SARA SILVERSTEIN: Welcome to the AAP monthly members only call. I am very excited to be on the set of TheStreet's very own set on the floor of the New York Stock Exchange. I'm joined remotely by Chris Versace and Bob Lang.
This is my first and probably my only time that I get to do this, so I am going to try to change all the rules. So if you have feedback, positive or negative on how we do this today, please feel free to send it along to AAP Club at thestreet.com. Or you can send it directly to me at firstname.lastname@example.org.
Now, Bob and Chris, before we look ahead, I do want to take a quick look back at last month. I'd like to hear how both of you feel. Like, what was the biggest mistake made last month, and the smartest thing you did. But I want to start with mistake because it's a little more fun. Chris, what do you have for us? What mistake did you make last month?
CHRIS VERSACE: Yeah, so late in the month, ahead of earnings from NVIDIA we opted to trim the position back around $172, given concerns about the PC and gaming market. And the bigger mistake would have been not to have followed our instincts, and just exited the position entirely.
And I say that because about a week later there was a license imposed by the Federal government, restricting sales to US and China. And we wound up closing the position out around $139, 140. So we arguably left some profits on the table that we could have had. And that's always a tough thing to swallow, Sara.
SARA SILVERSTEIN: Yeah. No, that's great. And, you know, there is no investor that doesn't make any mistakes. And the only investors I'm scared of are the ones that think that they never make mistakes. Bob, what about you? What mistake can you reveal for us from last month?
BOB LANG: So I think the biggest mistake that we made recently, and it flowed into August, was we kind of got into the energy space a little bit late. And we added the XLE back in mid summer, and we've been trying to take advantage of the dips and add to it. But we did get a good sizable dip earlier in the month of August, and we didn't add to that one.
We're getting another dip now, so we're looking at it very, very carefully to add a little bit more to the energy play. But we think the energy prices are going to rise still even into the end of this year and early next year, so we do think there's plenty of opportunity and time to get in there. But I think, by and large, not adding to that energy position early on was probably a big mistake on our part.
SARA SILVERSTEIN: Right, and thank you guys for playing along. Now, Chris, tell me what do you think was the biggest win, something that you guys did really great last month.
CHRIS VERSACE: I think that we noted all the challenges the market was having. And, really, in July and August we didn't really give in to temptation with a number of the head fakes that the market had, rather than use hopium. And we want this to go higher, we want to do that. And we hope this happens.
We did what we prefer to do, which is kind of stick to the-- excuse me, stick to the data, stick to the technicals, and really let that speak to us. And by doing that we weren't really caught off guard by any of the market movements lower. So I would say that's a pretty big positive during a month that lost about 4%.
SARA SILVERSTEIN: And I love that word. What is that? A hopium? Is that what you said?
CHRIS VERSACE: Oh, yeah, yeah, yeah. It's a Chris-made word, hopium.
SARA SILVERSTEIN: It's great, I love it. Bob, what about you, biggest win from last month.
BOB LANG: Well, I think one of our biggest wins was taking advantage of some of our names that we had good moves on, and taking some profits off the table. Let's talk about ChargePoints.
So ChargePoint is a volatile name. It's in the EV space. Chris and I will talk about it a little bit later. But ChargePoint is the name that we saw travel from about the mid teens, all the way down to single digit levels, about $8 or $9.
We did add a little bit more of it to the portfolio around $11, $12. And, in fact, it's the largest position in the Action Plus portfolio today. And we did take some profits on the name when it nearly doubled in price up about $15 and 1/2 $16, with some excitement around the EV space. So I think that's probably a good win for us.
We also early in the month unloaded the NVIDIA trade. And, again, as Chris mentioned, it was a bit of a miss or a mistake that we got off of there too late. But I'm telling you right now, I think that was a good move for us.
It looks like there's some downside to go in the stock, but we'll talk about it a little bit later too. So I think that those two probably tied for the biggest win in August.
SARA SILVERSTEIN: Great. We're in a bear market, Bob, and everybody wants to know when things are going to turn around. From a technical standpoint, what are the main indicators that you look for to signal that the long-term trend is changing?
BOB LANG: Well, I wish I could be called Nostradamus, and be able to tell you exactly when the market was going to turn, but I can't. But certainly we've been in this bear market for the better part of nine months now, probably since the end of December of 2021.
And we did hit our peak all time highs in the early part of January, and it's just been lower highs, lower lows. So from there I would look for some nice, tight, range sideways consolidation for a long period of time to make sure that the sellers have been washed out of the markets. And then a little slow climb of higher highs and higher lows, which establishes a nice uptrend.
But make no mistake, as long as the Fed is hawkish and continues to wreak havoc on the markets with higher interest rates, and trying to battle higher inflation, this bear market is not going to go away.
And if you look back historically when the Fed has been in such hawkish mode like this, equity markets have been a difficult place to be in, they've performed poorly. And this year it's rather interesting that it's the bond market that has done more poorly than the equity markets.
Having both the markets, bond and equity areas performing poorly, is rather rare. But, listen, it's being dictated by a very aggressive Fed. And until that ends, we won't see an end to the bear market.
SARA SILVERSTEIN: Great, I know you'll keep an eye on all of that for us. Chris, what is your outlook for the markets for the next month and through the end of the year? And how have you positioned the AAP portfolio to best navigate that?
CHRIS VERSACE: So when we look at all the data we're getting, it's pretty clear cut that, one, the Fed is going to continue to increase interest rates, even as the economy continues to slow, we've continued to got dollar headwinds that are really going to weigh on company forecasts and revenues.
And, in fact, we actually expect that combination, along with some other items, to really result in greater downside risk to earnings expectations really through the balance of the year.
