SARA SILVERSTEIN: Welcome to the Action Alerts PLUS October members-only call. I'm here on the floor of the New York Stock Exchange, joined by your portfolio managers Bob Lang and Chris Versace. This has been a rough year for all investors, but the AAP members have done a little bit better than the market, especially in September. Bob, can you give us a performance update?
BOB LANG: Yeah. So through the end of September, Sara, we came in about 200 basis points, or 2%, above the S&P 500. And that has pretty much been our performance since Chris and I got started October 1st of 2021. So 200 basis points, 2%, is not the best, but still, considering where we have the portfolio, we're not 100% fully invested, and I think would have to look towards our more defensive and defense-type positions and positioning that helped us outperform. We have inverse ETFs, which we're going to talk about a little bit later on today. We've raised our cash level to more than 25%.
We're diversified quite a bit across the landscape to try and eliminate some of that beta that's in the market on a regular basis. We know that the market's been very volatile over the past nine, 10 months, and we've tried to blunt some of that volatility with some of the new ETFs and new strategies that we've put in the portfolio. So overall, I think we're very happy with the performance. We do always have a lot more to work on, we can improve. And we will over the next several months and years.
SARA SILVERSTEIN: Great. And to start off, before we look ahead, I want to look back and see what went right and what went wrong. Let's start with my favorite, our biggest mistakes. I don't trust anyone that claims to be a perfect investor all the time. So Bob, what caught you off guard last month?
BOB LANG: Well, what caught me off guard last month was some of these names that we have some really high beta in and we didn't reduce them enough. And I think sometimes you have to look at your portfolio and say, look, I'm going to say uncle and this is enough pain that we're going to take and we're going to move on to other ideas. Chris is an excellent stock picker. I do the best I can, as well, to find names, on a technical level.
But sometimes you just have to realize you're wrong. And it's OK to be wrong. It's not OK to stay wrong. And I think that when we look back and look at some of the trades that we made over the past several weeks, we did take some pain on some names, but at the end of the day, a couple of days later, we took a breath and realized that it was the right thing to do.
A couple of names that stand out, Morgan Stanley being one of them, the stock went down sharply right after we got out and it turned out to be the right move. And then Nvidia not too long after that, we unloaded that name. And it's far lower than it was when we sold it. So I think one of the lessons that we've learned, painfully, unfortunately, but we're going to learn and correct it in the future, is unloading the stock before it gets too painful.
SARA SILVERSTEIN: Chris, what about you? What could have gone better for you?
CHRIS VERSACE: Well, you know, Sara, as you said, and Bob alluded to, it was a tough, tough month for stocks in September. I reiterate what Bob had said. I think he's 100% correct. If I had to add to it, though, I would say the one craw for me was the one that got away. When we had this last members-only call in September, we talked about the new bullpen edition that was Clear Secure, ticker symbol YOU.
And the right move, Sara, would have been to have pulled the trigger soon after that. It was trading below $23, above $26 now. That's a nice 15% move that we could have added to the portfolio. So it's kind of the flip side, I think, of what Bob was saying, in that sometimes we need to be a little more nimble getting into names, and I think of late, we've actually done a better job of that in the last few weeks.
SARA SILVERSTEIN: That was great. Chris, what was your biggest win? Brag a little bit. What were you right about?
CHRIS VERSACE: You know, so again, it's tough. Because when you look at September, I mean, it was just a horrible, horrible month for the market, in general. So if we simply go by what really worked in the portfolio, it's a name that, I have to say, I'm very passionate about. That's going to be AMN Healthcare. It finished up about 3%. Compared to the S&P 500, that was down 9%, so a clear win in the month of September.
But I would step back and say, why did we pick AMN? Well, obviously, because of the long-lasting pain point with the nursing shortage. But to us it says, you got to continue to focus on the data, hard and soft, no matter what's going on in the market. And that will be the canary, one of the canaries, I should say, that we want to follow.
SARA SILVERSTEIN: That's awesome. Bob, what were you right about last month?
BOB LANG: So Sara, when the market was down for the month of September, at about 10%, there really was not very many places to hide your money and come out shining. But one name that we did really well with, and actually took some profits off the board, was ChargePoint, CHPT, which is one of those names, smaller names-- actually, Chris uncovered this one a while ago, and I really embraced it as being something on the edge of electronic vehicles and charging stations. This is the future and this is what we're looking forward to.
And this is a stock that actually performed real well for us in early part of September. We did take some profits on the name, as well. It is actually one of the largest, if not the largest name, in the AAP portfolio, which kind of odd. In the past, it's always been some kind of bigger, general technology name, like a Microsoft or an Apple, or something that was the largest name in the portfolio. But this one is the one that we think that, over a long period of time, is going to perform extremely well for us and for subscribers in the portfolio. So I say the best name that we've had by far in September, for me, was ChargePoint.
SARA SILVERSTEIN: Right. And it's important to look back, especially when you guys can help us learn from how we're managing the portfolio. But a big part of your job is to help us prepare for the future. So let's get to what you're seeing. Bob, the S&P had a strong showing the first few days of October. Does this mean the bear market is over? If not, what are you looking for?
