Action Alerts PLUS Members Call - April 2023

SARA SILVERSTEIN: Hello, members. And welcome to the monthly live call. As we step into the second quarter, we want to take a look at the state of the portfolio, explore Chris's management style and, of course, dig into the stocks you've been asking the most about. But first, let's get into what happened in the first quarter of 2023. Chris, what was the most consequential narrative of the quarter, and how is it guiding your approach to the portfolio?

CHRIS VERSACE: So I think the biggest thing that we saw unfold in the quarter was really the shift in expectations for the fed funds rate. The fed communicated several times that it's going to be doing more in terms of fighting inflation and keeping interest rates at elevated levels. But the market continued to think that no, it's going to have to back off from that. And we saw rate cuts emerge in the CME FedWatch tool. And that got the market kind of excited, if you will, I think a little ahead over its skis as we'll soon see in the next couple of weeks.

But as it related to the first quarter, it really led to an explosion in technology stocks, which are often one of the first sectors to kind of lead us out of a market downturn. So I think that was probably the biggest narrative-- and I think adding to that, too, where the bank failures that we saw emerge that kind of rattled investors as well as kind of helped foster that migration into technology, Sarah.

SARA SILVERSTEIN: And the threat of recession has been looming. You just mentioned the problems that we've seen at the banks. Jamie Dimon added fuel to the fire with his annual letter to shareholders. Is all the gloom and doom justified, or are things turning around?

CHRIS VERSACE: So I think we're starting to see things settle out. The last week or so we really haven't had the dire headlines that we had 2, 3, 4 weeks ago. It does take a little bit of a settling out process. Dimon's comments also kind of liken what we saw with the failure of two major banks to something that was nowhere near what it was back in 2008. And I think that's what people were kind of fretting a little bit of financial PTSD, if you will.

And as I said in my alerts to members that I think at an area of calm kind of comes over the market regarding the financials, I think we'll start to see that confidence in the banking sector come back. But remember though, too, that we are going to see tighter credit weave through the system. That's going to have an impact on the economy.

The big question is how much will that tighter credit equate to a would be tightening in the fed funds rate. Question is, honestly, TBD. That's why we'll be leaning pretty heavy into what the banks have to say in about two weeks when they start reporting their earnings to get a real sense of that.

SARA SILVERSTEIN: Another headwind that's become more and more concerning thanks to TikTok is the US relationship with China. The strength of the Chinese consumer has been a big part of your thesis behind your Coty position. Going forward, what are you watching, and is there anything that would change your view of Coty or any other name in the portfolio?

CHRIS VERSACE: So let's put some context around that. So for Coty, it's only 10%, 15% of its sales today is from Asia-Pacific. So that's the longer term opportunity, really fueled by its premium business as well as the company leading into what we've talked about previously better known as clean beauty products.

So if we see an issue with China it could have an impact on that. But remember that here this is more a play on the Chinese consumer and the reopening that goes kind of twofold. One is on the ground in China, but also in Europe. And now that China is no longer locked down, more affluent wealthy Chinese are allowed to travel. And I think that is really where we see the most near-term benefit to Coty.

SARA SILVERSTEIN: An AI ChatGBT this is a huge trend that we're seeing. From a purely business perspective what's your take on the rise of AI, and how is the portfolio exposed?

CHRIS VERSACE: So I have to say, I think it's pretty fascinating. This has the potential to be very disruptive, however we've seen a number of disruptive, excuse me, technologies in the past. And more often than not, the market tends to overreact in the near-term, pulling forward the potential for this disruptiveness.

If you look back just over the last two years, a lot of talk about AR/VR hasn't really taken off. We talk about the metaverse. Again a lot of folks are kind of backpedaling on the metaverse from Facebook doing so, to even Disney mothballing its Metaverse Group. So I suspect that this is likely to be the case with AI.

Having said that, how are we positioned for it inside the portfolio? I think three ways. The first is obviously going to be with Microsoft, which is folded AI into its Bing search engine. And then second would be the competitive response from Alphabet/Google. But third, as AI matures, comes to market and perhaps does do some of that disruption that people are hoping for, it's going to drive significant amounts of data that speaks right into our thesis on the shares of Marvell.