So over the last several weeks, we've actually positioned the portfolio for that. We have gravitated into more defensive, or as we like to say, inelastic names. Names with great dividend streams, whether they're increasing their dividends on an annual basis or ones that offer, like Verizon for example, a really great dividend yield.
So I think the key for us is that we're always looking out six to eight weeks or so, even though we have a longer term view. And the idea here is to course correct, and make sure that we don't really get hoodwinked or caught off guard by anything that's happening. It does happen from time to time. But the key here is to minimize that from happening.
SARA SILVERSTEIN: And I love that the inelastic names. What are the inelastic names that are in the portfolio that offer a little bit of protection?
CHRIS VERSACE: Sure. So we've got Verizon, like we said. And in today's increasingly connected world, I challenge you to find anyone that is going to go without their mobile phone service. American Water Works, AWK, water utility.
Water is making all sorts of headlines today in terms of shortages and droughts. But here's the thing, you can't live without it. So arguably that's probably the most inelastic product out there, meaning that you'll pay no matter what because you need it to live.
SARA SILVERSTEIN: Great, you're right, we can't live without our cell phones or water. Bob, I'm going to give you one minute to talk about your favorite topic, volatility. Volatility has been rising, it's a little bit higher than it was before. How do you look at that? And how does it change the way that you look at a portfolio?
BOB LANG: Well, let's remember volatility all it means is that the ranges are expanding. And when volatility is on the rise, we see bigger movements up and down. What makes people uneasy is those big moves down. For most of us as investors and traders are risk averse, so we don't like to see our portfolios going down, we don't like to see markets going down.
So when volatility is expanding, it means that the ranges are expanding. However, there's a reason for that, and it's about uncertainty. Well, volatility right now is down about 25% on the VIX. And it's down a little bit from where we were earlier in the summer, but it is up from more recent times.
And it's reflecting a little bit of uncertainty as in terms of policy from the Fed. It's also in terms of uncertainty with the economy, where the economy is going to go. And really the jobs market has been, really, the only thing that's been carrying the economy right here.
And if it starts to falter, we could see some negative readings on GDP going forward. And that could cause a little bit more angst in the markets for investors. But, really, right now there's not a whole lot of uncertainty to speak of, as it relates to the markets, as we had back earlier in the summer.
We had a lot of uncertainty with the Ukraine, Russian conflict that's still going on right now. But as far as Fed policy, everyone seems to know that the Fed is going to be raising interest rates. There's no surprise right there. So volatility is something that we're going to be watching very, very carefully over the next several months.
SARA SILVERSTEIN: And, Chris, I'm going to throw it to you on this name topic of the Fed, but I'm going to give you one minute. On the most important economic factor of the year, which is inflation.
From a portfolio management perspective, what is the most important thing about inflation? Is it how the Fed reacts? Is it how inflation actually-- the actual level of inflation, how it measures up to what we're expecting? What are you looking at?
CHRIS VERSACE: So I'll kind of give you a bad and a good, if you will. So what we really need to pay attention here is how quickly or not inflation is coming down. And the reason I say that is that velocity or lack thereof is really going to dictate how much longer the Fed is going to remain in a tightening mode.
So if the CPI continues to linger, hovering, retreating very, very slowly, we can expect the Fed to go bigger and go longer. If on the other hand, we see quick progress, it could mean that the Fed kind of curbs back its bite sizes, or how long it's going to have to keep its interest rates at elevated levels.
That could be a positive sign for the market. The one little thing that people tend to forget about inflation is that price increases that companies put out tend to be rather sticky.
And what I mean by that is if companies like grocery stores like Kroger or whoever are raising prices, even when the input prices tend to fall, we see perhaps some deflation, or at least more normalized pricing, you don't really see them dial back their prices. So this little secret here is price increases today to fight inflation can be margin drivers in the future.
SARA SILVERSTEIN: And, Bob, the portfolio is about 24% in cash right now. And this is an important allocation decision. How are you thinking about cash in the portfolio?
BOB LANG: So we've had a lot of cash for a long time. And, frankly, it is part of the bear market playbook. And what does bear market playbook say? It says be very cautious, you have high levels of cash, and have some protection.
So we have both of those. We'll talk about the protection later on in the program as a regards to the PSQ and the SH. But the high levels of cash are important to remain a little defensive against the market drops and the market volatility that we've seen over the past seven or eight months.
And as that market volatility recedes and we start seeing some-- to borrow one of Wernicke's famous phrases, "Some green shoots in the economy." We'll start using that cash and deploying that into investments and trades that we think are going to do well in the current environment.
But for as for right now, it's a great defensive move, we've held on to the cash. And some people would tell us that, Chris and Bob, you're not earning anything on that cash, it's a drag on your portfolio. And that's true, but still the S&P 500 is down some 17 and 1/2% to 18%. We're matching it and still with that heavy horde of cash.
Remember the S&P 500 is a fully invested vehicle. S&P 500 it's 100% invested. And if we're only 80% or 75% invested, and we're still earning a return that's similar to the S&P 500, it means that our return on risk is much higher than the S&P 500.
So we're going to keep that high level of cash for a little bit longer. And, again, watch the developments in the markets and the economy. As they unfold and get better, we will be using more of that cash.
SARA SILVERSTEIN: And as we get into talking about the individual positions in the portfolio, and maybe as a nod to all of our Fantasy Football drafts last night, I want to ask you guys to do the same thing with the portfolio.
What is your single favorite holding in the AAP portfolio as we go into September? And we will check the records at the end of next month and see who wins this. I'm just kidding. Bob, you want to start what's your favorite pick.
BOB LANG: Well, I could say my favorite name--
SARA SILVERSTEIN: Sorry.