BOB LANG: Yeah. I don't think it means the bear market is over at all. And if you go back to July and August, and then back in June we had a big rally in those months, as well. They were just bear market rallies. And let's remember something. In bear markets, you have some of the most spectacular, biggest rallies that you'll ever see. And certainly, Monday and Tuesday were strong. S&P 500 was up 200 handles in those two days alone. Gave back some of it yesterday and started to give back a little bit more of it today. And again, what is the bear market rally, defined? It's an area where big money is going to start taking money off the table on these rallies. It's so much easier to sell when you have rallies than it is when the markets are down. You sell into the buyers that are coming in. And I think that pretty much until the Fed comes off of their hawkish pedestal, it's going to take months, maybe years to do that. We're going to be mired in a bear market. So bear market rallies are definitely times for people to sell. It's big institutions distributing stock.
SARA SILVERSTEIN: And Chris, heading into earnings season, what are your expectations? And what do you need to hear to become more bullish overall?
CHRIS VERSACE: Sure. So members know that I've been a little skeptical about the earnings expectations for the back half of the year. We've written a number of pieces on that. And they have started to come down a little bit, but Sara, when we sit back, you still got a number of headwinds, everything from the dollar, higher borrowing costs compared to a year ago. Inflation pressures are continuing. We're seeing weakening demand. And of course, supply chain continues to be an issue. Just a lot of negatives out there.
But to your point, to become bullish, we probably have to see companies say that they're seeing significant drops in inflationary pressures and that demand is holding up far better than expected. Now, that's a pretty tall order, I have to say. And I don't really think that we're going to see that, based on what we've heard from the companies that have already reported or preannounced, as well as the economic data. So I don't think I'll become bullish in the next couple of weeks, I'm afraid to say.
SARA SILVERSTEIN: That's OK. That's kind of what I expected. Bob, higher rates for longer seems to be the very clear message that we're getting from the Fed. What sectors or groups will be hit hard during that period? And what are you looking for to perform well?
BOB LANG: Well, higher interest rates are definitely poisonous for equities, because bond yields start rising and they become an alternative to equities. And certainly, one of the names, one of the sectors that's going to get hurt the most is going to be housing, and I think banking, as well, too. Housing, of course, is basically the lifeblood of the mortgage market, and mortgages recently hit 7% on the 30-year. And incredibly enough, just earlier this year, I want to say January, February, we were looking at 2 1/2% to 2.75% for mortgages. So the cost of buying a house and servicing that house has gone up enormously over the past seven, eight, nine months. So as interest rates continue to rise, we're going to see that 30-year mortgage go up. So in addition, I think in a tough environment, especially the Fed is looking for unemployment to start heading up. I think retail is going to be a very tough area to be challenged over the next 16 to 18 months. So we've reduced our exposure to only two names in the retail area, Costco and Amazon. And I suppose you might include Apple in that, but I think that's more of a technology name. But still, I think those two areas. And then also staples are going to be a difficult area that I think, in the long run, are going to have some difficulty with a higher rate environment, as well, too. So those three areas right there.
SARA SILVERSTEIN: You've added to the portfolio health care and defense exposure, but you've cut back a lot in tech over the last few months. Chris, when do you think might get back into tech more heavily, and what are you looking for to indicate that?
CHRIS VERSACE: So when we look at technology, obviously long-term. we think there's a number of growth drivers for it. We've talked about this in notes with members kind of ad nauseum over the last couple of months. But what we are seeing right now is falling demand. So what we want to see to get back into technology would be for that demand at first to stabilize, maybe a quarter or two where it's flat, and then start to look for some new growth drivers so we can get back into these names, especially in names like semiconductor capital equipment or other capital-intensive industries. When the backlog levels for the industry bottom out, that's one of the buying signals. So that's what we're looking for.
SARA SILVERSTEIN: Right. And this month we're ready to get into our stock buy stock review. This month, we're going to be driven mostly by questions that we were sent from members. So please keep emailing us your questions a email@example.com. Let's start with Axon, the newest addition to the portfolio. Bob, why now and why this stock?
BOB LANG: So we just added this one yesterday, Sara, and it's actually having a real strong day today. Market's getting drilled and this stock is up strong for a second straight day. We're happy to add to this name. If you don't recognize the Axon enterprise, it used to be the former name called Taser. And I remember trading Taser back in the mid-2000s, 2004, 2005. It was one of the best trading vehicles I've ever seen and was a great place to make some good money.
So why do we get on Axon right here? So the chart is real strong. It's got a nice, little cup and handle pattern on the daily and the weekly chart. We also like the fundamentals of the name, too. I think in a previous portfolio life, Chris had the stock and did really well with it in a prior service. And we just like Axon here because it's very different. It's in law enforcement. They sell tasers. They sell software and cameras, and so forth, to the police departments and to the state, and also too the Feds. We think this is a very reliable business. It's strong. And regardless of whether the economy is going into a recession or not, this is a name that we think is going to perform well over time.
SARA SILVERSTEIN: And you recently added Elevance, formerly Anthem, Lockheed Martin, Vulcan Materials to the portfolio. Bob, these are a couple of slow growth names offering nice value. Is this a good time for value stocks, and why these?
