Action Alerts PLUS Members Call - March 2023

SARA SILVERSTEIN: Hello Action Alerts Plus subscribers and welcome to the monthly March call. We've heard your feedback. So we're dedicating this entire call to reviewing our rating system and discussing some of the stocks in each-- in each rating, according to their rating. So Chris, let's get started by walking through how you use the rating system.

CHRIS VERSACE: Well, so whenever we add a new position to the portfolio, or we think about an existing position, we're always doing it with the rating system in mind. What we're trying to do is isolate the stocks that we-- as the rating system kind of indicates. We want to be buying now.

The fundamentals are fantastic. Valuation is compelling. Risk is low, as opposed to some of the other names that we need to see some additional developments. It could be a positive catalyst. It could be confirmation of an item that we're waiting for, whether it's a economic data point, industry data point, what have you.

And then, there are others out there, Sara, I have to be honest, where the outlook is a little uncertain in the near term, even though we may have some great long-term prospects with the name. And I would say right now, at least in our 3's, that really speaks to, say, a company like Apple, where the near-term outlook for the smartphone market continues to be 1. That's at best rather uncertain or, for example, with Microsoft, Google, where cloud spending seems to be slowing.

So in those instances, we want to find our right price point, hence the 3 rating. But we could also revisit all of this, depending on what we hear in terms of fresh catalysts, which unfold day to day, week to week.

SARA SILVERSTEIN: And so if you're a new member, how do you get started? Do you just buy everything in the buy now category? Is that the way you're looking at it?

CHRIS VERSACE: Yeah, so for anybody who's just joining us, we understand that it's very tough, right? We have roughly 30 positions in the portfolio. So of course, the question becomes, what do I do? I'm just getting started. That's partly why we have the buy now category. These are the stocks that you should be buying as you get started.

In terms of the 2's and the 3's, I would suggest that existing members and newer members really make the moves that we do when we do them. For example, today, on a catalyst with the positive JOLTS report, we sold some more 4 rated McCormick. And we used it to buy some 1 rated AMM. It's a very easy move to explain, given the positive data in the JOLTS report.

Last week, we actually did some nibbling on some of the 2 rated stocks because they have come in. And again, we're using the 4 rated McCormick to kind of fund that. So that's the type of thing, how we use the rating system, and how we would suggest that members kind of follow our moves as we make them.

SARA SILVERSTEIN: And how does the rating system relate to the distance to the price target? Because is it that if something has a price target that's way above where it is, it should be a 1? And if it's below where it is, or if it's close to where it is, it should be a four. Because those things don't always line up. So can you walk us through that?

CHRIS VERSACE: No, they don't always line up. And I think the best example is probably some of the 3's that we have right now, whether it's Google, Amazon, for example-- sorry, Amazon's a 2 rated stock, no 3 rated stock, yeah, Amazon. So we know that there's some long-term prospects there, right?

If you look at Amazon, for example, we are going to continue to see the growth in digital shopping. We're going to continue to see long-term cloud adoption. It's just, again, that the near term, the risk reward or the visibility is a little uncertain, given a number of different factors. The same is true, candidly, with Google right now.

And I say that because we want confirmation for Google that it is continuing to hang on to its search market share as Microsoft leverages AI to attack that with Bing. Long-term prospects are great. But that doesn't mean that we want to be buying these names here and now. We're, again, kind of in that holding pattern that we like to say, waiting for some positive developments or potentially negative ones that could cause us to rethink the position.

SARA SILVERSTEIN: And how often are you adjusting the ratings in the portfolio?

CHRIS VERSACE: So that kind of ties into one of two things. The first is, what's the outlook for the industry and the company in particular? As that evolves, we will of course revisit our rating system. But it also speaks to something you asked about earlier, which was the price target.

Typically, they go hand in hand. If we see a lot of upside, then we'll start to think, oh, maybe it is time to revisit the rating on the stock provided, provided that the downside risk is modest. We always like that favorable, what we say, risk to reward trade-off. We want that to really skew in our favor. So that's kind of some of the thinking there. But as, again, as I alluded to though, there are times when we'll take a focus more on the near term than the very long term.

SARA SILVERSTEIN: And I just want to go back to the difference between the 1 and the 2. Let's break it down a little bit more.

CHRIS VERSACE: Sure. So 1, very simple, buy now, stocks you should be buying pretty much any time. The 2, stockpile, these are ones where we would kind of wait to, again, see a more favorable risk-reward trade-off. What do we mean by that? That's really where we want to step in and use a pullback to add to the position, hence stockpile it, slowly but surely building the position using any price weakness to do that.

And again, that was something that we did last week when we scooped up the shares of Elevance, Chipotle, and some others. We were buying them, from a technical perspective, towards the lower end of their trading range, again, using that weakness to get a better entry point from a risk to reward trade-off.