BOB LANG: Yeah, yeah, I'd have to say my favorite name in a portfolio is the CBOE, the Chicago Board of Options Exchange. One that we got into a little bit earlier this year. It's performing fairly well, it's up a little bit for 2022.
It's a company that's got the dominant position in options and commodities, trading and market making functions. Month after month they have been coming out with record numbers. I don't know very many companies that have been doing that lately, certainly this year in 2022.
But this is probably my favorite company, favorite business. And there aren't very many market making businesses around, certainly not the size of the CBOE. They have a dominant share not just across the United States, but across the world. So CBOE is probably my favorite name.
SARA SILVERSTEIN: Great, Chris, what about you? What's your pick?
CHRIS VERSACE: Well, you know, everywhere I look around, Sara, it's that time of the year. I'm starting to see pumpkins. And when I think of pumpkins, I think of corn stalks and harvests. And that means pretty soon we'll be starting to get the data on not only corn harvest, but the soybean harvest as well.
And when we look at those prices, they're up not only nicely year over year, but a big year over year that tells me that farmer income is going to remain robust. That gets me very excited about John Deere and Co.
SARA SILVERSTEIN: Awesome, that one is surprising. I love it. Now we're going to do the stock buy stock review of the portfolio, which I know we do all the time. But as I mentioned, I am going to change the rules a little bit. I know a lot of people love to hear from both of you on every stock.
I am not sure that I feel the same way. So we're going to test it out, do it a little bit differently this time. And, again, please send your feedback. But this time I'm going to ask that you only answer the same question if I don't ask it for you, ask you. If you agree, then node along, give a thumbs up.
But only add something if you absolutely disagree, or you have something that's so important that we just simply cannot miss out. And so I appreciate you guys playing along and trying this out with me. So let's start-- let's see. OK, let's start with Vulcan, the newest addition to the portfolio. Let's see, Chris.
CHRIS VERSACE: Mhm.
SARA SILVERSTEIN: Sorry, let's see. OK, so Vulcan.
CHRIS VERSACE: Yeah, so we added the name--
SARA SILVERSTEIN: Yeah.
CHRIS VERSACE: So we added the name recently. Members know that we've been really paying close attention to the Biden infrastructure law, and what that's going to mean for non-residential construction to highways, ports, airport runways, that sort of thing.
And while we already had exposure with United Rentals, which is equipment renting, obviously, predominantly construction equipment, we wanted to expand the portfolio's exposure to that big surge in spending that'll be coming over the next several years.
So we looked at a number of different players. We even have one or two still in the bullpen. But from a risk reward perspective, we really liked Vulcan because of its concrete and aggregates business.
Pretty much any aspect of what you're going to do related to infrastructure, you're going to wind up consuming the company's products. It also has a very nice dividend, and that was the rationale behind that addition.
SARA SILVERSTEIN: And you cut United Rentals instead of just adding to the infrastructure play by adding Vulcan on top of that. Why did you decide to do that?
CHRIS VERSACE: Well, when we looked at where we were, we had prudently, smartly, if you will, added to United Rentals earlier in the summer. And it had a monster run from about 240 to around 320.
So we started off by first harvesting a little bit of those gains in the United Rentals. And starting to essentially use the newfound cash in profits to deploy it into a secondary position, Vulcan Materials, thereby increasing our overall exposure.
SARA SILVERSTEIN: And, Bob, does anything stand out in the charts of either United Rentals or Nucor right now?
BOB LANG: Well, I'm going to say this, love, love, love both these charts right here, right now. And I'll tell you why as far as the Vulcan Materials is concerned. This stock came down to about the 100 day moving average more recently. And we bought into it a little bit too soon as it was peaking.
But I told Chris, I said, let's get a small bite of it right here. And we both discussed it and said, you know what? If it comes back down towards that 100 day moving average, it's actually about a 38% Fibonacci retracement level, from the recent highs to the lows in June.
So this is actually a great spot to be adding more Vulcan Materials. Now, as it relates to United Rentals, this is another one that pulled back nicely. And then has now pulled back to the 50 day moving average, which is an area where the stock has done extremely well when it has pulled back to that on a retracement.
So it's not quite very much oversold right now, it is moderately oversold. The indicators are pretty strong, still the intermediate indicators, especially on the weekly chart, are very strong for United Rentals.
And I think making a move off of this $290, 293 level is good. And if you're light the stock, I mean, I'd definitely say green light go to buy more United Rentals. Right here, this is a good spot to add.
SARA SILVERSTEIN: Right, let's talk about our two big auto holdings, Ford and ChargePoint. The AAP Ford position, Bob, is up 61%. Do you have an exit point in mind for this? Or do you have a target to add to it if it reaches a certain price?
BOB LANG: So more recently, the stock made a huge run from about single digits-- almost single digit. About 980 was the low in July I think. And made a run up towards the 200 day, moving average of about 16. So about 80% run for this stock, and in about a month and a half. So it's cooled off a little bit here.
I would say we did pull a little bit off the table around that point. And it pulled back around that 15 and change level. I'd say if it kind of consolidates here, this 15 to 1,550 level, we could see a move right back up towards that 200 day moving average. And then it's a decision point for large investors as well too.
We like the dividend in Ford. And I think this stock has got a lot going for it. Of course, it's one of the biggest names in industrials in the United States here. But making a move back to that $16 level would be a green light go for this stock.
SARA SILVERSTEIN: And, Chris, can you talk a little bit about why have a position in Ford plus ChargePoint, as opposed to, say, a position in Tesla. Can you talk about how you compare a company like Ford to Tesla, maybe from a valuation perspective, or how you're playing that.