BOB LANG: Yeah. So again, during a higher interest rate environment, it's hard for growth stocks to advance. I think we've noticed, over the past nine months, value has beaten out growth, certainly on the S&P 500, for most of those nine months of 2022 with higher interest rates. So I'm trying to find names, good, high quality names that are going to perform well and be a little bit more defensive versus the S&P 500 market beta over a period of time, is where we want to go. So we looked at some names that throw off a nice dividend.
Elevance, which is the former Anthem. It's in health care. It's HMO name. Of course, they've got some competition with UNH, Humana, Cigna, and CVS, which have bought Health Net. But this is a good strong, reliable business. Everybody needs to have health insurance. And especially on the West Coast, Elevance is one of the strongest names out there.
And then we look at Lockheed Martin. Of course, one of the top defense names. Has been getting contract over contract with the government. And again, this is a name that-- again, doing work with the government is going to shield this company from having huge losses if the economy goes down or it goes into recession, or we even go even worse, into a tailspin there. So these names are going to do well for us over the long-term. And again, another name that's got a nice, decent dividend.
SARA SILVERSTEIN: Chris, one of our members, Kyle, says he's been interested in Lockheed for a while, but their large pension liability has been a big concern for him. What are your thoughts on that?
CHRIS VERSACE: So when we look at all the defense contractors, in one form or another, they have some degree of pension liability. So to begin with, it's not necessarily a big concern because it's part of the way the industry is structured. Having said that, though, Lockheed has been transferring that risk over the years using annuity contracts. And given the outlook for its business, as Bob was just discussing, as well as having one of the best customers out there, i.e. the US Federal government, we expect them to do more of the same in the next few years. So over the long-term, we see that continuing to come down. Candidly, it's some concern, but not a major concern for us.
SARA SILVERSTEIN: Bob, one of our members wants to know why you chose Anthem, Elevance, over UnitedHealthcare. The member points out that United has a better dividend and price target. So how do you compare those two?
BOB LANG: Yeah. So far as the growth rate is concerned, I took a look at both names, and it was a very close call. We could have gone with either one of them. In fact, we do have UnitedHealthcare in the bullpen, and that have had that in there for quite a while. It was a close call, but I think that the growth pattern and the path that Elevance is on is a little bit better trajectory going forward than UnitedHealth. UnitedHealth is trading a little bit more of a premium than Elevance here. Again, both high quality names and strong. I think both are going to perform extremely well. I just think we have a little bit more of an edge and advantage with Elevance.
SARA SILVERSTEIN: Great. Moving on to Verizon and UPS, Chris, it seems like there's a conscious decision to add companies with long history of increasing their dividends. So is that what's happening with Verizon and UPS, and why?
CHRIS VERSACE: Well, I think when you look at those companies, as well as McCormick and other partners that we're identifying, we like that long track record of increasing dividends for a couple of different reasons. First and foremost, in order to do that every year, you have to have a very disciplined management team, you really need to understand your business, and be able to grow your business over time. So we do like that.
But the other side of it is when we see companies that do this, historically speaking, we've seen what we call a step function higher in the stock price over time as they continue to increase their dividends. So it's another tried and true strategy that we want to bring into the portfolio. And just honestly, look for companies that have far better stock price performance ahead of them than they did in the past.
SARA SILVERSTEIN: And Chris, one of our members, Karen, asked why selling Morgan Stanley was a good idea, given that it has a low PE ratio and a decent dividend.
CHRIS VERSACE: So the tricky thing with low PE ratios is sometimes you've got to worry-- people focus on the P and not necessarily the E, or the earnings. And when we looked at Morgan Stanley, really, throughout 2000-- throughout this year, sorry-- what have we seen? Well, the IPO window has really shut pretty hard. The filings have kind of dried up. And the question is, when is that business going to turn relative to what's expected from Morgan Stanley's earnings?
So we kind of took a hard look at that. We saw the M&A market was softening a little bit, too. And we said, you know what? The downside risk in that earnings number is there. And as Bob mentioned earlier, it was a prudent time to enter. The shares fell soon after that. But is it one that we'll continue to reevaluate over time? Sure, it will be.
SARA SILVERSTEIN: And this came up in this Morgan Stanley question, but quite a few members questions have to do with the price that they actually bought into, not necessarily when the portfolio added the name. And so my question is, Chris, how much should you consider your cost basis when you're looking to exit a position?
CHRIS VERSACE: So let me flip the question around. So the way I would look at it is if the position is under the cost basis by a meaningful amount, what's the outlook for the business? What are the catalysts that you can identify that can drive the stock price back to that cost base, or hopefully even higher?
If there are some, then it's probably worth sticking out. If there aren't, however, you really have to make a tough decision and say, am I better off exiting this position here and now and folding the return capital into a better stock, i.e. one with far better growth characteristics, better risk reward, so you can recoup that loss capital fast?
SARA SILVERSTEIN: Right. Bob, moving to AMN, which you brought up at the beginning of our discussion, why do you have AMN and Elevance in the portfolio? What do they both bring that's different?
BOB LANG: I mean, they're both in the healthcare industry, but AMN is much more concentrated and focused in on hiring and healthcare workers, whereas Elevance takes another angle towards health care and HMO for customers, and so forth. So if we see both of these companies doing well, we know that this is a group and a sector that's going to perform extremely well versus the market.