SARA SILVERSTEIN: Great. And you may have discussed this recently in our rundown. But for those of us that missed it, you've talked about a holding pattern very specifically. Can you talk about that a little bit? And that's the 3 rating. What do you mean by holding pattern?

CHRIS VERSACE: Sure. So there's typically two reasons why a stock is in a holding pattern. The first is-- and this is the simplest one to explain. And simplest to explain and I think the best example is probably PepsiCo, right? So throughout the last couple of months of 2022, we were nibbling away, building up our position in PepsiCo.

And it currently stands around 4% of the portfolio or pretty close to that. That's pretty much a full position for us. We're not really going to go much over 4%. So for us, we're just now sitting back and letting the thesis play out, right?

For members that don't have the same weighting as the portfolio, we've been telling them, look, these are the spots that you want to buy them, right around 170, 171, or preferably below that. So they understand where they should be buying it. So that's the first.

The second, though, is what I was describing a few minutes ago, where the near term, the next few months, the outlook is rather uncertain. Again Apple with the smartphone market. Alphabet with the potential challenge to its core search business. We want to sit by the sidelines and potentially look to pick these stocks up either on a positive catalyst, something that would drive the shares higher, or on meaningful weakness in the name.

So right now, risk-reward very uncertain, very unclear, doesn't give us a lot of high conviction in the very near term, despite the longer term prospects. So when we're in a situation like that, we'll hang back-- as I've written and shared with members-- sit on the bench until we get the sign, yes, now is the time to act. And then we will.

And a great example of that was what we did last few weeks with Axon shares. We were taking a look at that. And we were waiting for confirmation that we were continuing to see state, local, and federal spending on police and safety-- police and related safety equipment. And we got that in Motorola Solutions.

What did we do? We upgraded the stock, boosted our price target. And it shot from 185 to about to 220. So that's the type of high conviction data that we like to have, that gets us, again, off the bench or out of the holding pattern.

SARA SILVERSTEIN: And so it's not a strict rule that we never add to things that are rated number 3. But you there has to be something that breaks it out. There has to be one of these catalysts in order for that to happen.

CHRIS VERSACE: 100%. I have found that when we buy stocks-- and I'm speaking from personal experience here-- that if you buy just to buy something, or if you buy when you're overly emotional, it almost never works out, which is why members will always hear me talk about either a particular catalyst, data that we're looking for. And preferably, when we can kind of triangulate 1, 2, 3 confirming data points that really builds our level of passion, our conviction. And in my experience, that is really what makes for some of the best stock calls that we can make.

SARA SILVERSTEIN: And would you ever, or do you ever, or when would you sell or pare down a position that was rated a 1 or 2?

CHRIS VERSACE: Well, there's a couple of things, right? So if it was a 1 or a 2, and I had to say, uh-oh, either I'm going to downgrade it to a 3. Or I'm going to do something more extreme, downgraded to a 4 and then work our way out of it. Something has to have dramatically changed with the underlying thesis, OK?

For example, if-- and this is a big if-- if we learned all of a sudden that the smartphone market was going to tank, whoa, I'd have to revisit what I was thinking about Apple say. Or if I learned with-- let's say we got a JOLTS report like we did this morning that was very, very positive for the shares of AMN Healthcare. Because it showed that, yes, the nursing shortage continues.

I believe it was the fourth largest jobless percentage openings out of the entire report was for the health care sector, great for the company. But-- again, this is if-- if all of a sudden, we saw the number of job openings plummet in an upcoming JOLTS report, would that give us reason to revisit the thesis behind AM Healthcare? It would. We have to therefore revisit perhaps the price target? We would.

Would we have to rethink the rating? Of course. And as I'd like to say, when we are investors, things are always evolving, right? This is not, as I joke, crockpot investing, right? Fix it. Forget it. Come back in two months, three months, four months. No, things are always changing. And that's especially the case as we've seen over the last few months, giving the dynamic on the macroeconomic backdrop, with the economy, inflation, and the Fed. So we're hypervigilant on all of this these days.

SARA SILVERSTEIN: And walk me through the process for setting the price targets.

CHRIS VERSACE: Sure. So whatever we do our homework on a particular company, and we get ready to bring it into the portfolio, one of the things we have to be mindful of is, what's the target? Because that will help set the rating. It'll set how aggressive we might be in building out the position.

So two things. One, we always look for the upside target. That's the one that we publish, right? That's always the, again, as the name implies, target. But we also do a downside risk assessment as well. That's how we develop this risk to reward framework.

But in terms of establishing that upside price target, typically, what we try to do is triangulate around a couple of different valuations, also taking into account the speed of the business, whether it's growing its earnings faster than the market. Or there's a catalyst ahead that could kind of springboard the revenue earnings growth, driving some multiple expansion. So what are some of the likely metrics that we tend to pay attention to?

Well, they're the ones that most people use, PE, or price to earnings. We'll use enterprise value to sales, enterprise value to EBITDA. If it has dividends, we'll look at dividend yields as well. And again, we're doing all of this both from an absolute perspective relative to the market, relative to the peer group, and relative to history. So that's a lot of math, a lot of Excel spreadsheeting to derive those price targets.