CHRIS VERSACE: Yeah, sure. So Ford and ChargePoint are two very different companies. We all know Ford is a company that's in the midst of a transition from being a combustion engine focused company, to an EV company. So we're really looking to unlock that value, and just to give you an idea when we look at value creation as that transformation happens.
You mentioned Tesla, it's trading around 7.2 times enterprise value to sales, based on 2023 expectations. Ford, on the other hand, is trading at less than half a multiple point, 0.4 times on EV to sales.
So as we see Ford continue to lean into EVs, we should see that multiple expand. At the same time too, as the competitive environment continues to creep up in EVs, we could see that valuation accorded to Tesla shares start to come down. So we'd rather be on the side where the expansion is happening, not on the side where there's downside risk and multiple contraction.
But as far as ChargePoint goes, again, very different business. That's in the EV charging space. And in order for the EV market to flourish, we need, simply need, more EVs to replace gas stations. And this is another beneficiary of the Biden infrastructure law, given that there's over $7 billion being earmarked for the buildout of charging stations. So we continue to like both.
SARA SILVERSTEIN: Great. And Chris, just coming right back to you with Apple, they're having the latest product event today. What should investors be watching for?
CHRIS VERSACE: Well, in some respects this is going to be more of the same from Apple. We're going to see a total refresh in the iPhone, several different models. We might see some new watch models as well. I think the expectations now that we'll see another event in October that will be geared towards iPads and Macs.
So for me the one thing to really watch is going to be how excited and how differentiated the new products are. But more importantly, what are the price points? Because we know the consumers are having a tough time, we know consumers are trading down on what they're doing.
And if the price points are excessively high compared to past years, that could raise questions about the upgrade cycle that we'll see. And Apple's got literally billions of customers across the globe. But, again, the question here is going to be how quickly will they upgrade, or will they wait if this is not a blockbuster model, for perhaps the iPhone 15.
And I say that because the iPhone 15 is expected to have a USB-C charging point, not the not the lightning charging point. That could foster an even greater upgrade cycle, particularly in Europe. So it's going to be really interesting to see what they have to say, Sara.
SARA SILVERSTEIN: And I want to take a step back and just talk about our other big tech holdings Amazon, Microsoft, Alphabet. And stop me if you have any material changes or any thinking on any of these specific positions that you want to talk about because, otherwise, I'd really like to talk about the tech sector in general. Bob starting with you, what do the technicals point to as far as where we should be positioned, as far as tech overall?
BOB LANG: Well, Sara, when we got started with this portfolio, just under a year ago, we were very heavy tech. And Chris and I had to dismantle the portfolio quite quickly because we had felt that there was a recent damage done to a lot of these tech names.
And some names like Salesforce and PayPal and Facebook or Meta that we got rid of quite earlier at much higher prices than they are right now. But we stuck with some of the big names like the Amazon and Google and Nvidia for a while, and we no longer have that one in, and Apple.
So we stuck with some of the big names, the more reliable names. The ones that we felt could weather the storm of a heavy and long enduring bear market. And we still think that these stocks are strong, they're going to do well.
It could take a while. You know what? We have to be patient but, you know what? These stocks have stood the test of time for a while. I mean, I remember when these stocks were struggling back in the dot com days, and even during the financial crisis. But these stocks are strong right now, and money seems to be flowing towards these names.
So overall, I think that these stocks are going to be fine. We do have an 18 to 24 month time horizon with our portfolio names. And we think that, at least for that long, these companies are going to bear fruit and do well for us in our portfolio.
SARA SILVERSTEIN: And, Chris, you look at things from a thematic standpoint a lot of times. How are you looking at tech and how that's going to play out in its role right now?
CHRIS VERSACE: So there's a couple answers to that. But I think if we cleave through them and try to keep this kind of simple. A lot of tech tends to be disruptive, a lot of tech tends to be focused on productivity. And I think we've got some great plays on that inside the portfolio.
Obviously Amazon, probably one of the biggest disruptors that we've ever seen on the planet. And we continue to like that business, really, as they continue to focus on removing friction not just from its core business, but in other areas as well.
There's also the productivity aspect there and the migration to the cloud, which we also tend to see with not only Microsoft, but also Alphabet as well. So we like all of those aspects.
If I was to say the one area that we're kind of lacking in by design right now is going to be in the chip sector. We exited a bunch of chip names throughout the year. I think, though, as we look forward, as the market bottoms out when it bottoms out, there might be some opportunities to pick up some differentiated chips than what we have today.
So today we have AMD, for example, really leaning into still PCs, data center, industrial. There might be some opportunities either on the mobile side or someplace else. That will be some of the things that we start to think about. And that will bring another layer of thematic exposure to us.
SARA SILVERSTEIN: And, Bob, you mentioned that in a recent chart that you noted that AMD could be running out of steam. Are you looking for an exit point there?
BOB LANG: Yeah. So AMD as basically it's followed Nvidia to the downside more recently. And unfortunately when the hits keep coming, even the best names, the highest quality names are not immune, especially in a bear market.
So we did see the stock stall at about $100 and $305 right after earnings came out. They really had a nice explosion in volume and good price action at the end of July into early August, that it's come down in lost most of that already here.
So we're looking for the stock to bottom out. It's well oversold right now. The technicals are all in oversold condition across the board, whether it's a daily or weekly chart.
So we still like the name, it's a high quality name. And we think that this one is probably going to do much better over the longer term than an Intel or an Nvidia over time, because of their great acquisition last year of Xilinx.
So we're going to be patient and wait with this one. But it's coming into an area where we think that it could be advantageous to start picking up share, so we'll wait for that.
SARA SILVERSTEIN: And, Bob, the inverse ETFs, they're about 3% of the portfolio. How effective have they been in dampening the volatility and adding diversification?
