JD DURKIN: Good morning, subscriber's. Chris will be making his way to the New York Stock Exchange for Wednesday's live show once this video hits your inbox. So please check your alerts for his read, specifically on the consumer price index. However, we would never leave you hanging, so don't worry, folks. We are here with answers to some of your biggest general questions from the last few weeks. And it has been a busy few weeks at that. Chris, good morning, my friend. Kick us off with a quick breakdown of how you determine price targets.

Price targets, one of my favorite subjects because we always look for price targets in two ways. One is how high can a stock go, but what's our downside risk when we're initiating a new position? But I guess the question is, how do we triangulate around these things? Again, that word triangulate is key.

Typically, we try to use at least three valuation parameters to determine the upside and the downside. Most common valuation frameworks tend to include the PE ratio, sometimes the price to earnings growth ratio, otherwise known as the PEG ratio, enterprise value to revenue, enterprise value to EBITDA, but also depending on the company. If they have dividends, a dividend yield.

And here's where it gets a little art and science. It's not just straightforward what the numbers tell us, but it's relative to what they were in the past when the stocks have peaked or bottomed out but also relative to the market, its own valuation, and again, relative to the overall peer group. So there's a number of puts and takes, but that's the general framework that we use.

JD DURKIN: Moving over to the rating system, Chris, when looking at the three rated stocks, can help explain what you mean by holding pattern? And give us an example of what you would consider a fresh catalyst, especially for people that may hear those phrases and may be a bit unfamiliar with the context that they should think about them in.

CHRIS VERSACE: Sure. So there's really two types of stocks that land into our three rating or a holding pattern. The first is probably the simplest to discuss. It's when we've got a full position size, typically around 3 and 3/4 of a percent, 4% of the portfolio's assets-- excuse me. At that point, we're not likely to add any more, so we want to let the investment thesis play out. That's the first type. The second type, however, is one where we're waiting for a catalyst to emerge, a fresh one.

Let me give you an example. Last week, we actually upgraded the shares of Axon from a three rating to a one. What was the catalyst? What was the action that led us to do this? Very simply, we were waiting for confirmation on public safety spending in 2023. What we heard last Thursday night from Motorola Solutions was that catalyst. It also relieved some concern over Federal spending because the vast majority of their backlog growth was on state and local authorities spending. So that's a type of a catalyst that would lead us to re-energize our thoughts on a stock, get off the bench, get off the holding pattern, and re-engage.

JD DURKIN: Chris, for any members out there who might be looking to add AAP stocks to their IRAs, are there any names that you would avoid?

CHRIS VERSACE: So this is an interesting question because IRAs tend to be, in my opinion, more longer lived. And that's certainly meshing with how we think about the portfolio. Remember we tend to take a 12 to 18 month time horizon, sometimes a little bit longer, but on average 12 to 18 months.

The stocks that are extremely volatile, where they have a high beta let's say, those might be some of the names that-- again, people who are looking in their retirement accounts, they want a little more long-term money. That volatility can be a little upsetting to them. So I would say if we had to exclude any, it would be those more volatile names that we tend to see from time to time in the portfolio.

JD DURKIN: And talk to me about the inverse ETFs. If a member has not bought them yet, that person might be wondering, is it too late? What do you say?

CHRIS VERSACE: So we use those inverse ETFs really to hedge the market, kind of an insurance policy, if you will. So you have to be really careful when you add them. Typically, the best time to add them is when there's some type of rethink going on in the market where the downside risk might be greater. It's also a great opportunity at that time to check in on the technical look for the market. And I know that the technical team here at ARP is really watching the 4100 level. I believe that we've bounced in and around that. And if we test that and fail yet again, that could be an opportunity to add more of the PSQ or the SH ETFs that we use. Again, those are the inverse ETFs inside the portfolio.

JD DURKIN: All right, let's move our attention now and talk about the wonderful wide world of capital gains tax liability. That's right, folks. All those free party people out there. When AAP members buy a new portfolio stock, Chris, should they operate on the assumption that they'll end up holding that stock for at least 12 months?

CHRIS VERSACE: That is certainly the preferred timeline that we operate on, JD. But as we know, from time to time, there are unexpected catalysts, in a positive sense, that can pop a stock. I was talking about Axon a few minutes ago. That happened last fall where the stock rocketed from around the 110, 120 level all the way up to 185. Some folks might want to use that as an opportunity, trim it back, understanding that it was a short-term move. We obviously held back waiting for that next catalyst that allowed us to rethink the position, raise the price target, and stick with that longer-term view.

That's one example. Again, there are other times where we see significant moves in the very short term. We don't plan for them, but on the other hand is responsible, portfolio managers, we do not necessarily want to leave those big gains on the table because we could risk losing some of them. So we do our best to think about the long term. I hate to say it, but that's the way we have to do it. Long-term focus, but we do have to contemplate the short term as well.

JD DURKIN: All right, Chris, that was a great conversation as always. Thanks a lot for it.


JD DURKIN: As a final programming note to you watching at home, Chris will be live with TheStreet's editor in chief Sara Silverstein and AAP team member Ellen Miller that is set for tomorrow from the very seat that I am in right now here from the floor of the NYSE. You can catch that beginning at 12:00 PM either by checking your alerts or by tuning in to the AAP home page. Thanks for watching and have a great day.