So again, we like Elevance because of the potential for getting more customers online, whereas AMN is indicative of what's happening with the jobs market. And when there's a shortage of health care workers, this is a company that's going to thrive and do well. In fact, the last couple of months we noticed that-- for instance, the JOLTS report came out earlier this week and showed a shortage of workers, and we saw AMN rising sharply on that report on Tuesday. So this is a name that is going to benefit even when there's a shortage of workers.
SARA SILVERSTEIN: And moving to this sector of the market, love to hate, in September, Chris, how worried are you about the club's position in big tech?
CHRIS VERSACE: If this was a couple of months ago and we had a lot more attack, I think I would be far more concerned now. But we've done a prudent job in reducing the exposure to technology. And the ones we have, Microsoft, Apple, even Google, are probably a little more insulated than some of the others that we exited over the last few months.
So I'm feeling pretty good about it. One of the things that I've said in the last several weeks is as we go through this, I think folks are going to have to take another-- excuse me. Folks will have a chance to take another look at how they're valuing some of these names. Case in point, Microsoft. One of the big drivers there is the cloud business, but it's also got a hefty exposure to subscription-based businesses, which tend to be rather sticky, compared to, say, five or 10 years ago.
When those businesses were smaller, it was far more reliant on the PC market, which we know is experiencing some rather pronounced declines for this year, and they're expected to continue in the first half of next year. So I think as Microsoft comes out, for example, and is able to show that its business can really weather the PC storm, I think people will come back and revisit how they value it. That's one of the reasons why we continue to like the shares and the opportunity we had with them.
SARA SILVERSTEIN: And Chris, all else being equal, for things like Microsoft with stickier businesses, does that make them more recession-proof because it's harder for other things to adjust around them?
CHRIS VERSACE: Yeah. I think that's the right way to look at it, Sara. But keyword there is going to be "more." There still will be businesses, again, like the PC business, that are going to get impacted. But to the extent that they're able to withstand that recessionary environment better, hold up their margins, revenue doesn't fall as much as it did in past recessions-- as we go forward, that's where the multiple for the valuation will be rewarded.
SARA SILVERSTEIN: Great. Bob, member Jack wants to if you would add to Apple if it falls below $140, or at what level you would be looking for?
BOB LANG: Well, stepping back and thinking about Apple here, they have earnings coming out in about three weeks. It's really the clash of the Titans here. You've got Apple on one side, with their large subscriber base and install base and new phones coming out, and so forth. And then you've got inflation and a dropping economy here, which is a huge headwind, again, for Apple and any other retailer or any other technology company. So who's going to win this battle? We really don't know. Usually it's Apple. But Apple has dropped sharply over the past several weeks, from all-time highs around $180, just hovering around $140 right now, as Jack said. So to answer Jack's question, I'd be cautious here, buying it to too much below $140, if it hangs out over here. The trends are down right now, but of course, the long-terms trends are strong and bullish and positive for Apple. But I'd be a little bit cautious right now buying it until I saw the quarter come out, which, again, is going to be coming out towards the end of October. And if they put up a good number and the stock makes a move back above $145, I'd be inclined to buy it.
SARA SILVERSTEIN: Chris, member Joseph wants to know what is going on with Apple-- I mean, what is going on with Google? What's driving the stock into such dire straits?
CHRIS VERSACE: Yeah, I think there's really two things that are weighing on Google shares. The first one is concerns over advertising spend in a recessionary environment. Typically, companies cut back on advertising spend. But we have to remember that there's that structural shift towards digital advertising, mobile advertising, where Google really plays with its search business. And even YouTube continues to win over what we call legacy forms of advertising-- print, TV, radio, those sort of things. So I do think that while there's some concern for overall ad spending, I think Google's advertising business is going to hold up better than expected.
I think the second weight, if you will, on Google is some of the uncertainty that's out there as a result of growing regulatory environment, both here in the US, as well as in Europe. And it's something that we continue to watch, but for now, I think it's a little overblown.
SARA SILVERSTEIN: And what timeline are you considering when you look at AMD? One of our members doesn't mind the short-term pain in AMD because she expects it to recover after we come out of the recession and the difficulties in Ukraine. So very long-term. Is that the timeline you guys are thinking about for AMD, or is there a shorter term exit in mind? I don't have anyone, in particular, if somebody wants to grab this. Bob, you're nodding. Do you have something to say?
BOB LANG: Yeah, I'll take this one. So AMD has been hit with a lot of other chip names over the past several months-- Nvidia, of course, which we exited. More recently, Marvell, Qualcomm, Intel, you name it across the board. Lam Research, KLA-Tencor. Again, across the board we're seeing a lot of weakness in the semiconductor group, so AMD would not be immune to that weakness.
But we do see AMD coming down into the $60s more recently and just trying to find a low here and build a little bit of a base. And if it does, it may get a run-up to the $70, $75 area. But it has fallen sharply this year. I don't see a huge recovery in AMD before the end of the year. Of course, just a little less than three months remaining till the end of 2022.
I don't see a big recovery over here. In fact, we did downgrade the stock two or three, and we are actually looking for an exit on this name eventually here. We just think that the stock has fallen too hard in the recovery. Timeline for semiconductor stocks is extremely long. There's going to be a time to get back into these names. Chris, I know, follows a lot of these names, along with myself. But it's really not the time to be in these names when the semiconductor stocks are weak. So we're going to be looking for an exit on this name, and probably maybe looking at it in 2023.