SARA SILVERSTEIN: Is there a time frame for the price targets? Is it consistent? Do you look at them all differently based on your thesis? How does that work?

CHRIS VERSACE: Yeah, we tend to stick for by and large with 12 to 24-month price targets. For some where we've got multiyear catalysts, say, for example, a ChargePoint, say a Vulcan Materials, United Rentals, those sorts of things, because they have a lot of power behind them, positive tailwinds, if you will, given the stimulus spending out of Washington that's powering our investment thesis behind that, we can go a little longer.

But typically, we tend to stick in that 12 to 24-month window. And if we have to revise our price targets higher because the benefit to that stimulus is coming sooner than expected, we'll do it.

SARA SILVERSTEIN: And the hedges, some of them are natural hedges. Some of them are very direct hedges. Do you look at those differently in the rating system or should the investors and the members?

CHRIS VERSACE: So I think you're referring to the inverse ETFs that we have. They're candidly more tactical positions. So right now, I think most of them are rated to 2, which is probably exactly where they should be. Because we've been in this trading range with the market.

Bob Lang, Helene Meisler have talked about it. I think Doug Kass has talked about it as well, all our AAP team members. And I'm sure I can throw Sarge in there as well. We're in that 3,800, 3,900 to 4,100, 4,200 bandwidth.

So again, what would cause us to get off the bench, out of the holding pattern? Say what you want on this. It would see the market kind of melt up to the 4,100, 4,200 level. Because as we've heard over the last day and a half or so, we're looking like the Fed is going to have to do more with interest rates.

What that likely means is we're going to see a more pronounced slowdown in the economy in the back half of the year. And we have to think about the follow through when it comes to earnings expectations, particularly for the S&P 500. You and I talked about it on the last monthly call. Those numbers have been coming down.

To the extent we get the sense the economy needs to slow even further as interest rates go higher, we're going to see those numbers come down even further. So we would look to revisit that again, closer to 4,100, 4,200 on the S&P 500.

SARA SILVERSTEIN: And let's get to the portfolio, the stock by stock portfolio. We're going to go rating by rating so we can see how all this plays out in our portfolio. We're going to start with the 1's. I do not have these ranged from favorite to least favorite. But I would love to know which is your very favorite name in the portfolio right now, your immediate buy.

CHRIS VERSACE: Oh, boy. That's a totally out of the blue question. That's a great one. I would say it's a toss up. It's a toss up, right? So I would say, as of like this minute, it would be-- and this is not going to come as a surprise to members who have seen the alerts today-- it's going to be AMN Healthcare.

And I say that because I love confirming data. And I love it when it tells us that the risk downside is very low, a lot of upside to be had. That's exactly what the JOLTS report told us. And the backdrop on that is that AMN Healthcare shares are down something like 30% since early December.

So I sit there. And I understand that some folks are leaning into comments from the hospital companies and saying, oh, we're picking up more nurses. Things are improving. But we have to remember, and I've shared this data with the members in the alerts, that hospitals are a piece of the overall nursing shortage. They're not the largest piece. There is certainly not the most driving factor.

Because we have to consider everything from assisted living as well as doctor's offices, rapid care offices, and the like. So hospitals are a piece, but they're are by no means the largest piece. So when I get the data like this, and I see the risk to reward, I say, wow, we have got to step in and do something here. And that's exactly what we did, reducing the portfolio's cost basis in the process. So from where we are here today, it is AMN.

SARA SILVERSTEIN: Great. That's great because that was actually the first one I was going to ask you about because of the JOLTS report. And then the second one you know I'm going to ask about is ChargePoint. Because we always get the most questions about ChargePoint. And you've been very transparent.

There's been some member frustration about the volatility. But this is a long-term play. What keeps it at a 1 for you?

CHRIS VERSACE: Well, you just hit the nail on the head, Sara. It's a long-term play. And we know that even though we've seen EV sales over the last 12 to 24 months continue to grow, it's still relatively early days for EV sales.

And that tells us that as people lean into that, in part because of the tax stimulus, but also too just greater environmental awareness and more automakers bringing more models to market, reducing prices, as competition heats up, we're going to see that continued uptake of EVs. And it just tells us that there's a natural pain point there for EV charging stations.

So to some extent, if you were to ask the question, Chris, this sounds like a rising tide lifts all boats. It kind of is. So I think that a number of the EV charging station companies will do well over the next several years. We like ChargePoint because in the near term, it's got the best balance sheet out of all of them.

And that tells us that the odds of it having to do a very potentially painful secondary offering is rather low. And we've seen that happen with the couple of the other competitors out there. That makes their shares even more volatile.

