JD DURKIN: A very happy Monday, subscribers, one and all. We have an avalanche. Yes, an avalanche of club holdings reporting later on this week. But before we take a deep dive into what's ahead, I do want to kick things off with a look at the state of the portfolio.

Joining me now is Chris Versace, of course. Good morning, Chris.

CHRIS VERSACE: Good morning, JD. Happy Monday to you.

JD DURKIN: Happy Monday to you as well. As you take a look back at last week, what stood out to you there before we take a look at what's ahead?

CHRIS VERSACE: So we had a number of earnings last week, both in the portfolio, outside the portfolio. And I think the one thing that really kind of jumped out at me was that the market kind of digested bad news better than it has in the last several quarters. We take a look at earnings from Intel, Microsoft, Lam Research, and a number of others out there, and did we see the usual 10%, 15%, 20% drop after either a bad quarter or disappointing guidance?

And the answer is, no, we did not. And it tells me that I think the market has indeed been prepped for bad news. I think, like the market tends to do, it's looking forward, trying to figure out, OK, are we going to have a recession? Is China going to roar back? What does it all mean?

And the big wildcard I think that we're going to have to deal with this week is going to be the Fed and what it has to say, not so much about its monetary policy hike that's widely expected on Wednesday, but really the cadence of additional rate hikes in the back half of the year. That, to me, is going to be the big question that could roil markets.

JD DURKIN: OK, we do want to make some time here for the weekly hindsight 2020 check-in. Is there anything especially when it comes to earnings that you wish played out a bit differently, I wonder?

CHRIS VERSACE: Yeah, so we have been thinking that the number of price increases that we saw across a wide array of portfolio companies are going to start to translate into margin levers. And we've heard some confirmation of that-- Lamb Weston, Conagra, which are outside of the portfolio. So it was a real disappointment to hear McCormick say that it was going to continue to struggle with input cost inflation in the current quarter and things will slowly get better throughout the balance of the year.

So that was a bit of a disappointment. However, we're also hearing reports of continued drops in chicken prices, butter prices, and other key inputs. And I think that's going to lead to some nice margin expansion at several other portfolio companies, notably Chipotle. So it's a bittersweet experience with McCormick. And on that, it leads us to think that there might be more issues inside the company, which is why we downgraded the shares to a 3 rating.

And as we shared with members, if the shares rally back towards the $80 level, we're likely to contemplate downgrading it to a 4 and starting to work our way out of that position.

JD DURKIN: A great perspective there, and also underscoring the importance of earnings for a name like Chipotle for some of those key input items, as you said there. On the earnings front here, we did hear, as you said there, from McCormick. We got Lockheed Martin, United Rentals. You and I love talking United Rentals, as well as the folks over at Microsoft, just to name a few. Any big takeaways for you?

CHRIS VERSACE: Yeah, so if we look at United Rentals, we look at Lockheed Martin, those are rarely representative of some of the bigger themes that we see playing out this year. One, of course, with United Rentals, is increased non-residential construction due to not only the Chips Act but of course, the Biden Infrastructure Law. Whereas at Lockheed Martin, it's the real ramp in defense spending for this coming year and prospects for it to continue to pass that.

Both companies have very, very large backlogs of work, gives us great visibility at a time when the marketplace is a little less certain about the near term. Microsoft, of course, continued echoing the news that we've got a weak PC market. We heard that earlier. So more confirmation there.

It did raise the flag on cloud spending. And that's something that we're going to lean into this week when we hear from Alphabet, Amazon, and of course, Meta Platforms.

JD DURKIN: Well, of course, two of the names you just mentioned, Alphabet and Amazon, they were top of mind in my conversation on Friday with Doug Kass. And Doug explained why he sold his position specifically in those two companies ahead of earnings, citing the potential for short-term downside risk. Obviously, look, we're taking the long-term approach here at AAP.

But Chris, talk to me about how you are getting your head ready? How are you getting right as you enter game time, right? It's like the NFC Championship for you here for the week that the word busy doesn't really seem adequate to describe, because it's slightly more than busy, isn't it?

CHRIS VERSACE: Oh, you could call it a barn burner. You could call it pretty much whatever you want. It's going to be intense. And I think the way to get our head in the game is to kind of sit back, not necessarily relax, but take a poised approach to what's going. I liken it, JD, to playing Checkers, not Chess.

In Checkers, you're thinking kind of move to move for the most part, really reacting. Whereas in Chess, you really have to have your head about. You've got to be thinking two or three moves down the line so you're properly positioned. And with that in mind, as we go through the week both for companies in the portfolio, as well as a number that are outside the portfolio, we've identified some of the key things that we'll be paying attention to. That, I think, will help us cut through the clutter, if you will, and have a very keen and clear sense of what's coming and what to do next.

JD DURKIN: Keen and clear sense. I like it. Keen, clear, and under control. That's not what they say, but it is-- it should be what they say. You've been following the chip stocks very closely. What will you be looking for from NXP Semi, Qualcomm, and other names that we're expected to hear from in the next few days.

CHRIS VERSACE: So we've shared with members that we're kind of cautiously eyeing some of the chip stocks. They've gotten beaten up. And as we've signaled, we want to start really looking at these as their backlogs of business start to bottom out. So we want to be hearing comments to that effect. We also want to understand the tone of the different end markets.

For example, if we're still looking at PCs, we know that's going to be a tough slog. But what about data center, what about automotive and other end markets? As we get that confirmation, then we're going to start to really figure out which chip stocks we want to be buying first.

JD DURKIN: All right, back to that busy word. The word of the week. AAP has Amazon, Apple, Alphabet, Ford, CBOE reporting this week. We just touched on big tech a bit, but you have a report on reports that you're paying particular attention to. Is there one top dog?

CHRIS VERSACE: Yeah, so we just touched on tech land. And I can't underscore it enough, it is going to be a big week for tech. But among that, the one outlier is going to be Ford. And for us, we really want to see the transformation that Ford's been talking about, the cost-cutting initiatives really start to play out on the margin front. To us, that's going to be key to what's next for Ford.

JD DURKIN: Outside the portfolio and the bullpen, are there any other reports that you're also focused on you think should be top of mind?

CHRIS VERSACE: Well, I mean, look, we've got 550 reports. And we just kind of went back and forth on less than a dozen. So of course, there's going to be a huge number of reports. Some in the bullpen, like Estee Lauder, we'll want to hear what they have to see about the reopening for China. That might get us off the bench, as it were, with Cody.

But when you step back and look at that see of other companies that are out there, you've got McDonald's, you've got Mondelez, sorry, you've got Waste Management, you've got CNH Industrial. These are all going to say various things that we want to pay attention to whether it's about the speed of the economy, the outlook for crop prices as it might relate to John Deere, whether input costs are moving down, and price increases are translating into margins like we talked about earlier. So it is going to be a busy week both inside and outside the portfolio.

JD DURKIN: Certainly will be. Busy is the word of the week, folks. Chris, we'll be back tomorrow to get you ready for a ton of economic data, as well as this week's Fed meeting. That's right, how could we possibly forget?

I think I can ask this for all of us. Is it Friday yet? Chris, is it Friday? I'm just checking since sources haven't confirmed.

CHRIS VERSACE: Certainly not.

JD DURKIN: All right, well, we'll do it again later this week. Thanks for joining us. Thanks for being here, Chris.


JD DURKIN: All right, folks. And thank you at home subscribers for watching. We'll do it again soon. We'll see you then.