SARA SILVERSTEIN: And a member has asked, why don't we have more exposure to generative AI in the portfolio? And I'd like to add to that. If somebody is interested in getting more exposure to AI, what would you recommend?

CHRIS VERSACE: Well, I think if you want real pure play exposure to AI-- and I say that because when you look at Microsoft and its business mix, it is not a pure play AI company. You can say the same thing with Google as well. We all know that Google derives a disproportionate amount of its revenue and profits from search and advertising.

So again, not pure AI plays. Are they out there? There are some out there, but they tend to be rather small companies. I think we did a podcast with a company Presto Technologies a couple of weeks back, which is a pure play AI company, on the fast food industry, as they look to use AI through drive-throughs. Kind of niche application, I give you that. But I think that's really where we are today.

Having said that, are we likely to see more companies come to market focused on an AI? I think we will. And I think that will probably give us a greater pure play opportunity.

SARA SILVERSTEIN: And we saw a tech revival in the first quarter in yesterday's Daily Rundown. You talked a little bit about regretting not leaning into tech sooner, but you also said you're looking for opportunities to pick up shares at lower prices. How should we be thinking about adding to our tech positions?

CHRIS VERSACE: So there's really two levers to that. The first is if we see the end markets strengthening sooner than expected, that would kind of be a key to get us off the bench. But the second point would be if the share prices were to come in, have we identified price points where we would be looking to add to them both existing positions as well as new positions. And in terms of new positions, we've been pretty vocal in our comments over the last few months about companies like Applied Materials, Universal Display.

I think what concerned us is that a lot of these tech companies have gotten, again, a little bit ahead of themselves. With Applied Materials, there are some concerns over semiconductor capital equipment in China, despite the Chips Act. When we take a look at a company like Microsoft, the PC market continues to be weak and is poised to remain so throughout the balance of this year.

So there are times when these stocks can get a little, sorry to say, ahead of themselves to us. That means that the risk/reward opportunity isn't sufficient enough to kind of step in. We would rather pick our spots. And sometimes it means being patient, and unfortunately there are times when it means that one or two of them are simply going to run away from us. But there's a lot of stocks out there that we can continue to hunt through and look for the right candidates.

SARA SILVERSTEIN: And this may be the answer-- you may have just already answered this, but I want to bring it up because it is a member question who wanted to know why are most of our big tech positions still rated as 3s? Even though, of course, you upgraded Alphabet to a 2 yesterday afternoon. But is there anything you want to add here that you didn't address in the last answer?

CHRIS VERSACE: Well, I would just say when you look at them-- I just touched on Microsoft. You mentioned the upgrade for Google. So I think that kind of covers it. But when you look at Apple, the smartphone market is going to continue to be weak in the first half of the year. That has us really thinking more about the second half of the year for Apple. That's also when they tend to introduce the vast majority of their new products.

But the one thing that does have me a little concerned is their upcoming WWDC '23 event in June. They're going to take the wraps off supposedly of their AR/VR headset. And I think it can really go one of two ways.

It can either be a smash hit, or this could be kind of a repeat of the Apple Watch, which was kind of a sleeper in its first one to two years. It really wasn't until the third iteration of the watch came out that we really started to see far greater adoption of it. And my concern is that the run up in the stock price reflects a little of that hope that yes, Apple will finally introduce a new product. But the reception, the price point, those are things to be concerned about.

SARA SILVERSTEIN: OK. And as far as stock picking and timing in the first quarter, it seems like you did a great job. But the portfolio was a little bit weighed down by our cash and our short exposure. Can you talk about how you're thinking about the short ETFs? Are they still serving us? What's the thesis?

CHRIS VERSACE: So let me reverse that if I can, Sarah. Let me take the cash position first. So when we exited 2022, we actually had 24% to 25% worth of cash.

So what did we do during the first quarter? Well, we added some Bank of America. We added Coty. We added Marvell. But we also moved deeper into a number of other existing positions.

If you remember when we talked about exiting 2022, one of my concerns was that we had too much cash. So we've been carefully deploying the cash throughout the March quarter. And I think we'll have some opportunities to do more of that as we move throughout the second quarter.