The other thing that I would just mention is that as the EV market continues to mature, I suspect that ChargePoint shares as well as the other EV charging station shares won't be as volatile. As I pointed out, I think, one or two member calls ago, that whole basket is extremely tied to Tesla. Tesla has been a volatile stock, in part because people are wondering, what in God's name is Elon Musk focusing on today?

Is it Twitter? Is it the space company? Is it Tesla? So I think over time, as the industry matures, that will start to fall by the wayside. So as I pointed out, I think, in one of the notes to members. If we retrace something like this back, whether it was mobile phones, smart phones, data centers, what have you, when you're in the early innings, that rising tide really kind of plays out over innings 1, 2, 3, 4. And that's exactly where we are, in the very early innings, with EV charging stations.

SARA SILVERSTEIN: And one of our members is wondering, for something that is a long-term play, like ChargePoint, what makes that a 1? How do you look at those things differently if it's a short-term or long-term thesis?

CHRIS VERSACE: So a couple of things. One, we get a lot of data that talks about the continued uptake in EVs. And I know a lot of folks tend to think about particularly with Ford because we have that in the portfolio, understandably so. But when we look at month-to-month, not just in the US, but outside the US, we just see more and more EVs being sold.

And we have to pay attention to that not only in the US, obviously for ChargePoint and Ford, but also inside Europe as well, where both of those companies also have businesses. So we try to take a very wide approach to this. And again, when we look out 2, 3 years from now, where is the stock likely to be as this build out happens?

That's the reason why we have a buy now or a 1 rating on ChargePoint. Plus, as we've talked about before, we also factor in the technicals. We're towards the bottom end of that range. The last few times we've scooped up ChargePoint shares, they've been between 8 and 1/2 and 9 and 1/2. That's a lot. That tells us the downside risk based on the current share price is rather low, a lot of upside ahead, which also fits with the buy now rating.

SARA SILVERSTEIN: And so for the buy now's, is it either that from how far it is from the price target you like buying it more and more, as much as you can at this price or for new people at this price? And then for shorter term plays, it has more to do with what's going on in the market and with the stock. Is that true?

CHRIS VERSACE: I think generally speaking, that is right. We like for the 1's to have compelling risk-reward, upside to the price target. We'd like to have confirming data points with the 2's or the stockpiles. We could be getting confirming data points, keeps us very bullish on the name.

But they might be hovering or approaching our price target. That's why we want to see them pull back, get another bite at the would-be apple. And then for 3's, again, there's some murkiness in the near term, which speaks more to either the industry, the company physicians, something like that, even though the long-term price target could be very positive. I hope that helps.

SARA SILVERSTEIN: Yeah, totally. And Vulcan Materials, you're very-- been very bullish on that. Some members have asked about the competitors, like Martin Marietta, which one member has brought up that they bought that. They like the price action there. Why do you view Vulcan as the gold standard among materials suppliers?

CHRIS VERSACE: So when we took a look at building out our positions relative to the Biden infrastructure law, we took a hard look at a couple of different companies. And from where we were at that time, the upside to the price target, what we were hearing about Vulcan passing through favorable pricing for its aggregates, the data that we were getting on rail traffic was all very, very confirming, really indicating that Vulcan was probably the better way to go. But again, take my comment on ChargePoint, right?

The Biden infrastructure law is going to benefit a lot of companies. And if a member said, wow, my preference is I like Martin Marietta or Company X. If they've got the same positive drivers-- just because our preference is Vulcan, and we do think it's the better play, they probably won't go wrong by scooping up some shares of Martin Marietta or another person involved in that marketplace because of that positive infrastructure spending tailwind.

But again, we would suggest that they kind of make the moves that we make. And that would be Vulcan Materials.

SARA SILVERSTEIN: And going on to Verizon, another 1 rated stock. Is the dividend enough to keep it in 1 rating in this environment? Or is there another reason or a different thesis that you love it?

CHRIS VERSACE: So I'm glad you just said the words this environment, Sara. Because the environment that we're in is one of rising interest rates and a slowing economy, increasing concerns about a recession. Again, it looks like it might have pushed out a little bit, second quarter, maybe to the third quarter.

It's in that environment where we think stocks like Verizon, even American Water Works, are going to shine because of the sticky nature of their business. But we also like them because, as we've shared with members, they have rather low betas. That means they're not as volatile as the marketplace.

And at times when the market gets choppy, that's a great place to be. So we continue to like Verizon. I wouldn't be surprised if we see renewed concerns about the speed of the economy and we start to see people, again, circle back into shares of Verizon. We saw that happen earlier this year. And I think we're going to see it happen again.

SARA SILVERSTEIN: And let's talk about American Water Works. Why did you view the recent pullback as an opportunity to buy more, other than that it's a 1 rating? And that's exactly what we're learning here.

CHRIS VERSACE: Well, so that's a great point. And it speaks to, really, part of the reason for it. So American Water Works, it's been in this band in the mid-30s to about 150, 155. So when it came back, we wanted to pounce on it. But there are other reasons for liking American Water Works here.