BOB LANG: Yeah, I love these inverse ETFs. They've done a great job in terms of lowering that volatility, Sara. And we only have a small allocation of this. I mean, in total, about 3% of the total portfolio.
But on days like we had recently when the S&P 500 was down 150 points, it was more down more than 3%. These were shy, and the NASDAQ was down quite sharply as well too. So these worked well to blunt some of that portfolio volatility. And we'll keep holding these as long as we can see-- until we see some daylight for a bull market coming sometime soon.
But I think protection should be in place. And as we mentioned earlier, the bear market playbook requires you have lots of cash, very light on positions, and have some protection as well too. So there are lots of different vehicles for protection.
We just chose these two because they're much more aligned with our benchmark, and how we have constructed the portfolio composition for the subscribers. So we do like this.
SARA SILVERSTEIN: Yeah, it sounds like you are very-- you take a lot of careful consideration also in having other names in the portfolio that don't necessarily move with the market, that are not just inverse-- you know, inversely correlated. Can you talk a little bit about which positions in the portfolio play that role?
BOB LANG: Yeah, so I think as far as the defensive positions that we have in the portfolio, as Chris mentioned earlier, I think of Verizon certainly comes up a number one when you're talking about defensive type positions. It's got a strong yield, it's over 6% I believe.
It compares with AT&T, which is similar businesses. They have-- they're over a 7% yield. So I think that Verizon, and also that American Water Works, is a great one to look at in terms of being defensive. Sure.
SARA SILVERSTEIN: Talking about the positions that where you've talked about where they don't move with the market. I know we have a whole bunch of defensive positions as well, but I really like to hear about the positions that aren't that correlated with the market, and will provide more diversification than some of the others. If that makes sense.
BOB LANG: So I think a name like the CBOE, and with ChargePoint as well too. These are names, especially the CBOE and then McCormick, is not really one of those movers with the markets. It's got a rather high beta, but it's still not too much correlated with the markets. I think that I like the McCormick.
Again, the seasonal trade, they're coming up into the holiday season. But the CBOE really is the one that I think is not necessarily moving with the markets. It's got a very low correlation with the S&P 500, and the NASDAQ as well too. But we like this name as it provides a lot of diversification. And, again, not too much correlated with the rest of the market.
So this is a name that you've got to pay attention to. It can go up when the market is going up or down. And, again, when the markets are down, more recently we saw the stock doing extremely well.
CHRIS VERSACE: Hey, Sara.
SARA SILVERSTEIN: Yes.
CHRIS VERSACE: Can I point one thing-- let me one thing out. So Bob rattled off I think CBOE, McCormick, ChargePoint, and I think AMN if I heard him correctly. And while it's true that they all don't move in tandem with the market more often than not, we selected each one of those for a very specific reason.
So with CBOE, it was the use of options by individuals and institutions, given the volatility that we were seeing in the marketplace. AMN, the nursing shortage that's going to continue to drive that stock no matter what. McCormick, the big trade down with consumers eating more at home, but, yes, there is that seasonal component.
And then ChargePoint, I think we talked about it earlier. But, again, there's that big buildout in EV charging stations that's backed by the infrastructure law. So, again, very specific reasons. And in some cases, pain points, which to me always makes for a great investing opportunity.
SARA SILVERSTEIN: Yes, absolutely. Pain points that will come about because of things that are going wrong in other places, absolutely. Can you talk a little bit about Mastercard, and what role that plays in the portfolio. And what you're looking at coming into the holiday season.
CHRIS VERSACE: Sure. So when we look at Mastercard, the long-term thesis for us is one that it's pretty simple, and it's increasingly evident in people's everyday lives. Which is the accelerating shift away from cash and checks. I personally still can't believe people use checks, but that's just me being me.
But towards other forms of payment, whether it's debit and credit, swipe or tap, or mobile payments, which we're really starting to see accelerate. And there's one proof point that I saw on this just this morning, which is that there's a third party research firm that says Apple Pay just processed in the last year $6 billion of transactions.
And if we think about that, Apple Pay squarely fits into mobile payments or online payments, depending on what your setup is. Clearly people cannot use cash or checks for that.
And to keep it very simple, I have yet to see a laptop or computer that allows you to shove cash or check inside. Meaning, if you want to buy something online or on your phone, you've got to use some other form of payment. It's a natural as we continue to go forward. And this is a global phenomena.
In terms of your second part of the question, seasonally strong and consumer spending, yeah. I mean, look, we're going to continue to see that. I think we might see a shift more towards credit, given the state of the consumer, than perhaps debit. But make no mistake, as we see online shopping continue to chew into overall holiday sales, we're going to see Mastercard continue to benefit.
SARA SILVERSTEIN: All right, Bob, let's talk about Morgan Stanley. There was a target to sell Morgan Stanley. Is there a new target? What happened there?
BOB LANG: Yeah, so we were looking for the stock to make a move towards that 200 day moving average, call it around $88, $89 more recently, and it did. And we did take a little bit of money off the table, we didn't take enough. But we do have a nice pull back down to the 200 day moving average here-- I'm sorry, the 50 day moving average, excuse me.
We are right in between that 50 and the 200 day moving average. Let's call it about $83 to 88 and 1/2 right now. So we're going to move back above that $88 and a half level, up towards 92.
92 is an awful looking double top. When you go back to March, about $92 and 1/2. And then we hit another one in early part of August, and rejected there. We get back to $91, $92, I think we're going to start looking to cut bait on this name.
SARA SILVERSTEIN: And, Chris, what about Costco, what's the most important number that you look at for Costco or the most important factor in that investment?