In terms of the inverse ETFs, look, we're coming up on an earnings season that is going to be potentially very wild. We take a look at the PMI data that we've been getting and the close correlation to S&P 500 revenues that PMI data has been contracting. We've seen earnings come down. There is the risk that we do see companies kind of reset expectations even further.

We can talk about that because, well, interest rates are likely to be higher for longer. We know that. We still have some dollar headwinds in the second quarter. These are all going to weigh on those expectations. So for now, we're going to continue to hang on to those inverse ETFs.

SARA SILVERSTEIN: And one of the members asks, is there another reason for these to be in the portfolio? What is the signal that it would be time to get out of these positions? And I have the same question, and it makes me think that, is the fact that we all are anxious to get out of them a sign, that we absolutely need them right now?

CHRIS VERSACE: Yeah, it's a good question. So what we've said before is once we see a far clearer path ahead, we would start to unwind those SH positions.

And again, to be clear for members, I think a month or two ago, we said that we would wind the cash position down first and then revisit the inverse ETF position. So we are executing on that plan. But again, when we take a look at the disparity between what the CME FedWatch tool is looking for in terms of where the fed funds rate will be at the end of the year compared to what the fed has at 5.1%, I think we've got some adjustments to go through.

And remember, the fed funds rate doesn't necessarily have to move all the way in its lockstep with what the market expects. It just has to be closer to the fed funds rate that the fed is forecasting. A lot of f's there. A lot of tripped up tongues there. I apologize.

But it's really watching the movement between those two expectations that could lead to a market rethink. And that is the real reason why we have those inverse ETFs to protect us when that happens because when it happens, it tends to be a little painful.

And I would point out too, when we look at where the stock market has been from a multiple perspective when the fed funds rate has been high 4s, low 5s, it tends to peak out around 17 times. The market currently is just a little bit north of 18 times forward earnings. So it tells us that there's probably more downside in the market than potential upside. Another reason to keep those market hedging positions in play, at least in the near-term.

SARA SILVERSTEIN: OK, great. Then let's continue in sort of this macro scope. Let's talk about the golden energy exposure that we have. Gold has traditionally been a safe haven. It's been a little bit more complicated right now. What is the strategy there?

CHRIS VERSACE: Well, I mean when you take a look at gold, there's really two big reasons to own gold. One is an inflationary environment. The second is really for cover fire in a challenging macroeconomic environment. And I think if we look back since we've added the GLD position of the portfolio, we've seen a combination of that. And candidly, at least in the near-term, we're going to continue to see that.

So the plan here is to continue to hold GLD for the duration. Once we start to see either an end to rate hikes, we'll contemplate peeling it back slowly but surely. But again, if we see the economy really turn hard down into a deep recession, we're going to be happy that we have that gold position.

SARA SILVERSTEIN: And yesterday you said OPEC's surprise production cut could have a ripple effect through the economy. Could the good news for our energy ETF be bad news for the rest of the portfolio?

CHRIS VERSACE: I think that's right. I think it could be bad news too for the economy because again, to the extent that oil goes higher, the ripple through on overall energy costs will start to move higher again. Also, pain at the pump for the consumer. So for those reasons, even though we were happy to see the rate cut for our XLE shares, it does raise concerns about the other shoe, i.e., the economy and what that could mean for the fed's fight on inflation. And again, the higher oil prices go, the greater the ripple through, or said a different way, the more work it will take to get inflation back to the fed's 2% target. That's going to be a headwind for the economy.

SARA SILVERSTEIN: And let's take a look at a few of the winners and losers from last quarter. And we'll start with Axon, which is up over 30% year to date. What is the thinking that led to this name in the portfolio?

CHRIS VERSACE: So when we were looking at a variety of opportunities in the back half of 2022 into 2023 and 2024, we were, of course, focused in on stimulus spending out of Washington. And there were a number of fronts for that. We've talked I think several times on these monthly calls with members about the Biden infrastructure law and the beneficiaries of that.

But in this case, it was more on public safety spending and the continued adoption not only of body cameras, but also digital services supporting those, whether it's for police, fire, first responders, or increasingly the federal equivalent for those positions. So that was the big catalyst for us, and we've continued to see positive data regarding it. And I was very happy when we, as I like to say, got off the bench with Axon earlier this year around 185 using confirmation from a competitor that it's not only federal spending dollars but state and local dollars for these programs that are flowing and will continue to flow throughout the year. So in my opinion, that was a great pick up, and we continue to be very long-term bullish on Axon.