SARA SILVERSTEIN: Chris, you noted yesterday that falling steel prices could provide Deere with some margin relief. What's your outlook for Deere?
CHRIS VERSACE: So in addition to that prospect for margins, the key driver for us with Deere has been the trend in farmer income that ties back to prices for the key commodities in the ag world-- corn, wheat, and soybeans. And they've all gotten some lift as we've gotten some updates on their harvest forecasts. So year over year, continue to like Deere.
I think this time last month I said it was one of my favorite picks going into the fall. It remains that. I also think, though, too, as we've seen fertilizer prices really start to rebound, that's another tailwind for Deere in the form of precision ag. The more efficient and updated the equipment is, the less fertilizer you need. So continue to remain very bullish on Deere, not only through the end of the year but into 2023.
SARA SILVERSTEIN: Right. And that's part of the reason we switch up the things that we're talking about now a little bit, is because we expect you to have the same favorite over time. We don't expect those things to come to fruition in one week or one month. Bob, should members be buying Chipotle here? What do the charts say?
BOB LANG: Oh, you had to do this to me. It's lunch time, Sara, and I'm getting pretty hungry and I wish I had a Chipotle burrito to chomp on right now. But I do like Chipotle. I do like the stock. It had a huge earnings move back in July, and it took off. And it's given back quite a bit of that as the markets come down over the past seven, eight weeks.
But I do like it, the fact that it's pulled back down to the 200-day moving average here, and it's caught support. And again, with earnings coming out on this name in a few more weeks, we'll be able to hear a little bit more about the rest of the year and what their plans are for 2023. I did have one of their new guajillo steak burritos the other day. It was excellent. And I think they've had some good reviews on that, as well, too, and along with the chicken chorizo.
Chris had mentioned that to me about a couple of months ago, and that was real good, as well, too. So I think real positives with Chipotle. They like to bring out new products and try them out. They've got a very good, creative CEO there in Brian Niccol. And I think going forward, I think Chipotle is going to be one of the winners in the restaurant group.
SARA SILVERSTEIN: And Bob, member Josh asked what you think of the recent pullback in MasterCard, and do you recommend buying at these levels?
BOB LANG: Yeah. So Mastercard, it's been basically traced in a range here from about $300 to $400 for the better part of a year. And we've been telling subscribers that when it drops down to around $300, that's a good place to buy. Back up the truck and start adding some shares. And if it gets up close to that $400 level, anywhere from $370 to $400, it might be time to lighten up a little bit.
We've done that a couple of times over the past year. So we did break through that $300 level more recently as the markets fell through the June lows last week, but it has rallied back above $300, and we still think that the stock is a buy around the $300 level. So we do like Mastercard here at this point.
SARA SILVERSTEIN: Right. Chris, PepsiCo was added to this last quarter. Why bulk up ahead of earnings?
CHRIS VERSACE: Oh, it's just one of the great defensible companies that's out there. We talked earlier about dividend increasers. This is another great one for that. And in an uncertain time, we know that folks are going to continue to eat. They're going to continue to snack. And when we look at PepsiCo's lineup, it's honestly second to none.
The one thing I would say is a lot of people tend to focus in on the beverage business. Obviously, that's what the company is named after. But the real secret sauce, if you will, is the snack business, given the margins there. So it's just one of those names that we love, and we were very excited to not only add it to the portfolio, but able to scoop it up on a strategic basis, which also has the plus of increasing the portfolio's exposure to that dividend stream.
SARA SILVERSTEIN: And yes, people continue to eat and continue to snack. One of our members wants to know how you feel about McCormick's relatively high PE ratio, Chris?
CHRIS VERSACE: So I have to lay all my cards on the table here, Sara. If the AAP members were to walk into my kitchen, they would be amazed at the amount of McCormick products that I have, everything from hot sauce to spices to you name it. And I'm gearing up for what I'd like to call "seasons eating," because we are moving into probably the strongest time of the year for McCormick's business.
In terms of the question on the P/E, look, the company reduced its outlook for the earnings earlier in the year. No surprise, given some inflationary costs. So the E has come down, inflating the P/E. But I think that as we look forward, as these inflationary pressures start to abate and the price increases that they've put in place in 2022, to the tune of three of them so far that they've announced, that's going to translate into faster earnings growth in the quarters ahead. Again, as those inflationary pressures kind of come down, to me, as that happens, that's going to bring the P/E down. So again, not overly concerned about it here in the near-term. I'm far more concerned with what we'll hear in the coming weeks, in terms of the dividend. This is another company that has increased its dividend for something like 35, 37 years on a consistent basis. We're approaching that time when the next dividend increase announcement should be upon us.
SARA SILVERSTEIN: And here's a challenge for you, Chris. Without saying "seasons eatings" ever again, what is your outlook for the upcoming holiday season? And what metrics are you watching? Like for Costco, let's say.
CHRIS VERSACE: Right. Right. So we are a little concerned about the consumer, right? We know credit card costs and other borrowing costs are going higher. We know disposable income is a little under pressure. So we are starting to pay attention to some of the studies that are coming out, the surveys.