CHRIS VERSACE: Yeah, so this might be a little unconventional. Most people tend to really focus in on it, and understandably so, the comp sale numbers that they put out every month.
But I actually go a little further in the press release, and I look for the number of open warehouses. And I compare that with prior months, as well as year over year. And the reason I want to do that is the number of additional warehouses tells you the trajectory for the number of memberships that they're selling.
The number of memberships tells you all about the important membership fee income that they get, which is about, depending on the quarter, 65%, 75% of their bottom line. So to me that's the most important thing, and the company's committed to continuing to expand its footprint. So another reason, aside from all the others that we have, to remain bullish on Costco.
SARA SILVERSTEIN: And that's a really interesting data point. Bob, what is the Costco chart tell you?
BOB LANG: Well, every time this stock pulls back there, it's been a great opportunity to add more shares. And more recently it topped out at about 563, an interim top here. And now it's pulled back down to where the 50 and the 200 day moving average, made it about $520 or so.
We had been trading in a range on the low end at about 400 in the middle part of May. We had hit a high in early April at about $610, so about 510 is about a meeting area where we think that the stock could be added. So maybe about another $5 or $10 lower we could look for-- a subscriber should be looking to add some more shares of Costco right there.
SARA SILVERSTEIN: Great. And Chris, what's your thesis for Chipotle? What's our main reason for liking it in the portfolio?
CHRIS VERSACE: Sure. So other than enjoying burritos, we have seen consumers, as I mentioned earlier, really start to trade down. They continue to eat out, but where they are eating out is a little different.
Remember that there's a lot of not fast casual, but sorry, casual restaurants and the like that have seen traffic really start to compress, because people are, again, going towards more affordable, more economical places to eat. Chipotle fits in that camp with its fast, casual strategy.
We also like the management team. Bob and I talk about it quite a bit. I know he in particular is a big fan of Brian Nichols because he's bought this limited time menu offering strategy to Chipotle, introducing new items.
Really driving not only more people into locations, but also punching up the size of the average ticket with premium pricing for those temporary items. So there's a lot to like there. And they are back on the expansion plan, in terms of their footprint. So continue to like Chipotle, enjoy your burrito, Sara.
SARA SILVERSTEIN: And we have a lot of strong dividend plays in the portfolio. These have come up throughout our conversation today, a really strong defensive move. I'd love to hear from you guys about how you look at dividend stocks differently when you're evaluating them. What's the most important aspect of that? Chris, if you want to talk about that from a fundamental standpoint first.
CHRIS VERSACE: Sure. So there's a couple of things to consider. Like Bob mentioned earlier that we have Verizon, which has a stellar yield, easily North of 5 and 1/2 percent, close to 6%. And on the other hand, we have a bunch of companies in there that are known for increasing their annual dividend. Verizon is among them, but also we have McCormick, we have PepsiCo.
So what we try to look for is dividend yields that are not overly stretched. And what I mean by that is if we see something that's 8%, 9%, 10%, on the one hand, some folks might go, wow, that's fantastic. Look at what I could get. More often than not, however, it's a warning sign that there are problems underneath, concerns that the dividend may not be sustainable.
So we always try to understand the fundamental of the business, the ability to throw off cash, the ability to further increase the dividend. And to really size those up. We-- excuse me-- pay close attention to what's called the dividend payout ratio. In other words, the size of the dividend relative to the earnings expectations.
And when we're kind of below 50%, that's a pretty safe zone to see companies that are growing their div-- growing their earnings, excuse me, continue to increase their dividends.
SARA SILVERSTEIN: Great. And moving into one of our inelastic opportunities. In an alert last week, Bob, you mentioned that the weekly chart of American Water Works looked murky. Can you update us about how you feel about this position.
BOB LANG: I still like the name here. And, again, the stock is pretty volatile. And we've seen the stock-- we've held the stock from when it was about $160 or $162, it ran all the way down to $130. So, I mean, that's quite a move, quite a volatile name here.
So we do have a nice inverse head and shoulders pattern that is evident here. It breaks out above that 200 day moving average once again, which call it about $166 to 168. We've got to move above there. We think there's blue skies above for America Water Works to get up towards the mid $170 level.
But on the weekly basis, the chart was starting to break down a little bit. It's getting some support here at the 50 day moving average over here, which is where it's at right now. So I still like American Water Works. It's been, again, one of those names that goes against the grain of the markets, oftentimes.
It'll be up, we'll see it-- we saw it up recently on a day when the markets were getting slammed. So we like that diversification and that lack of correlation, and name like American Water Works.
SARA SILVERSTEIN: And, Chris, last week you added to your CIBR position. Talk to me about how you see this cybersecurity theme playing out.
CHRIS VERSACE: It's kind of simple to say, Sara. But whatever you go online or still crack open a newspaper, you're hearing about all sorts of cyber attacks. And it's not only the growing number of cyber attacks or ransomware attacks, but the increasing playing field for the number of areas that are being attacked.
So I'll give you two examples. Today IHG, a very big hotel chain, announced it was compromised. And then in the last couple of days we learned about an Italian electric company that was attacked.
Now, these are just anecdotal data points. But when we also pair that with companies and CEOs saying, I think something like 43% have said, hey, we are not prepared for a cyber attack. We think about cybersecurity, the need for companies to protect their crown jewels.
And even though we're learning seemingly day by day that more companies are planning on cutting back their spending, we know that they can't cut back on their cybersecurity budgets.
If only they have to expand it, it becomes a greater portion, if you will, of enterprise spends and technology spends. So for that perspective, we continue to like it, again, another example of pain point investing.
SARA SILVERSTEIN: And, Chris, talk to me about the XLE Energy EGF position. What economic factors are at play? One do you want sort of a broad energy exposure? What do you like about it?
