrote a book about it.

So, I think that there's an opportunity for you to learn if this is something that you've been shying away from for a long period of time. But make no mistake. We're just going to stick to stock investing for AAP. And everything we do with options trading is clearly an enhancement or just on the side.

KATHERINE ROSS: So, one of the beauties of this portfolio and our members is the fact that I get emails from retirees looking to set up their portfolios. And have them bring back gains for them in their final 20 years of trading. But then I also have younger investors who are asking me about are we going to take a little bit more of a risk on approach at times. Like, can we marry a long term portfolio with some risk on education if not trades? So, I want to put that to you Chris.

CHRIS VERSACE: I think the answer is yes. I think the beautiful thing about that is that approach allows people to take on that additional risk if they want to. I think we have to recognize that risk tolerance is a very personal decision. Some people might want that extra juice of options. And Bob, will educate them on how to do it. But it's not going to impact the actual portfolio.

The other Avenue that we can as a portfolio. However, move into is mid-cap and small cap stocks. And that's something that hasn't really happened before. But again when you look at some of the things that we've done in Trifecta and even really Stocks under 10 in this instance.

There are wonderful, wonderful opportunities that we can introduce to the AAP portfolio that can generate some good returns. So, that it's all part of our collective tool belt to do that.

KATHERINE ROSS: OK. So, one other thing that I'm getting a lot of questions on. Is this idea of the model portfolio. And so I'm going to be honest with you guys. Both Bob, and Chris and with our members here. I'm confused about skin in the game. I'm getting a lot of questions about it. And if I'm being honest, AAP has never had such skin in the game per se right. I mean it's the same portfolio it's always been. Can you better explain that, Bob?

BOB LANG: Yeah. I think that nothing really changes in terms of the application that Chris and I are doing. And the discipline that we're trying to share with everyone about finding positions and managing positions.

Listen, I've managed a hedge fund before many years ago. I manage client positions. I do options trading for them. And it's all designed around the amount of risk we want to take. And in my company right now explosive options that I run. I've had it for 10 years going.

I started off with a model portfolio I didn't have money behind the portfolio. I started with about $85,000 and it was a model portfolio. But it was mostly intended to share with you about the amount of size you should be trading. We talked about position sizing a couple of days ago. How important it is to diversify, and manage your risk. And not put all your eggs in one basket.

So, that model portfolio that I started with $ 85,000 is well today over half a million dollars. Hindsight, I wish I had put the money up there. But I didn't. But it still it's a guideline and for people to know how to manage risk.

And I don't want to say that the AAP is just a guideline. It's just a guide here. Because there are people who have real positions in these stocks. My clients and my subscribers in my service also have real positions in those plays that are reflected in the explosive options portfolio.

But I think it's a guide for managing risk. And Chris hit on it a few moments ago. Everybody has their own amount of risk tolerance here. And if we look at the risk spectrum as a wide roundish type of a spectrum. With fear on one side and greed on the other. We're all on that spectrum. Every single one of us. All 7 billion people on the planet. We're all risk averse. And we're all greedy about making more money. Everybody, every single person on the planet.

So, we're just on different spots on that spectrum. But as far as managing risk is concerned that's one of our number one objectives. It's not the number one objective to manage the risk. And manage the downside risk. And then what when we have gains we have profits we take them as appropriate.

Chris would probably tell you one of the best trades that we've had over the past couple of years has been in trifecta in Chipotle. And we've trimmed we've taken risk off the table three times already. As the stock has run up and we have well over 100% gain in that portfolio.

So, that's the sort of thing we're interested in doing and sharing. That's the prudence, the discipline of managing risk in AAP portfolio.

CHRIS VERSACE: I think the other point to hammer home here is. I think Bob and I recognize some of the questions that people have. We recognize the faith and trust that people are putting in because they're looking for someone that they can again trust and follow to help them make prudent investment decisions.

So, to think that we might make these decisions lightly? Certainly not the case. And just from an industry perspective. People who do run hedge funds mutual funds and the like. They honestly live and die by their investment track records. So, we are extremely mindful of what we're doing both near-term and what we're setting up for the longer term as well.

And I think I just want to say to the subscribers that we understand your concerns. We are working for you. And I think you can see by the number of Alerts we've put out. And other things that we know what you're used to. And it's our aim to deliver.

KATHERINE ROSS: OK. So, I want to move on to a member question. Because I think that this is really relevant to the size of our portfolio. So, Craig H emailed me and he said as a personal investor he cannot manage 34 equities, which I mean, that's a lot. So, he's comfortable with about five to six. And he's wondering if you guys. And I want to start with you Chris. Have any guidance to select that amount of stocks from the club's current portfolio.

CHRIS VERSACE: So, Bob and I talk about this quite a bit, right. It's a fine balance between wanting to introduce new names, harvesting profits, right. And having something that is unwieldy particularly for the subscriber. I understand that folks some might be retired as you said Katherine. Some are new. Some are working. So, staying on top of 30 for positions is quite a bit.

Particularly as we continually to revisit risk reward in the different positions. There are some that I suspect over time that we will exit. And we'll look for better position names for the coming 6, 12, 18 months. So, that's the first part.

Do I think that over time and no quick order again over time. We're likely to trim back to something a little more manageable. Call it round numbers. 25 plus or minus. And there will be times where we have probably more than that. In times when we want to be prudent again. Really prudent disciplined that we might have slightly less than that.

I think that's going to happen. I think as we also contemplate smart position sizing. Our rule of thumb over a trifecta has been Max out around 4 and 1/2, 5%. If we do that that's kind of in keeping with that 25 plus or minus. Kind of over the long term.

KATHERINE ROSS: All right. Well, want to thank Bob, Chris and every single member for tuning in today. And I want to encourage members that if you have questions about names in the portfolio. If you have questions about investing education. Or Bob and Chris's current strategy moving forward. Please send them to me at on Twitter @tstalert, and @bykatherineross. And also, you can find me on my email @katherine.ross@thestreet.com. Thank you for joining us today. We'll see you again tomorrow.