SARA SILVERSTEIN: Absolutely. And it's up 20% since you added to it in February. One of our members wants to if you're concerned that the Axon CEO recently sold shares.

CHRIS VERSACE: This is always something that we look at. And it's a great question. So thank you for that.

The context on this is that while he sold, excuse me, what would be considered a decent slug of shares, the reality is it was just a fraction of his overall position. So we have to keep that context in mind. Am I worried about it? Certainly not.

SARA SILVERSTEIN: And on the other side, AMN Health has struggled since the year began. Did we get the timing wrong here?

CHRIS VERSACE: One of the things I will say is to some extent, did we get the timing wrong? Yes. Were we leaning into the data and really focused on the data? 100%. And it really wasn't until this morning with the February JOLTS report that we saw a sizable move lower in what we call openings to hires, that ratio. It's been hovering around 2.34, 2.35 for the health care and social services sector. That's the one that we look at for AMN.

And when we sold the shares back in November, it was around that level. So without seeing it move demonstrably lower, that was the reason why we remained as bullish as we did on AMN. That's why we continue to slowly build back up the position in December, in January.

But look, Sarah, the data is the data and we have to hang our hat on it. So as the data moved with the February report out this morning, we downgraded AMN shares because the bottom line is that end market is simply not as tight as it once was. That could have ramifications on contract rates. So we are taking our wounds here and just kind of resetting our expectations for AMN.

SARA SILVERSTEIN: Great. And you also lowered the price target for AMN from 138 to 100. Can you take us through the thought process? How do you actually make that decision from one price to the other?

CHRIS VERSACE: Sure. So we did some back of the envelope math in terms of what lower contract rates might be, what lower volumes might be. And then as we flowed that through we had to, of course, readjust our valuation expectations. So it's really that triangulation, Sarah, that led to that price target cut. I'll also share, as I said in my note this morning, that our price target was around $138. The Wall Street consensus, the herd, if you will, was around $137.50. And I would be shocked if we didn't see other folks drop their price targets as well.

Remember, that's an average, that $137.50. That means there were some folks below it, some folks above it. And I think particularly with the folks that had higher price targets than we do, we're likely to see an even greater correction both in terms of their sentiment towards AMN shares as well as those price targets.

And again, as I pointed out in our note today, that's why we're going to be closely watching the $80 level. There's some technical support there. But if they break that, the next point for support is going to be around the $65, $66 level. So if we break $80, we will do the right thing by members and for the portfolio, most likely jettisoning those shares if that happens.

SARA SILVERSTEIN: And moving into some broader member questions about the portfolio. One member wants to know how diversified is the club currently, and how do you ensure diversification? How do you think about diversification?

CHRIS VERSACE: So whenever we take a look at a position that we're looking to add we always kind of size up what we have in terms of our overall exposure. There's 11 sectors in the S&P 500 and there's a number of different subsectors. So we kind of do a little bit of an overlay there. I will say, I think that we've gotten a little more diversified throughout the first quarter.

Again, did we have any exposure to financial services? No. But we brought in Bank of America. Were we underweight technology? Yes. We called up Marvell shares. And we also kind of added to our position over with Coty as well further diversifying the portfolio.

So it's always a work in progress. And I would liken this to the conversation we had I think one or two calls ago, Sarah, around the notion of beta that there are a number of factors that go into deciding what to add, when we add it. And this question of diversification is another one.

It also means, though, too that when we're examining an existing position versus one that's on the outside of potential contender, we're looking for hmm, what's the best opportunity? Is it with one in the portfolio, outside the portfolio? How do we not disrupt that diversification if we are where we should be?

SARA SILVERSTEIN: And are there any other sectors right now that you're watching that you may be underweight given how things may change that could happen in April or in this quarter?

CHRIS VERSACE: So the short answer is-- and I know you're looking for specific this one. But the reality is, it's kind of a rolling analysis of what we do. So would I'd like to have something in semiconductor capital equipment given the Chips Act? Yes, I would. But it's got to be at the right time. And I think we've got to see with this geopolitical issue is between China and the semiconductor capital equipment.