CHRIS VERSACE: So what we like about XLE is we're not really betting on any one energy company, rather a rising tide of oil and natural gas prices to kind of lift the earnings of all of these companies. And from a fundamental perspective, the shares have been kind of caught between this demand question, supply question.
And I think that as we go further, we have to remember that, particularly on the natural gas side, Europe their reserves are way below where they need to be. With the Strategic Petroleum Oil Reserve, is not going to be pumping any more oil that we know of into the economy at the end of September.
So there's reasons to think that the supply issues are likely to win out. There's also some questions over price caps for energy being exported from Russia. And I believe Putin was saying this morning that, look, if you guys want to instill these price gaps, we will simply stop shipping.
Again, another reason to be concerned about supply side on energy. And that is what keeps us bullish longer term. And as Bob said earlier, this is a name that we've been watching very, very carefully. And at the right time, we would look to build the position out, certainly in a move that would improve our cost basis.
SARA SILVERSTEIN: Great. And we've made it through all of our positions. But one of the most important decisions you make when you're managing a portfolio is what is not in the portfolio. And that plays out in a number of different ways. Getting stocks out, not selecting stocks, and also as we've talked about, our strategic cash.
And I want to start with the cash because we have a few member questions about the cash. Bob, if you could answer the first one. One member asks, where should investors park their cash? Should they be looking at a money market account or a money market mutual fund? What do you suggest?
BOB LANG: Well, I would say if you're parking your money in a mutual fund, you're taking some market risk here. And really the ideal situation here, the goal here, objective of having excess cash is to take that market risk off the table.
So I would say park the money in a money market fund because you're going to be able to earn a small yield on it, but it's going to be safer for you in case the market does get volatile.
And if you have some risk capital on the board currently right now as we do, that's fine. We can take the market risk with that. But as far as the cash is concerned, money market is fine because the Fed is continually going to raise rates over the next several months. And we know that the Fed funds rate are probably going to get up to about 4 to 4 and 1/2% in 2023.
And as long as that happens, we're going to get it-- you're going to get a bigger yield on your cash as the banks also raise interest rates to pay investors. So I would say, by and large, a money market fund is probably good.
SARA SILVERSTEIN: All right. And, Chris, another member wants to know if you decide to decrease your cash position, how do you think you'll go about it? I know it's impossible to know at a time, but will you be adding to new names or adding to positions you already have? What are you looking for?
CHRIS VERSACE: Oh, that's a simple answer, Sara, yes. [LAUGHING] No, I kid.
SARA SILVERSTEIN: Great, no, it was perfect.
CHRIS VERSACE: No, yeah, no, no, I kid. But, look, obviously when we start to put the cash to work, we're going to have to be very prudent. We don't want to have too many names in the portfolio.
We do probably have some room to expand out. But we also want to make sure that we've got the right size in the positions that we really, really want so we can get the biggest bang for our investing dollars. So we have some room to do both, without a doubt.
SARA SILVERSTEIN: OK, let's talk about more things not in the portfolio. Chris, what have you kicked out of the portfolio recently, and why?
CHRIS VERSACE: Oh, so other than Nvidia, in the last couple of weeks we kicked out some United Rentals, you caught on to that, we trimmed Costco back on the big run that it had, we trimmed back Ford. Again, Bob noted that very big run. And we kicked out some ChargePoint, again, going from nine to the mid-teens.
So what we tried to do there is to be very prudent stewards of capital, taking the gains when they come. I think one of the very easy mistakes that people can make is not converting paper gains to actualize gains.
And we always try to be smart about that, because it gives us a little more flexibility, and we can redeploy some of those profits into new positions. Just like we did with Vulcan Materials when we trim back United Rentals. Or we can use it to shore up other positions when we exited Nvidia, and we added both to CIBR and to PepsiCo.
SARA SILVERSTEIN: And, Bob, talk to me about the best technical signals for getting out of positions. And we can go back all the way from the beginning of the year. What was the best technical that you got from a chart that told you to get out of a position, and you did.
BOB LANG: Well, when we broke that 200 day moving average back in the spring for pretty much till just more recently. That was the great technical signal, and we followed through on to the downside. And we made a low in June down at 3,640.
I personally don't think that is the low for the year, so we're going to looking to go even further south than that. But for now that's the low of the year, about 3,640 on the S&P 500.
But more recently, a move up to that 200 day moving average. We tagged that 200 day moving average at about 4,345, and rejected it right there. It was literally a kiss right on that moving average, and it pulled right back. After that we managed to follow through to the downside on that move down, and we're continuing to move down.
We've sliced right through the 20 day moving average, the 50 day moving average, and 100 day moving average, like a hot knife through butter. So this is what we have to deal with when a bear market.
We rally back up towards these moving averages, which are above the current price levels, about the 50 and the 20 day moving average, and we can reassess from there. But for right now that move up, that generally moving average was golden for a sell signal.
SARA SILVERSTEIN: And I know it doesn't always work that way, some technical indicators work better in certain markets than others. Which ones work worse now in this type of market, that you're a little bit more wary of?
BOB LANG: Yeah, so the momentum indicators tend to work really well when markets are trending, trending up or down. And the oscillators kind of give us an idea of good entry points and exit points.
And so more recently the oscillators that I use haven't been working extremely well. For instance, like the McClellan oscillator reached a super oversold reading more recently. And we were expecting some sort of a large bounce off of that, and we didn't get that.
Conversely when we got the big, strong bullish rating back in the early part of August, that extended out as well too. And, again, that oscillator didn't give us a good signal until the price action moves. Usually these are good coincident indicators to use.
