Daily Rundown: February 6

KATHERINE ROSS: Good morning, subscribers. I'm The Street's Katherine Ross in for JD Durkin. Chris Versace is here with me to break down your week ahead. But before we get there, let's take a look back. Now, last week was a busy one for both news as well as portfolio moves. So I want to start with the portfolio's newest position. And for that, we have a member question. What do you see in COTY that justifies such a high price to earnings ratio, Chris?

CHRIS VERSACE: Katherine, that's actually a pretty interesting question. And we kind of headed that question off I think a little bit last week when we talked about how we like the number three when it comes to the portfolio. We try to really triangulate hence three around price targets, around downside risk with potential stocks. But to speak to the meat of the question, the PE for COTY, around 31 times or so on 2023 earnings, it does seem a little high. But that's an absolute.

I think when you take it relative to Estee Lauder or ELF, those are north of 50 times COTY's far more inexpensive. But if we take a look outside PEs for enterprise value to sales for example, here, too, COTY's trading nearly half the multiples if not less than what Estee Lauder or ELF are. And the kicker for me is that the free cash flow prospects at COTY are actually better than both. So I'm not so fixated on that number for the PE. But it's the context around earnings growth, free cash flow, growth and the relative valuation that makes me a little more comfortable with COTY shares.

KATHERINE ROSS: Yeah, and speaking of earnings growth, I mean, we get their earnings report on Wednesday. What in particular are you watching?

CHRIS VERSACE: Well, when we talked about adding COTY to the portfolio first through the bullpen, we were very cautious. Because we recognized that China is reopening. Sometimes the market gets out a little over its skis in terms of anticipation. It appears that this is the case. So we want to hear what they have to say about the China reopening themselves, especially after what Estee Lauder said last week, pushing out their expectations a little bit. Starbucks did the same.

But we also want to hear more importantly about how COTY continues to lean into one of the fastest growing segments of personal care products that's clean products. Here, what we mean by clean, we're talking about natural organic ingredients, not using paraffins, or other quote "nasty ingredients" that are actually harmful for the body. So those are the two things we really want to hear about.

KATHERINE ROSS: You also added to your positions in both Vulcan Materials and Deere last week. What made you so bullish about Deere ahead of their earnings on February 17?

CHRIS VERSACE: So there was kind of a push pull with Deere. The shares traded off. So we want to take advantage of that. But it was also what we heard from one of their competitors, CH Industrial that talked about the continued favorable prospects for farmer income. And that's one of the key, key things for us when it comes to Deere. Because the more flush that farmers are, they're more likely to spend on new equipment. The other positive, too, is we're seeing fertilizer prices start to creep back higher.

That's actually great in terms of the upgrade cycle for precision ag. And I think we're going to hear a lot more about all of that this week when we get another competitor to Deere reporting, and that's of course, AGCO.

KATHERINE ROSS: All right. And now for our weekly hindsight is 2020 check-in. What do you wish had happened a little differently?

CHRIS VERSACE: Well, as you pointed out, we had a very, very busy week last week both outside of the portfolio, in the portfolio. We could have gone one step further and actually nibbled a little bit on the shares of the first trust NASDAQ cybersecurity ETF. I say that because we're going to have a slew of constituents reporting this week. And after we did some homework on the deferred revenue cycle for a lot of the holdings, I do think that they're going to come out and surprise to the upside.

I know that the overhang has been oh, we're hearing about layoffs. We're hearing about spending cuts. Cybersecurity might get cut. But all the indications that we've been receiving from companies that have reported thus far is that that's not likely to be the case. So again, hindsight being 20/20, I wish we had stepped a little more into cyber last week. But I think we'll get a chance either this week or next week to do that.

KATHERINE ROSS: Let's switch gears now and look at what you expect from the week ahead. Now on the consumer front, we're expecting earnings from PepsiCo and Chipotle as well as COTY. Last Wednesday, you noted that McDonald's earnings had feeling pretty good about Chipotle's pricing power as well as input costs. So beyond the price of avocados, what is top of mind for you?

CHRIS VERSACE: Yeah, so you're 100% correct. The whole key for us in the first half of 2023, particularly with Chipotle is going to be seeing the price increases that they took last year really translate into margin levers for this year. There's a couple of things there. You reference the McDonald's report. Their prices were up. Low double digits didn't really seem to do any volume destruction. So we're looking for confirmation of that with Chipotle's earnings as well.

But we also want to hear about these falling inputs. You mentioned avocados, but also some on the dairy front. We're also seeing nice price declines in chicken. How does that balance with the expectation for pork and beef? So those are going to be the key levers, I think, for the Chipotle report. But also too, as we start fresh for 2023, what's the outlook in terms of expanding their footprint?

KATHERINE ROSS: OK, and then in January you added to your position of Pepsi. How are you feeling heading into Thursday's report?

CHRIS VERSACE: I think there, you have to remember there's the two dynamics, right? The first is going to be what do we think about snacks? And we think the outlook for snacks is good given on grocery side. On the beverage side, there's two things to watch, one grocery, which has been good, but what's been really strong in some expects stronger than expected has been restaurant sales, where we're really going to want to differentiate between those two end markets for the company.

But I think they're going to be very positive. The other thing, though, is with comments this morning from Nestle that they see further pricing prices ahead this year because they haven't been able to offset all of the input inflation thus far, we're going to want to hear what Pepsi has to say about pricing. And I think that is really going to be the one thing that will have us and the market really fixated on the PepsiCo report.

KATHERINE ROSS: We've gotten through the meat of earnings season. There are still slew of earnings coming out this week outside of the portfolio names that we've kind of hit on already. Are there any names that could influence your game plan so far?

CHRIS VERSACE: 100% there are. So I already alluded to the fact that we're going to get a bunch of cybersecurity names. But let's put that to the side. We're also going to start to get a trickle of retailers, right? And we the holiday shopping season is huge. But already this morning the Children's Place came out. And they said revenue is going to be below what's expected because we took very aggressive steps to work down our excess inventory.

Later this week, we've got VF Corp. We've also got Capri Holdings and Ralph Lauren. We're going to want to see one, was this a Children's Place only event, probably not, but let's get that confirmation. Two, what we hear from these four combined really set the stage for this next leg of earnings that we're going to get, which would be retailers. My suspicion is that the bloated inventories they had in the back half of the year did not get worked down as quickly as expected. There's going to be some pain in these numbers. That might give us the opportunity to take a fresh look at some of the retailers in the coming weeks and months.

KATHERINE ROSS: And when we put earnings aside, Chris, what's topping your watch list in the market this week?

CHRIS VERSACE: Oh well, two big things, the first, of course, is going to be Fed Chair Powell tomorrow when he speaks at the Economic Club of Washington, DC. I say that. Yes, we heard him speak last week. But we also got that monster January employment report with the unemployment rate actually falling month over month. The key here is going to be on last Wednesday, Powell said oh wait, I see a couple of rate hikes ahead. OK, Jerome, is that two, is that three?

And if so, is it possible we might have to do more because of that January employment report. And then tomorrow night, we also have the State of the Union address from President Biden. Obviously, we're going to be leaning into all sorts of comments surrounding the debt ceiling, government spending. And I say this not only for the portfolio's position in Lockheed Martin but also for Axon Enterprises as well.

KATHERINE ROSS: All right, Chris. Thank you for the insight. And Chris will be back tomorrow to dig deeper into what to expect from Fed Chair Powell, as well as the ongoing debt ceiling debate Thank you for joining us today.