That's one example. There are a couple of others. But I also don't want to front run myself, if that's OK with you.

SARA SILVERSTEIN: OK, that's fair. I'll allow it this time. And as most of our members, we rely heavily on our rating system where we categorize the 30 active stocks in the portfolio. How often do you revisit each stocks individual rating?

CHRIS VERSACE: So every Friday, we publish the big weekly roundup. And every Thursday, Friday I'm writing each of those positions. So when I do that, I'm kind of asking, OK, what's upcoming catalysts that could lead us to rethink this rating? Where would we need to see the stock price go either to pull back or to pull forward to contemplate, depending on the stock, an upgrade or a downgrade?

So it's very much an iterative process. To say it's once a week, I would say that's kind of a minimum. As we get news throughout the week for each position we're, of course, formulating that as well.

SARA SILVERSTEIN: And for members following your latest moves, do you always strictly follow the system, or do you use it more opportunistically, or have you recently that you want to address?

CHRIS VERSACE: So from time to time we will talk a little bit more about companies that we're warming to. We did that with Marvell. I think we telegraph that probably about as best as we could, including the price points where we would look to enter the stock.

However, there are times where we want to be opportunistic. I think Bank of America was a great example of that. The stock price cratered from 36, 37, down to 27, 28. That was an extreme situation and we wanted to be able to act. We were nimble, and we did.

Now, is that my preferred way of communicating where we're taking the portfolio? No, it's not. I would much rather kind of prepare members, work up, build a thesis, lay out our upside case or downside risk case, and set our preferred levels where we want to be buying the shares, and then execute on that plan. But we have to remain nimble, Sarah.

SARA SILVERSTEIN: And as we get into the stock buy stock review, you've added to a few positions at opportune times over the last quarter. And I know I don't usually let you talk about good things that you do, but I'd love for you to walk us through the catalyst that led you to add to Pepsi when you did, Lockheed Martin, and American Waterworks because we did slightly better than just holding those based on where you added to them. So what triggered you to add at the times you did?

CHRIS VERSACE: So in each of those cases, we saw the shares pull back where, as I like to say that the risk/reward was compelling, it made sense to add to those positions. They also at those levels had very strong technical support. So with American Waterworks, technology stocks were growing. So some of the more defensive names were falling a little bit out of favor, but they had that support there.

So what did we do? We picked up the shares for a couple of different reasons. One, because we're going into the seasonally stronger part of the year for their business. I think water consumption.

Two, the company has continued to make additional nip and tuck acquisitions, which is its bread and butter strategy. It goes in. It beefs up the infrastructure, and then it petitions for rate hikes. They usually get them. That really helps foster their target business model, which is to increase EPS 7% to 9% each year and grow the dividend 7% to 9% each year.

And that last part on the dividend is key because we just received a few months ago the company's fourth dividend at its most recent level. That means that we're poised for another dividend increase. They tend to happen around-- sorry, they tend to announce the next dividend around late April. So we're in a really good position for that. So that really explains American Waterworks.

In terms of Lockheed Martin, if you remember there was some concern over the defense spending bill. That seems to have been ironed out. Let's remember too that we have the ongoing war with Russia and continuing to fit Ukraine as well as updating our own defense capabilities.

Also too, we didn't talk much about this, but with Finland being named into the NATO, it means that it will commit to spending 2% of its GDP on defense. That's another boon for the sector. And just for some context, between 1960 and 2021, Finland spent on average about 1.5%, 1.6% of its GDP on defense spending. So it has some catch up spending there.

And then, of course, it seems like almost every week Lockheed is announcing some new program wins, adding to that multiyear backlog. And that's one of the areas that we really, really like about that business, especially if the economy does continue to slow. That gives us some great visibility, some great comfort, and defense stocks likely be a safer haven in that environment.

And then the last one I think was Pepsi. Again, here too the shares pulled back. But when we look at the data, whether it's the retail sales report, we've seen a pickup in grocery spending or, as I really called out in the most recent personal income and spending, breaking down the spending again really favored all the categories that Pepsi has to offer. Beverages, snacks, and other food consumed off premise. Meaning, outside the grocery store.