When we close out this quarter, we're going to start to move into the seasonally stronger part of the year for its business when we think about water consumption. So that's a positive. And that tends to be when the stock starts to outperform. And that continues into the third quarter.

Those middle two quarters of the year are really the seasonally strong part of the year. But we also have some other rate increases that are coming, as the company continues to petition Public Utility Commission. So reading on that and seeing that they have more of that to go, paired with the pullback, that is what led us to spring into action.

And the other part here, not to just pile on, the company is committed, yet again, to continuing to grow its earnings 7% to 9% a year with the same growth targeted for its dividend. That's very consistent. And typically, when we see these step-like functions emerge, we tend to see stock prices trend higher over time.

SARA SILVERSTEIN: And I want to bring up all of our 1 rated stocks so we can look at them as a group. It feels like a lot of our members really do understand what we're doing here. Because almost all of these were brought up in questions. Is there anything that ties these together for you, Chris, as far as the current environment that all of these stocks provide? Or are they really all individual theses?

CHRIS VERSACE: So if I look at the screen, Sara, we can take a look at Vulcan, which has positive catalysts Biden infrastructure. We look at ChargePoint, same thing with the build out of the EV charging stations. American Water Works and Verizon, low beta stocks, sticky businesses.

AMN Healthcare clearly benefiting from that nursing shortage. Costco, man, we got those January consumer credit numbers last night, continuing to ratchet higher. Consumers are going to be facing the pain of higher debt servicing. I think they're going to continue to lean in that direction of Costco.

Plus, it's going to continue to expand its footprint, driving membership fee income higher. All of that is great. And of course, Cboe, they are the market share leader for writing options, which we know investors both individual and professional are using to hedge their portfolio given the volatility and the market. So all of that is fantastic in my opinion.

SARA SILVERSTEIN: OK, great. Let's move on to the 2's. Let's take a look at the names that we have there. And I don't know if you have a favorite here or if any of these-- does anything ever move from a 2 back to a 1?

CHRIS VERSACE: Oh, absolutely they do. In fact, let me just see here. What was-- I mean, we can move up from 1's to 2's and 2's to 1's. But candidly, those are the ones that tell us that we're being successful, right? So if a stock is moving higher on a lot of positive catalysts, industry information, and to some extent, the market, if it's reaching our price target, that's when we'll downgraded to a 2 rating. So that's great.

So I can look at that for companies like Deere that used to be a 1 rated company. At one point Chipotle was 1 rated. I'm trying to see the--

SARA SILVERSTEIN: It's OK. It's OK. I'll read them to you one by one as we go through, the ones that members have questions about. Marvell, let's start there because we're talking about the ratings. You started Marvell with a 2 rating, which is rare. When do you do that? Why did you do that here, instead of a 1?

CHRIS VERSACE: So what we recognize--

SARA SILVERSTEIN: Or is it not rare?

CHRIS VERSACE: Well, it really depends, right? I mean, I hate to say that we always do something. Because when we add a stock to the portfolio, it tends to be on a case-by-case basis, depending on the position that we're looking to capture, depending on where the share price is. And with Marvell, we like the end markets that they speak to, which really ties to the digital infrastructure.

When we think about-- just think about how we're conducting this call, right? We're broadcasting it to members live. I'm in one location. You're in another. Think about the amount of data that's being consumed and created during this.

So when we think about that, we think about the overall increasing use of work from home, our overall digital lifestyle, streaming, if you will, we know that the digital networks are going to continue to add incremental capacity, densify, to use the language of the industry, as well as bring newer technologies to market. Because the explosion in data across the network has not slowed down. It is not going to slow down. So Marvell really speaks into that. So that's great long-term perspective.

But why then did we not add it as a 1? And when we started the position, we said we're starting off small. We set our price target as 52 that offered 15%, 16% upside. Excuse me. But we have seen the market being volatile. We could see downside to that $40, $41 level. And I believe from a technical perspective, it's slightly below that.

So when we look at that, yes, the net upside is positive. But is it enough to go chips in now and build out the position in a very aggressive way? Can't say that. We want to see the stock come in a little bit. And then we can get more aggressive. Then, we can upgrade it to a 1 and really start building out the position.

SARA SILVERSTEIN: And cybersecurity has been a theme of yours for a while. It has become-- it's been on top of mind a lot more since even the last time we talked. Can you talk to us about the CIBR position and why you have that rated as a 2? And how do you find-- what do you look for, for opportunities to get into something like that--

CHRIS VERSACE: Great question.

SARA SILVERSTEIN: --as an ETF?

CHRIS VERSACE: Yeah, so the whole reason again why we have the ETF is we really like that broad-based exposure. There's a variety of end markets that are getting attacked, a variety of solutions therefore needed to combat cyber attackers. And we think this broad-based approach really gives us that, rather than betting on any one particular stock.

