How to Use Our Ratings System

SARA SILVERSTEIN: 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 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. Could be a positive catalyst. 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 3s, that really speaks to, say, a company like Apple, where the near-term outlook for the smartphone market continues to be one 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 2s and the 3s, 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 AMN. 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 fund that. So that's the type of thing, how we use the rating system and how we would suggest that members 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 4? 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 3s that we have right now, whether it's Google, Amazon, for example. I'm 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 onto 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, 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 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, right, 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 some of the thinking there. But 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.