So we took advantage of that. And again, the company has not only continued to deliver, but those price increases that they implemented last year continue to look like they're going to be margin levers in 2023 and potentially beyond as input prices continue to improve.

SARA SILVERSTEIN: And you used the recent weakness in the banking sector to initiate a position in Bank of America. What about B of A made it an ad for the portfolio?

CHRIS VERSACE: So two things. One was the valuation framework. And we published a very detailed framework in our note when we added it. So that was arguably 50%, 60% of our decision.

But the balance was we wanted a bulge bracket bank because we saw deposits flowing out of smaller banks or concerns over the banking system? The bigger banks really being the beneficiary of that. That has proven out with a lot of the data that's been published since then.

But we also wanted to pick up a bank that was really going to prosper on that pickup. Other banks out there are more weighed into say investment banking, for example, more reliant on M&A and IPOs, which again, that market has been relatively quiet this year. So for all of those reasons, we opted to go with Bank of America.

SARA SILVERSTEIN: And just looking at the sector at large because everybody is talking about the financial sector, how are you feeling about banks after a quieter few weeks and with earnings expected next week?

CHRIS VERSACE: So I think that things are going to be pretty good. I think, again, not all the banks are going to be created equal. I think we're going to see the bank earnings kind of prove out the thesis that I just laid out, that the larger banks will be more asset gatherers. They'll be taking them from smaller banks.

But to me, the big thing that I want to hear in bank earnings is going to be again, I think we touched on it a few minutes ago, what the prospects are for tighter credit, what they're seeing for loan demand, what they're seeing for the consumer. And I think that will kind of chart the path ahead for banks.

But remember, with Bank of America, $27, $28 where it is today, it is still way off from its $35, $36 level that it was at the start of the year. And I think it can get back. Might be a slow road. We'll have to get more comfort and confidence in the financial sector, but I think given time we will get there.

SARA SILVERSTEIN: And given B of A's rating, which you recently upgraded to a 1, should members consider any sell off as an opportunity to buy?

CHRIS VERSACE: As I look at the Quotron, Sarah, it's below 28. I would say that we will be looking to do with the portfolio picking up where we can improve our cost basis. And if that's where the shares are at this moment, then yes, absolutely members should be looking to do that. And again, props perhaps buying even more aggressively closer to that $26, $27 level.

SARA SILVERSTEIN: And I can't believe we waited this long to even talk about ChargePoint. You--

CHRIS VERSACE: Oh, ChargePoint.

SARA SILVERSTEIN: --made it very clear with members that you're pretty frustrated with this name too, but you remain a believer in the long-term picture for EV stocks. But in the intermedium, is ChargePoint a growth stock that more risk averse members should avoid or should scale down? How should they think about it?

CHRIS VERSACE: Well, let me suggest a different word, Sarah, because I really don't like that word believer, as we really try to lean in on the data from a variety of different sources to support the thesis that we lay out. And belief, it's a little hopey-a-mish, and I'm not a fan of that.

So look, are we frustrated by the position? Of course, we are. I've shared that several times, I think, in various ways of communicating to members. However, as I also have said, we understand that this is a multi-year thesis. We know that we're still somewhat in the early stages of EV adoption, of the EV charging station buildout.

When we look at the data that comes in for EV sales month over month from a variety of players, not just Tesla, it seems to be pointing in the right direction. We have yet to really see the benefit of the EV tax credit. And I think that will help spur EV adoption as well.

I would point out that one of the more frustrating things with ChargePoint shares is their high correlation to Tesla shares. And it's kind of a conundrum to me because odds are Tesla will lose market share as all these other EV players continue to do better.

And remember, Tesla is one EV player. In fact, they make a lot of noise about China, but they are far from the number one player in EVs in China. That's actually BYD.

But the point being is that as the overall EV market grows, this correlation with Tesla should fall by the wayside. And it makes perfect sense because there will be more EVs on the road, not just Tesla EVs, and the more EVs we have, the greater the demand for EV charging stations. So I'm looking forward to that. The only word I could use is kind of overhang on ChargePoint shares from being removed.