So it's a 2 rated stock. What we have said in print is that we would look to buy more, closer to 41, candidly. That's probably where we would look to also upgrade the stock from a 2 to a 1. So there's a great example of one that could actually move higher.

SARA SILVERSTEIN: Great. And what about Coty? Where is your thesis right now on Coty?

CHRIS VERSACE: So Coty has a multi-pronged thesis, right? But the two key driving points are the reopening in China, which is a end market that Coty's management team is tremendously leaning into. There's also a lot of cost reduction going on in the business. And we detailed this in our last note.

They're just continuing to pull more costs out of the business make it a leaner, meaner, and greener Coty. And I say that because Coty is also leading into the clean beauty market, which is one of the fastest growing end markets in there. And when we talk about clean, it's really putting aside harmful ingredients, both to ourselves, as well as to the environment.

And CEO Sue Nabi has made this a mission for Coty. And the sense I have is it's really resonating with consumers. And I think we're going to get a very nice, positive update on all of this when Ulta Beauty reports their quarterly results on Thursday.

SARA SILVERSTEIN: Great. And so here's one example. And if we can go back to the full screen. There's one example of where the price target is pretty close to where the stock is trading right now. And this is a 2.

And is that why when you're talking about these are the specific things that could change, relationships with China, or results from Ulta, or whatever that is, that would either adjust our price target and give us an opportunity to keep this as something we're adding to, as opposed to something that has reached-- who has performed well for us and reached the end of the thesis?

CHRIS VERSACE: Right. Yes, so let me make this point kind of clear when it comes to 2's. Because this is a great example, Sara. We would either with Coty look to buy more shares at a lower price, closer to say 10, 10 and 1/2 dollars.

Or if we get some positive catalysts, that would allow us to increase our price target. Again, call it from 12 to 13, 13 to 14, something like that, where we see enough upside, the net upside is compelling, and we have got positive catalysts. That's something that would spur us into action and build up the portfolio's position from currently 1.8%, as members can see on the slide.

SARA SILVERSTEIN: Great. Thank you. I appreciate that. I read all of the emails that come in from members. And this is one of the things that I think could use some explaining, and so I think getting us all on this name page. What about Elevance? A member recently pointed out that Elevance seems to perform better when the market has a bearish tilt. Is this a trend you've noticed? Is this part of the reason it's in the portfolio?

CHRIS VERSACE: Simply, yes and yes, Sara. So health care tends to be a more defensive aspect of the marketplace. We know that Elevance particular is continuing to grow its footprint. And that's really why we leaned into the shares last week using, again, that pullback in the shares. They were as high as 500 late last year, earlier in the year.

And I believe when we picked up this last slug, they were around 465, 470. So again, that risk-reward is favorable. If you were to say but, Chris, then why didn't you upgrade the stock? And I would say the simple answer there is that we're waiting for the final report from Medicare pricing.

The initial report was a little concerning. But as we've looked back over history, typically, the final pricing gets revised higher. That would be a very positive catalyst to pick up more shares of Elevance, as well as revisit the 2 rating.

SARA SILVERSTEIN: And the SPDR Gold shares ETF, this is a 2. But I want you to talk a little bit about how this is positioned for the portfolio and how it's positioned right now with what's going on with Paul, and the Fed, and the economy.

CHRIS VERSACE: It's a great question. Because typically, gold is one of those positions that some people say you should have all the time. And last year, we were concerned about the economy. We were concerned about inflation. And that led us to bring this in.

We have nibbled on it. And I think we've said in print that we would look to do a little more between that 165, 170 level. And we're here. I think that we would probably entertain adding a little more gold, depending on what we see with some of the upcoming data. Call that the February Employment Report, the February CPI, February PPI Report.

In our view, what we learn from those data points will likely cement what the Fed is going to do at their March meeting. We've seen some things kind of flip around with a greater expectation for a 50 basis point rate hike at that meeting, following Powell's comments yesterday and today. Certainly, the ADP employment report for February that we got this morning really pushed it towards that 50 basis point rate hike as well.

But these are three big data points that are coming. So we don't want to get whipsawed. We want to get these data points in hand. And from there, we'll make our next move with the gold shares.

SARA SILVERSTEIN: And one of our members asked, what would it take for you to add to this position? I know you kind of answered that. But one thing I think would be helpful too is, how do we stay on top of where the target entry points are for these or how you're thinking about that?

CHRIS VERSACE: So we try to communicate them as best as we can with members. But I'd be lying, Sara, if I said I didn't have a little notebook next to me with copious notes on the positions, reminding me of where we get increasingly warmer, hotter, if you will, on the levels that we want to be buying these stocks. And it's certainly something that we can share with members as we talk about each of them.

SARA SILVERSTEIN: Yeah, I think, like you said, you've mentioned it. You mentioned it already before I even asked you the question. You talked about it recently for this position. But I do think it's something to stay on top of, especially in the 2's area where we're looking for buying opportunities. The more we can communicate that, the better. What about the Energy Select SPDR Fund? I don't know why I said it that way.