Bankrate just came out with one, and it said that consumers won't be spending as much this year during the holiday shopping season. So what do we think is going to happen? They are going to pivot to those areas where they can stretch those dollars, and without question, Costco is exactly where we want to be for that.
The other one, too, and Bob's heard me refer to this company as the deflationary Death Star. That is Amazon. So we continue to think that both Costco and Amazon will be net winners of the holiday shopping season. But Sara, I want to, as the next Prime event unfolds next week, what is on your shopping list?
SARA SILVERSTEIN: Oh, man. Well, you just said Amazon, and I'm single-handedly keeping Amazon afloat. I am building a haunted house this year, and so I just ordered all of those cheesy animatronic things. So my children are already scared.
CHRIS VERSACE: Nice. Nice.
SARA SILVERSTEIN: But Halloween is my favorite holiday in the holiday season.
BOB LANG: So Sara, we want to see pictures of that on the next monthly call in November, OK?
SARA SILVERSTEIN: I promise.
BOB LANG: Right after Halloween.
SARA SILVERSTEIN: I will disclose more depending on the performance of the portfolio.
Morgan Stanley recently upgraded Ford to overweight while lowering its price target for GM. Chris, how does Ford compare to GM? Obviously Ford is in our portfolio.
CHRIS VERSACE: Right. So they're both automotive makers and they're both trying to tap into the evolving nature of the auto industry, whether it's EVs or AVs. And if you were to stack the two up, I would say that Ford is probably far better positioned on the EV front. GM has a better leg up on what we'll eventually call autonomous driving.
And if we look at the catalysts, here particularly coming out of Washington, we know that there's going to be a lot of legs for EVs in the coming years, particularly with the extension of that EV tax credit. There's also some rumblings that the EPA might be looking to do some fuel credits, as well, for EVs. So at the same time, autonomous driving, that timetable seems to be pushed out and pushed out. I think we want to be more in the EV lane, if you will, and that keeps us with Ford.
SARA SILVERSTEIN: Great. Bob, ChargePoint remains the club's largest position, but it's also very volatile. How confident are you in the $21 price target?
BOB LANG: I feel pretty good about that, Sara. And actually, I'm looking for the stock to get much, much higher over a long period of time. In fact, more recently, the stock has just traced out a range of about $15 to $20, $20 on the high side. Tag that in August and in September, three or four different times where we saw the $15 level hold.
We're kind of on the lower end of that range right now, and after giving back a little bit of ground in the middle part of September. I do like the chart. Chart's constructive, longer term. And as long as we stay up in these mid-teens, mid to high teen area, it's certainly a buyer on any pullback. So we did have a nice run on the stock in the early part of September when the markets were falling apart, which is incredible relative strength for a small cap name like ChargePoint.
So stock was actually going up-- I think I want to say the stock went up three or four straight days in a row when the markets were down three or four days, three or four days in a row, which is tremendous relative strength, again, for a small cap name. But the company does have some wind at its back with the big charging stations, and companies like Tesla and Ford, as Chris just mentioned, moving themselves into the EV space. So over the long term, I think ChargePoint is going to be a huge winner for us.
SARA SILVERSTEIN: Chris, Eric, one of our members, wonders how you feel about ChargePoint's balance sheet in light of increasing borrowing costs.
CHRIS VERSACE: Two quick thoughts there. One, if they had a lot of debt that they had to refinance, I would be concerned. But the reality is they have no debt. They've got about $470 million in cash exiting the July quarter, which, if we look at the cash burn, that's about six to eight quarters' worth. But remember, we are seeing the ramp in that business, so we would expect to see that cash burn fall in the coming quarters.
Remember, too, that there's-- the only way I could describe it is that nitroglycerin is about to be thrown on this business. And what do I mean by that? It's the Biden infrastructure plan. Dollars are starting to be released for charging stations. That's been one of the core thesis points for us. So I'm not really concerned about the company's balance sheet that much at all.
SARA SILVERSTEIN: Right. And Chris, cybersecurity has been a big theme for the portfolio. We talked about it last month. We have a new focus, it seems, on defense. Has this replaced cybersecurity or does it go along with it?
CHRIS VERSACE: In a word, so I can be clear, no. It does not replace it. If anything, we're capturing just different streams of defensive spending. Bob alluded to Lockheed Martin earlier with defense contracts. Axon is more on public safety.
And if we look at Washington, there's a lot of positive stimulus dollars coming from both of those businesses. But make no mistake. The number of attacks that we are seeing are increasing daily. The types of attacks are expanding, all while we have a greater number of attack vectors out there, thank you internet of things. So absolutely not. This is no replacement. If anything, we see enough room in the portfolio for all three.
SARA SILVERSTEIN: Right. CBOE, we have the QQQ short ETF, the S&P short ETF, all volatility plays. Did these do their job in September? And how are you going to use them for the rest of the year? Let's see. Bob, you want to start with this?
BOB LANG: Yeah, I'll pick that one up. So the PSQ and the SH, of course, the inverse ETFs for the NASDAQ-100 for the PSQ, and then the SH is the inverse for the SPY, or S&P 500. Our portfolio is much more correlated now to the S&P 500, so that works nicely as an inverse. And look, I just answered subscriber question the other day. Our intention here using these vehicles is not necessarily to make money, if we do them. So be it, it means that we're probably losing money in other places.