SARA SILVERSTEIN: And when you look at ChargePoint, which is also rated a 1, does that mean that you feel the same way about it, that any pullbacks are an opportunity to add to it, or are there certain groups of stocks that you treat differently as 1s?

CHRIS VERSACE: No. I mean, if they're 1s we would be buying them particularly for newer members that are just joining the fold. They always want to know, and understandably so. Hey, I'm just getting started. Where should I be buying?

And that's what the 1s are for. Does a 1 mean that we'll be buying it all day, every day? That's very hard to do, almost impractical. So to some extent, even though we've got ChargePoint shares rated to 1, we have to take a look at the position size and really look at buying smartly.

But when we look at also for 1 rated stocks, we have to ask ourselves, is the reward skewed significantly higher than the downside risk? And in the case of ChargePoint and the other ones, that is the case.

SARA SILVERSTEIN: And this is something you talk about a lot, weighing the risk versus the reward. One of our members asks, how should members weigh if a stock is profitable, or is more of a long term bet? It seems the further something gets from its target, it's a better bet sometimes. So can you speak a little bit to your risk/reward mentality?

CHRIS VERSACE: Sure. So let me just kind of step back a second. And when we talk about risk and reward, we're trying to identify with each stock position on what we call a net basis. And I gave this example on a recent AAP podcast. And I'll repeat it because I think it's a great example.

If, say, stock x, y, z, is at $10 and we see upside to $14, you would say, wow, that's great, Sarah. That's 40% upside. But if we look at a variety of metrics from dividend yields, historical PEs, peer valuation and where the stocks have traded in the past, and it says wow, there could be downside to 8. Well, 10 to 8, that's about 25% downside. So 40% up, 25% down, that's about 15% net upside.

And candidly, to really get behind the stock, we'd like to see at least 20%. So that's kind of the way we think about risk/reward. And in that case, if that stock went from 10 to 9, the thesis was the same, all of a sudden 9 to 14, that's a lot greater upside than potential downside from 9 to 8.

So just to set the table for that, that's how we think about it. And I think getting to the question that you asked, there are times when stocks trade off. There are some concerns in the market driven concerns, if you will, that kind of lengthen the upside.

Does that mean we should be getting more aggressive in them provided the thesis is the same? We will. That could also lead us to upgrade a position. Case in point, we did both recently with Deere.

SARA SILVERSTEIN: And can you go through the risk/reward thesis for Clear Secure?

CHRIS VERSACE: Sure. So Clear Secure when we added it, we said we would be more aggressive buyers in the low to mid 20s. We saw upside originally to $35. And we had since upgraded that price target to around $37.

So from that vantage point, there is very good risk to reward in the shares of ChargePoint. That's why they're a 1 rated stock. We've got about a little over 3% in the portfolio.

So from here to get close to that gap of 3.5%, 3.6%, 3.7%, we probably have 2, maybe 3 more smaller bites. So we need to be a little prudent. But that same risk/reward that I just described for newer members, very, very, very compelling.

We continue to see favorable TSA data. We continue to see Clear Secure expanding its footprint. They're in the top 50 airports in the US. Their target is to be a top 75 by the end of the year.

As we get those catalysts, I think we'll see those shares move higher. But for now, that risk/reward for new members, very compelling.

SARA SILVERSTEIN: And let's check in on Elevance. You upgraded it to a 1 and did some buying yesterday. How do you feel about it after yesterday's final notice on Medicare Advantage plans?

CHRIS VERSACE: So that was the one thing that we were waiting for. And as we noted with members, there tends to be a preliminary notice and then a final notice. The shares traded off, let's say technically speaking here, big time because of that final notice. It was a much harsher ruling than was expected.

However, when we traced back over the last few years the differences between preliminary notice, final notice, we tend to notice a softening. We got exactly that. We had a much better sense of what the impact would be.

With that overhang removed, that's how we stepped into Elevance shares and upgraded the stock as well. I also think that as concerns permeate more about the economy, I think that Elevance shares health care and the market that they serve, again, very much a safer haven. Who's guaranteeing the bulk of the payments? Medicare. I think we'll see a lot more investors start to wade back into those shares.

SARA SILVERSTEIN: And Elevance has received a series of by recommendations from the street in recent weeks. It's still trailing its $550 price target. A member wants to know, what kind of catalyst is next for Elevance?