CHRIS VERSACE: Well, that's probably because that's the name. So you're talking about XLE shares. And if I was to speculate, you're probably going to ask me but, Chris, if we're believing in Ford and ChargePoint, how can we own this in the portfolio? And it's really kind of simple.

Just the way that we think about Ford's shift into EVs and we think about ChargePoint building out the EV charging network, is it going to happen overnight? No, it's certainly not it's a multi multi-year process. That means that we will continue to have demand for oil and natural gas.

So we have it in there really for that exposure. Typically, we're going to monitor this kind of carefully as a barometer of the overall economy. And in the case of oil in particular, we know that China is the largest importer of oil. And as that economy reopens, something we got confirmation of in the most recent PMI data for February, we think that that's going to be a positive catalyst.

But oil is also a commodity, right/ so for members who probably listen to one of our team members, Carly, talk about commodities because she's an ace at that, we have to not only consider demand, but also supply. So we have to be very careful watching what OPEC says about their production. Are they going to increase, decrease it? And how that plays into what they see in terms of overall global demand.

So from our perspective, we added to XLE shares last week. We have said below 85. And we did do that. Because we do see over the coming, call it 6, 12, 18 months, rising demand for oil, particularly as China's economy continues to come back, but also, too, as any bump in the road global recession comes and goes. So we continue to like that position for the long term. And we'll manage it for that.

SARA SILVERSTEIN: Great. And let's jump to the 3 ratings and the one that you use is the example earlier. Let's start with Apple. Are you considering Apple's exposure to China when it comes to the stock in the future in the portfolio. Oh, that's a member question, by the way.

CHRIS VERSACE: So there's two ways to think about that, right? One is the political risk that we're seeing. Because we're seeing some renewed saber rattling. We wrote about this to members earlier this week. But there's also the reopening that I alluded to for Apple. Because they do most of their-- I shouldn't say they. I shouldn't say that their manufacturing partners do most of their assembling in China.

And that supply side was a real issue for Apple in the back half of last year. So we tend to watch China on multiple fronts. Based on what we're seeing here, when we talk about companies, whether they're Micron, Qualcomm, or some others, the outlook, like I alluded to earlier for the smartphone market, which is Apple's largest end market, continues to be a little bit murky.

So for us, some of the catalysts we're watching to potentially have us reengage with Apple would be greater clarity on this AR/VR headset that they're talking about, continued growth in the services. Business we might even entertain revisiting the shares, depending on what the company says at its annual shareholder meeting, which is tomorrow, when it comes to the dividend.

SARA SILVERSTEIN: And I want to keep this up for a second and talk about generally when I think of 1, 2, 3's, I would think that would be correlated to the size of the weighting in the portfolio. And here, this is a relatively large position. And based on everything that we're talking about today, it's clear that the ratings have more to do with where we're headed, what we want the position size to be, and not necessarily what the current position size is. Is that right?

CHRIS VERSACE: I would say if you could say that again, we could record it and print it. You would be spot on, Sara.

SARA SILVERSTEIN: Because I was just looking at this. And I was like, but I want to know why it's a 3 if we have. So much in it. And so that makes a lot of sense. And we have a member question about Apple. For people that have a lot of exposure, should they consider downsizing or should if it's outsized?

CHRIS VERSACE: Yeah. I mean, that's kind of a tough question to answer, right? Because it really hinges on what is outsized? If anybody has 10%, 15%, 20% of their holdings in Apple, I would say that is quite a bit. And you have to prudently work your way out of that, perhaps using it to put funds into some of the 1's that we have or maybe some of the 2's that you're underweight relative to where we are. But again, at the right price point. That's what I would say.

SARA SILVERSTEIN: Great. Let's turn to Ford. Can we get an update on the EV push, now that they sold a majority of its position in Rivian?

CHRIS VERSACE: Yeah. And I thought that was great. I mean, the Rivian transaction was an interesting one. So they were kind of hedging their bets a little bit. But it's allowing them the proceeds to fund some of the work that they're doing. So Ford's a 3 rated stock. Why is that?

Well, they've had some stumbles of late. I think we all know that. We've talked about that rather well in our alerts to members. So the question I think that we should be talking about is, what are we waiting for to get off the bench? And again, we've been very clear with this in members. What we want to see is one, or two, maybe even three months of data that says, yes, EV adoption is accelerating.

We are seeing the benefits of that EV tax credit. However, as I pointed out in last Friday's rundown-- sorry, round up two members, we now know that Ford isn't really going to jump start all of its production on the EV front, be back at 100% until mid-March. So this is going to push that timing out a little bit. I think, not happy about it. But we have to deal with the data that we get. So for now, we're going to remain in that holding pattern with Ford until we get that confirming data.

SARA SILVERSTEIN: And to use this as an example for the ratings again, for a 3 rating where the price target is still a ways away, where I'm sure it's a probability thing if we get up to 1 or if it goes down, when you're looking for times to sell out parts of the position, are you looking forward to go up closer to the price target? Or are you also looking to cut losses if it starts going down? What would trigger selling?