But what we're trying to do here with these inverse ETFs is blunt the volatility of the markets. Currently right now, we see the S&P 500 down a little bit today, but the volatility index is ticking up near 30%. And what is 30%? Basically tells us that the market is looking for big moves of about 1.8% to 1.7% a day. And what does that mean? That's about 60, 70 points of S&P 500 moves every single day.
So we actually had that today. We had that yesterday, even though the markets barely finished down. So these are there to protect us against higher volatility, and higher volatility simply means bigger ranges of expansion up and down in the markets. Markets are going to go up a lot, like they did earlier in the week, and they're going to go down a lot, like they did last week. So that's pretty much been doing their job.
And as far as the CBO is concerned, just racking up record numbers every single month of options trading, hedging against market volatility. Big institutions are using options to hedge themselves against high volatility in the markets. And they offer an assortment of products, not just volatility, but elsewhere. Commodities, as well, too. So the volume in these products has been brisk, to say the least. So as long as CBO is around and they are the largest player in market-making business, We Feel real confident that this name is going to do well for us over the years.
SARA SILVERSTEIN: Great. And one of our members, Scott, wants to know what ETF you would use for short-term S&P exposure on the long side. He likes seeing what you use, obviously, on the short side. But what do you use for the long side, Bob?
BOB LANG: For the long side, you'd probably take a look at the SPY, S&P 500, or the NASDAQ, which would be the QQQ. We do have some subscribers who are with Vanguard, and the proxy for the SPY for Vanguard would be the VOO, or the VOO. That basically moves in lockstep with the S&P 500.
So if you're going to go long these ETFs, those would be the ones to go. Of course, there's others, as well, too. There's the Russell 2000, the IWM, the Dow Industrials, the DIA, and there's other inverse names for those, as well, too. But if you want to go long, those are the ones to go to work with.
SARA SILVERSTEIN: Right. And that is all the questions that we have for our stock by stock specific conversation. So please continue to send those and we will get better and better about using them throughout all of our coverage of the portfolio. But now moving outside of the portfolio, Chris, one of our members, Linda, wants to know how worried we should be-- and I want to know-- how worried should we be about the Credit Suisse situation? And what impact, if that does fall apart, would that have on our portfolio?
CHRIS VERSACE: Yeah. So I don't think it's going to have any direct impact on the portfolio. Candidly, we don't have a lot of financial exposures at the moment, something we continue to evaluate. But if something does go wrong with Credit Suisse, it's likely to be a market event. So yeah, it will have some indirect impact on the portfolio.
Candidly, it's another reason why we want to keep our SH and PSQ inverse ETFs in play until we a little more about the situation. The company is supposed to chair its strategy review findings at the end of October, so hopefully in the next couple of weeks that this would be a potential market headwind that we can remove. But again, we'll need to know more, again, near-term. Just another reason for us to remain defensive.
SARA SILVERSTEIN: Great. Bob, one of our members, Paul, wants to know if you have any thoughts about solar energy stocks right now.
BOB LANG: I love the solar energy group, Sara. And this group has done extremely well since passing of that infrastructure bill into law more recently. And then also, it seems like every other week there are some news coming out of Washington about some credits for people who use solar products, and so forth. And so names like First Solar, FSLR; Canadian Solar, SCIQ; which, ironically, Canadian company is actually a Chinese company. JinkoSolar, SunPower. These names are going to do extremely well over the long-term.
And listen, I'd even throw Tesla in there. Tesla bought SolarCity, which is a company that Elon Musk started some years ago. They bought SolarCity a few years back on the cheap before the stock, before Tesla, really started to take off. And they've combined their resources with the electronic vehicle and the solar power to become a real powerhouse in this industry, as well, too. So I think over time, especially as Washington continues to craft what is beneficial for the environment, I think solar companies are going to be right there on the forefront to successful trading.
SARA SILVERSTEIN: Right. And I want to wrap up with our rating system, the AAP rating system. And I think it's very clear sometimes, but in times like this, like the meaning of things, it feels like it's changing. So Chris, help me understand. A lot of people are wondering-- a 2 rating means stocks we buy on a pullback. But what does it mean if every stock is in a pullback? What should investors be doing with the rated 2 stocks right now?
CHRIS VERSACE: Yeah, it's a fair question, especially given what we saw in the market in September, Sara. And with prospects for continued volatility as we enter the September quarter earnings season, it's a great, great question to try and get our head around and provide some answers for. I'd also say, candidly, it speaks to the limitations of the rating system.
If we're being very clear and transparent with members, it's something that Bob and I, we would be very open to rejiggering the rating system to something that was far more clear, whether it was buy, sell, hold, or maybe have a fourth category. So it's something that we would be open to changing if we thought that members would go along with that.
But having said that, clearly 1s are buy now. No real surprises there. But 2s, I think the best thing that members can do is really take a look at what we're saying in our Alerts, whether they're the fundamental or the technicals. I think Bob does the wonderful job of indicating buy areas for not just the 2s, but the 1s, as well. What are we saying in our Alerts or on our shopping list? Which ones are we preferring?