CHRIS VERSACE: Oh, good question. So that was the biggest one that we were looking for, which is why we turned positive on the stock. I think what we're going to have to see after that is twofold.

One, that they've just recently sold a vision. So see where they put that capital to work. Could it be another acquisition to expand their Medicare footprint? That would certainly be a positive.

And that's probably the big one that we would be looking to see, just further execution on their stated strategy of leaning into Medicare. Candidly, Sarah, not too different from what we just talked about with American Waterworks, where they too are acting as a de facto consolidator in a very fragmented market.

SARA SILVERSTEIN: And as you know, I always feel like what's not in the portfolio is just as important as what is in the portfolio. Let's talk a little bit about our cash position. A lot of people have been asking.

The portfolio currently has about 14% in cash. As you mentioned, that's quite down. You've put a lot of cash to work. Do you have any recommendations for making the best use of cash on the sidelines?

CHRIS VERSACE: So there's really two schools of thought on this. The first is, could we park it in a equivalent for the market, potentially getting a little bit of a return on that? We could do that. There are some ETFs would allow us to do that. There are ETFs for treasuries as well.

My only concern is that as we were whittling the cash down, if we did that, it could get a little confusing to members why all of a sudden we're adding to this ETF. Now we're dialing it back because we want to put more cash to work because we have an opportune moment.

So for us in the portfolio, I think with where we are, we wouldn't do something like that. But if there are members out there that are sitting on excess of cash, that is a decent strategy. And I would say, look at something more akin to treasuries than I would for, say, an S&P equivalent.

SARA SILVERSTEIN: And as we put money to work, let's talk about the bullpen. There are currently 11 names that you're pondering on the sidelines. Any top contenders that you're considering upgrading?

CHRIS VERSACE: Yes. Oh, I'm sorry. Would you like to know what they are?

SARA SILVERSTEIN: You're not going to tell us? Yes, I would like to know what they are. And I would like to know exactly what would make you put them in the portfolio, so we can front run you.

CHRIS VERSACE: All right. Well, let's talk about that. So one I talked about already on this call is Applied Materials, exposure to semiconductor capital equipment and the Chips Act. So I think that's something that-- previously before any, excuse me, geopolitical developments, we said we would be looking at that around the middle of the year because that's when the flow of funds for the Chips Act would really start to go from a trickle to something more pronounced. So we continue to watch Applied shares.

One that we've also talked about quite a bit is Universal Display. That's a play on organic light emitting diode displays, which are continuing to gain share not only in the smartphone market, but other applications as well. The catalysts that we're looking for here is seeing the bottoming out in the smartphone market. That's the largest application today for organic light emitting diode displays.

Remember what Micron said. It now sees the smartphone market down year over year. That likely means the first half of the year down more so. And the reality is that as we see more smartphones adopting OLED displays, it means that that part of the business for Universal Display is going to track the overall market.

So we want to get past that. There are a lot of reasons to be bullish on Universal Display shares longer term, especially as organic light emitting diodes, excuse me, replicates-- sorry to get complicated on this-- light emitting diodes and morphs into automotive lighting and then eventually general illumination.

I think the vast majority of people are familiar with the fact that most light bulbs today are powered by light emitting diodes. Over the next several years, they will be replaced by organic light emitting diodes. So that's the longer term opportunity.

And then the third one that I would mention is Kellogg. We've written quite extensively on this. It's the opportunity to go from owning shares of one company now into two. Typically when that happens, we see unlocking of value for both businesses. For us, it's just understanding a little bit more of the nature of the transaction.

Kellogg has communicated incrementally more details. We still don't know what the exact spin ratios will be. And I think as we get that and move closer towards the middle of the year, I wouldn't be surprised if we pick up some Special K portfolio.

SARA SILVERSTEIN: Thank you so much, Chris. This was such a pleasure. And that'll do it for this month.

We didn't touch on every name in the portfolio. So make sure to keep an eye on the alerts as well as the weekly roundup, which will break down everything you need to know about every stock in the portfolio every Friday. As always, please keep sending your questions and your feedback to aapclub@thestreet.com. And thank you for joining us.