KATHERINE ROSS: Good morning, subscribers. I'm The Street's Katherine Ross with Chris Versace to answer some of your biggest questions of the week. Let's kick things off with a general question on portfolio management. We have a member here looking to get started with a $500,000 portfolio. Which stocks do you recommend buying first and at what allocation, Chris?
CHRIS VERSACE: So typically, when we have somebody new coming into the club, what we recommend is start with the ones. Those are stocks that you can buy any time. We see great upside, compelling fundamentals. And the technicals are favorable as well. So in order to get started, I would say start nibbling on those positions working your way up to where we are in terms of an overall position size.
In terms of the stocks that are rated two, I would say look to make the moves that we do. And I say this because the two rating means we want to be adding these stocks or adding to these stocks on market pullbacks. And as members will see, we did just that earlier today when we nibbled on the shares of AMN Healthcare once again and did the same with American Waterworks.
KATHERINE ROSS: Now, over to the market, if the S&P 500 trades sideways in 2023, is there a plan to buy the dips and sell the rips?
CHRIS VERSACE: So this is a great question. And it's something that we've actually done really since we took over the portfolio. We like to be mindful of when stocks have not only pronounced moves in and of themselves, but a particularly pronounced move relative to the market. And for that we really compare against the S&P 500.
So a great example would be when we trimmed back the position of United Rentals. It was on a huge tear since September, October up until early January and into February. I believe the move was something like 60%. So we did trim the position back. So we're not afraid to do that. But at the same time, we will use pullbacks in the stocks that we like. Again, we're doing that earlier today with AMN Healthcare and American Waterworks.
KATHERINE ROSS: There has been a lot of criticism of the accuracy of the monthly employment report, especially following that extremely hot January jobs report. When planning for the portfolio, is it time to take the jobs report with a grain of salt?
CHRIS VERSACE: It's a great question. And it's hard to say because the data is the data. And it's pretty much what everybody leans on. Having said that, do we rely on any one report, any one data source? No, of course we don't. As I shared with members earlier this week, what we'd like to do is really triangulate around things, whether it's determining the speed of the economy, a price target for a stock, or even downside risk for a stock.
So it's really multiples of three. This is why we look at not only the employment report. But we dig really into what ISM data has to say about employment trends, wage trends as well. And the same thing with the ADP employment report. And what complicates things from time to time is restatements or rejiggerings of the math behind these reports. So again, it's a great, great reason to look at multiple views.
KATHERINE ROSS: Chris, I noticed that you did a little buying this morning specifically of AMN, which has topped your watch list in the past couple of weeks. Give us a reminder on the thesis that led to this decision.
CHRIS VERSACE: I'll give you a reminder on the thesis. And I'll give you an anecdote that relates to me as of today, Katherine. So first and foremost, the whole reason behind AMN Healthcare being in the portfolio is the ongoing nursing shortage, which was amplified during the pandemic. But when we look at all the reports that are out there, when we look at staffing issues and the JOLTS report, we continue to see outsized demand for nurses compared to hires.
This tells us that there's a very, very robust demand for what AMN Healthcare does. And to be fair, it's just not nurses. There are doctors too. And more importantly, it's just not hospitals. There's a wide array of slots that need to be filled across medical offices, assisted living, nursing homes, and the like. So we really have to take a more comprehensive view rather than what any one particular company in that N market might have to say.
As terms of the personal anecdote, I have to schedule-- I had to schedule-- sorry-- my second shingles shot. And they told me that I would have to go out a couple of weeks. Why? Because they don't have enough nurses. And they can't offer those shots more than one day a week. To me, that's one more data point that says the demand for nurses remains robust. And against that, we use the recent pullback in AMN Healthcare to once again wade deeper into the shares.
KATHERINE ROSS: Sticking with healthcare here, is there any concern for you over the level of debt over at Elevance?
CHRIS VERSACE: So this is a great question. And when we think about debt, there's a couple of different ways. The first one is geez, what is that absolute number of debt? Because it can be kind of eye popping. But the more practical way to look at it is, how is the company able to service this debt? Is it able to? And what are its coverage ratios? For that we really want to look at what's called EBITDA, or earnings before interest, tax, depreciation, and amortization, over the interest expense, both on an annual basis.
And when we look at Elevance, those coverage ratios have ranged over the last few years, from very high single digits to more recently low double digits. That tells us that the business is pretty secure, pretty stable, and can service that debt with little problem.
KATHERINE ROSS: Yesterday, Chris, Microsoft did briefly pass and hold near that $269.25 price target. Some members are wondering, what's next for the stock?
CHRIS VERSACE: Yeah, so it's fair question. It's at that price target. It is a three-rated stock, which is in a holding pattern. Remember, there's a couple of puts and takes here with what's going on with Microsoft stock. We continue to see the expectation for weakness in its hardware businesses. Cloud looks to be slowing a little bit. So that's kind of supporting our more cautious outlook. In the near term, the driver by what we saw in the recent rebound in the stock price really pertains to ChatGPT and what that might mean for market share for its Bing search engine against Google, as well as the integration in some other products.
And I certainly appreciate what Microsoft's trying to do here, shore up their competitive position. The real question is, is it going to make a difference in its market share, again, for Bing? They're not releasing the product until next week. We'll have to see what the adoption is. But based on that, we will look to revisit our price target and perhaps our rating.
KATHERINE ROSS: After last week's disappointing earnings, we also have members taking a look at Amazon and wondering what your long term thinking is here?
CHRIS VERSACE: So if we were to focus solely on any one particular quarter with Amazon, it's proven more often than not to be a little bit of a mistake. We know that there are a lot of secular trends behind its business, consumers leaning into digital shopping, no question about it, both here and abroad, the continued growth in cloud, albeit in the near term a little slower.
But it's some of these other businesses that they're developing, particularly in healthcare that really has us interested in sticking with the shares. When you step back and you think about what Amazon does probably better than anybody, in my opinion, it is removing transactional friction. We know that there's a lot of pain with that in the healthcare system. And they started to do some interesting things on prescriptions, bundling it into Prime. If they can really make a go of that, that could be a game changer for the way we think about Amazon.
We're inclined to be patient, see how that unfolds.
KATHERINE ROSS: And finally, Chris, let's check in on the clubs oil play. Is XLE a buy around $85 in the current environment?
CHRIS VERSACE: I think it is. We've been really kind of looking forward about the reopening for China. We're continuing to hear positive comments about that, even PepsiCo who was out this morning saying yes, we are seeing people move about more freely, starting to spend. I do think the expectations for China's reopening got a little bit ahead of themselves. And it looks like we've got a more rational view on that.
So we'll see continued progression in the coming months and really hitting, I think, a more accelerated pace as we enter the back half of the year. So as that happens, we're going to continue to see demand rise for the energy complex. That keeps us long term bullish on XLE. And yeah, I do think if it dips much below $85, we would look to kind of wade back into that position.
KATHERINE ROSS: Well, Chris, thank you for joining us today. That will do it for today. Members, please keep sending your questions into firstname.lastname@example.org. And I'll be back tomorrow for a deep dive into the technical landscape with AAP team member, Helene Miseler. Have a great day.