Clearly companies like a Costco, Verizon, Vulcan Materials, United Rentals, those that have some nice, powerful tailwinds because of spending plans out of Washington, but also watch the ones where we're shifting and becoming a little more negative on. Probably the best example there would be AMD, which we had a 2 rating, and as Bob correctly pointed out earlier, we downgraded it to a 3, which likely means we're looking for a near-term exit. That's probably the best that I can say. I don't know, Bob, if you've got anything you want to add to that.
BOB LANG: No, I think that's right. And you know what? When we're signaling that we're going to exit a name, that really has to be clear and very concise about what our plans are. When we don't like a stock, we'll wait for a little bit of a rally up to exit the name in a little bit more professional way, I guess, hopefully maybe on an upswing or something like that.
But you know what? When a stock is broken on the chart, there is no repairing that breaking for maybe quite some time. And a name like AMD, like you mentioned, it's going to take a little while for that stock to get back up there.
So why do we have to spend our time waiting for the stock to come back up when it's going to maybe be in a continually go down or be in a basing period for a long period of time? We're not going to make any money. We have to talk about opportunity costs here. What is your opportunity cost for staying with the stock that is not moving for you when the rest of the market is? So that that's really what we're talking about here.
SARA SILVERSTEIN: Well, this just opens up a really exciting conversation, I think. So I think that if we're open to reevaluating the way that the ratings work, let's find out from our members what would serve them most. Please send in your comments and we will take that to Bob and Chris and talk about if there is something to add to that or a way to change that-- firstname.lastname@example.org.
And Chris, I'm going to hammer this a little bit further, just because we do have quite a few new members that join this month. So if you wouldn't mind laying out for them, if you're ramping up your portfolio right now, lucky you. How would you do it? How long does that take? How do you recommend using the rating system to do that?
CHRIS VERSACE: Sure. So first off, welcome. And as Sara said, there's the email address you can reach us at with questions. Bob and I would be happy to answer them, whether it's through the Alerts or even on the podcast that we do on Mondays. So by all means, new members, reach out. We're here to help.
In terms of using the ratings and building the portfolio, straightforward, I would say 1s, again, feel free to plunge in at any time. Would I recommend you buy all of your position at once? No. I would say you really want to space these out and try and build your position in three, four, or five trades. This way you can take advantage of any pullbacks in the market.
In terms of wading into the 2s and moving past the 1s, I would say do what we do, in terms of scooping up the 2s. And also, keep your eyes open for more bullpen additions, some of which can be congratulated-- excuse me, can be graduated to the portfolio. But in times like this, we want to be opportunistic and introduce new names. If we introduce a new name, like we did just yesterday with Axon, there's a reason why we're doing it. And if we're adding it to the portfolio, you might want to be doing that, as well.
SARA SILVERSTEIN: And for a final question, what is keeping you up at night, outside of inflation? Bob, let's start with you.
BOB LANG: What keeps me up at night? So Fed policy here. And obviously, I'm wondering-- there's a lot of people out there who are looking for the Fed to pivot. I mean, it's guessing. And frankly, we've been in this bear market for the better part of nine months, and I think people are frustrated. They're disgusted. They're ready for this bear market to be over.
But one thing that I learned many, many years ago is you don't tell the market what to do. What you do is you wait for the markets to move for you and then you respond to it. And right now, when the Fed has their foot on the gas pedal of rate hikes, you have to respect that. Regardless of what they're saying, you have to respond to what they are doing.
And I think most people out there, again, are showing their frustration, and they're trying to look for any little piece of evidence that would help them make money on the upside. Because I think, by and large, with the S&P 500 being down close to 20% in 2022, I think, for the most part, people have lost money this year.
I don't think there's anybody out there that I know of who has been making money in this bear market. And as I've said a long time ago, in bear markets, most people lose money, bulls and bears. It's just there are moments in time where you're going to make a little bit and you're going to lose a little bit. But for the most part, it's very, very difficult to make money and to hang on to your money. But I think what Chris and I are trying to do is do the best we can in a challenging environment.
Because we know that when this bear market is over-- and as I talked about last month-- over bear mountain, what do we see beyond bear mountain? We do see a bull market coming and rising, as it usually does and has been doing over the past 100 years. So we just want to be around and have enough capital there and available firepower for when the market comes up. So right now, the Fed is still keeping me up at night, but I'm sleeping a little bit better because our portfolio is positioned for it.
SARA SILVERSTEIN: And Chris, other than letting me and Bob down, in general, what is your biggest fear?
CHRIS VERSACE: My biggest fear, I think it's pretty much the same one that I shared on the last member's call, which is if things do turn around in the market, that we get caught flat-footed with the amount of cash that we have in the portfolio. And again I mean, turn on a sustained basis.
As I mentioned earlier, I don't really see that unfolding in the very near-term, but that's why members have seen us really start to add a bunch of new names to the portfolio. We think that we'll continue to do that, as well as build out the bullpen, so that we're ready to strike when the time is right, either for each individual position or if we do see something that says, hey, guess what? The market looks like it is going to turn up on a sustained basis.
SARA SILVERSTEIN: Great. Bob and Chris, thank you so much for your insights. And everyone, thank you for joining us. We will see you all next month.