But for now these oscillators are not working as well as they could. But when we get into a more of a trending market, up or down, I think they're going to be much more reliable than they are today.
SARA SILVERSTEIN: Great. And, Chris, thematic Chris, what sectors or themes have you shied away from, leading up to September this year? And where are you looking for opportunities?
CHRIS VERSACE: Yeah, so probably the biggest area that we've gone out of our way to avoid has been consumer discretionary. We have some exposure there with Costco so-- sorry, more defensive areas with Costco, even though it does serve some discretionary spending.
Remember when we several months ago when we exited Walmart, we were concerned about inflationary pressures, the tick down in the consumer saving rates, but also bloated inventories.
And we didn't want to get caught in that area. It seemed like a perfect recipe for disaster. So we really shied away from that. And one or two other areas that we've kind of stayed away from, one is financials. The only real representation there we have is Morgan Stanley.
And the one area that we haven't gotten involved in, and I think we'd like to find a way to do it, would be in the defense sector. And we have a couple of names in the bullpen, and those are some of the names that we continue to watch and kind of kick over for the right time.
SARA SILVERSTEIN: Great. And let's talk about the bullpen. Also still not in the portfolio, but maybe someday. You have clear in there in the bullpen, added somewhat recently. Is that part of the cybersecurity theme? What would get that into the portfolio, Chris?
CHRIS VERSACE: So it's sort of is. There's kind of a yin and yang. With cybersecurity we tend to think of as companies being attacked. When they are attacked, what are they looking for? They're looking for information, more often than not.
It can be individual information, personal information. That's really the flip side which gives rise to our data privacy and digital identity theme. And that's really where Clear Secure comes into play.
This is one that we really just added to the portfolio, in terms of the bullpen exposure. I think if it were to pull back a little bit closer to that $20, $21 level, Bob and I have agreed that that's where the risk versus reward really skews favorably.
At the same time, though, the expectations for its revenue growth in 2023 could be a little aggressive. So I think we'd also want to see more comfort on our part, that they could deliver order in $75 million in revenue or a higher for 2023. If we do that and we hit that $20 to $21 level, risk reward is great from our perspective.
SARA SILVERSTEIN: And, Bob, looking at some of the other names in the bullpen, what entry points do you have for other names there?
BOB LANG: So one of my favorite names that we have in the portfolio is General Dynamics, another one is Wendy's WEN. But let's look at General Dynamics over here. It has pulled back down towards the 200 day moving average once again. And it's been a level where the stock has performed extremely well, bouncing off that 200 day moving average. It's up nicely today.
And we think that this stock could make a run up, and so we're kind of biding our time here. If we get that move all the way down to the 200, it hasn't really touched it yet, but it's really close within about 2% or 3%.
We get that move down to that 200 day moving average, and we get a bounce off of there. I think it's good to go for the portfolio here. So we'll be watching that one real closely.
SARA SILVERSTEIN: Great. Chris, you added Starbucks to the bullpen back in March when the CEO stepped down. The new CEO was recently named. I'm wondering is that going to get the stock closer to getting into the portfolio? Or is it something else?
CHRIS VERSACE: Oh, it might, it might. I mean, they have their big investor day on September 13, so that's something that we'll be watching. But, I mean, just because we have a new body in the seat doesn't mean that the strategy has changed.
And I think there's going to be a lot of questions that the new CEO has to answer. Such as, how are they going to get people back into stores? What degree of pricing do they have? And those are just two off the top of my head.
There's the other concern right now, though, too about their exposure to China. People are cutting GDP expectations there. Why? Because of renewed COVID lockdowns and restrictions that could weigh on Starbucks in the near term. So I think we'd also want to get past that as well before we take a serious look at the name.
SARA SILVERSTEIN: Great. And before I let you guys go, I want to get both of your input on the one thing that-- the one risk, the one thing that really keeps you up at night. So both of you let me know what's the biggest thing, your biggest concern for the market heading into September and the rest of the year. Bob, why don't we start with you.
BOB LANG: So I think one of the biggest concerns that I have, one of the things that keeps me up at night is about the European energy situation. And how it could spill over not just to the United States, but for the rest of the world. It's a huge energy crisis right now.
And the energy prices are just soaring through the roof across the European zone. So will that spill over for the rest of the world and cause even greater harm with inflation, and higher prices down the road?
That certainly is something that is not in the Fed's mindset right now. They do have to be thinking about it as a corner of their eye, but I think right now that that is a wild card there that could cause a lot of damage economically for the rest of the world.
SARA SILVERSTEIN: Absolutely. Chris, what about you?
CHRIS VERSACE: So my answer is going to be a little different here. We talked quite a bit about having a lot of cash in the portfolio, and it's been a great buffer. And I think in the near term it's something that, as Bob alluded to, where we're going to continue to keep.
But the one thing that keeps me up at night. And this is kind of something out of what's the-- Andy Grove and only the paranoid survive, is getting caught flat footed with the amount of cash that we do have should we see a turn in the market.
And Bob and I talk about this quite a bit, obviously there'll be a number of signals that we'll be looking for that tell us, OK, the market is either bottoming on a technical perspective or inflation is coming down.
Probably the biggest unknown in all of that is if there's some abrupt war to the Russia-Ukraine war. Don't think it's going to happen, it doesn't seem to be signaling that.
Or if there's something new on the US-China trade front that we haven't foreseen. But it's making sure that when the market starts to rebound, that we're adequately positioned, and not having excess or too much excess cash on hand.
SARA SILVERSTEIN: Absolutely. It does feel like a right time for the only the paranoid survive type of energy. Thank you both so much for letting us your big brains. And thank you all for joining us. We will see you next month for a very special monthly update.