CHRIS VERSACE: Either one of those is fair game, Sara. Again, typically, as long as we're getting confirming data, both for the industry and for the company in particular, we're willing to stick it out with the position. In the case of Ford, they have stumbled a little bit. And we want to see that the EV sales resume. So we're in that, again, I hate to say it, that holding pattern.

If the shares melted up to 17, would we probably take some of that 2.9% weight off? Yeah, we probably would. Would we exit the position in full? Not sure. And I say that because, again, we're still in this multi-year tailwind of overall EV growth. And we want to capture that with Ford.

So it would probably, if it rose up to a 17, and it was a 3, we would probably trim the position back. And then we would look for a catalyst to revisit that price target. If after a period of time it didn't look like we were going to get one, then we'd have to reconsider Ford's position in the portfolio.

SARA SILVERSTEIN: And this is a perfect segue into McCormick, your only 4 rating. It seems like that's kind of what happened with McCormick. It stayed at a 3 for a while. And then you got the confirming points that you needed in order to make that a 4 and want to exit the position. Can you talk us through that process?

CHRIS VERSACE: Yeah. So look, Ford is a quality company in my opinion. They're a wonderful dividend dynamo. They increase their dividends every year, like clockwork. But the reality is that the pressure that we have seen on their business is just weight on the stock. And the pressure I'm referring to is on the margins, particularly with all the inflation that we have seen. It's taken a toll on them.

So we sat back. And we said, look, we know where our cost basis is. And it is going to be a slug to get there. Could we wait it out? Could it be nine months, 12 months, 15 months, something like that? Yeah, possibly, possibly we could get there. So I kind of sat back. And I said, look, it's a great company.

But this is a great lesson, Sara. Do not fall in love with your stocks. You have to be cold-blooded. And you need to really understand what is moving them and whether or not it is time to throw in the towel. And that was the decision that we came to. Because we said there are better positioned companies in the portfolio.

There are other positions that we want to add to the portfolio that could help us recoup the losses you see there in the slide. Let us do that. So what did we do? We downgraded it to a 4, trimming the position back along the way, funding some of those buys that we've made in other existing positions. So we try to be as clear as we can that we're going to do this.

And hopefully, members understand what we're doing and the moves we're making with McCormick. And we even used it again today to fund that last position by of AMN Healthcare. And I think we've got something like 0.3%, 0.4% of the portfolio in McCormick shares. And I wouldn't be surprised, by the time we have our April members call, that it's no longer with us.

SARA SILVERSTEIN: And I appreciate you saying that. Because I didn't want to bring up how much you did like McCormack or if you just liked the puns around it. But I think really knowing when to cut bait or not to fall in love is important.

CHRIS VERSACE: No, no, I mean, look, it's like I said before. These are rules of thumb when it comes to investing, right? You want to have high conviction behind your names. And when it came to McCormack, as things unfolded, I had to take a very critical look. And look, my cabinets might be stocked with McCormick spices. And I can tell you, that is the case.

So while I personally like the product, I have to separate that from the stock. Again, be cold-blooded, not fall in love with it. That is one of the biggest, biggest mistakes I think that people make. The second would be not understanding why you're buying something. And that speaks to the catalysts and the data that we've talked about quite a bit on this member's call.

SARA SILVERSTEIN: And before we wrap up, you did some spring cleaning of the bullpen yesterday. You whittled down the list of names. Do you have any favorites in there that you think might make it to the portfolio? Any names that might make it into 1's soon?

CHRIS VERSACE: So I always hesitate to tip my hand. However, I will say that for members who have been reading the notes, you obviously know that we're keeping close watch on Applied Materials as a beneficiary of the Chips Act. You also know that we're taking a look at Kellogg because of the spin outs that they're doing there and how that would offer us probably some exposure to very undervalued assets.

And there's probably one or two others in there. But those, I would say, are probably the two that are top of mind, as they say.

SARA SILVERSTEIN: And you might not be willing to talk about this yet. But do you have any themes that you're working on, that you're working through to see if it's something that you want to add to your overall thesis for the portfolio?

CHRIS VERSACE: Yeah, I mean, the Chips Act is certainly one of them, right? We know that there's going to be a lot of money spent reshoring the US. That's why I alluded to Applied Materials a few minutes ago. But in terms of other themes that are out there, I'm always kind of kicking some around.

And they'll be unveiled when the time is right. It's that old-- who was it? Oh, what's his name? We will sell no wine before its time. I will unveil no theme before its time.

SARA SILVERSTEIN: Fair enough. Well, that's it for this month's call. As a reminder to review the portfolio ratings, go to the portfolios tab on the Home page. And please, continue sending all of your comments and questions to aapclub@thestreet.com. Thank you so much for watching. And Thank you, Chris, for joining us.