Daily Rundown: May 10

J. D. DURKIN: Good morning, subscribers. Chris Versace and I are back here once again to help answer some of your biggest questions of the week. Chris, thank you, as always, for joining us, my friend. Let's kick things off with a question that's been on the minds a lot of people, both on Wall Street and Main Street alike. And you've talked about it in several alerts. But give us your take on the ongoing First Republic saga and any general thoughts you may have on the state of the banking sector overall.

CHRIS VERSACE: So it's rare that we only get one or two hiccups when we see something like this unfold. When we think about the web, if you will, of loans and other financial products that are out there, there's going to be, as they say, more than one or two shoes that drop. And we're starting to see that unfold. Again, our tact on that was to move into a bulge bracket, high quality bank, Bank of America, obviously, one we want to continue to pick shares up as long as they're below our cost basis.

But I think, J. D., that as we start to, again, continue to put further distance between this, the number of banks that are likely to fall is probably going to come down. The key here, though, is for investors, for consumers, in particular, and companies to continue to have faith in the banking system. I think that's why whenever we see Treasury Head, Janet Yellen or Fed Chair Powell come out, almost the first thing that they've been saying of late is the US financial system remains strong.

J. D. DURKIN: To the point of Fed heads, as I know you're fond of calling them, is the potential of the central bank achieving its goal, its inflation target goal any bit of a reason to consider revisiting AAP's current portfolio valuations?

CHRIS VERSACE: Now, that's actually a pretty interesting question because we know just based on the recent data of the last few weeks that we remain a ways away from the Fed's 2% target. That likely means we're going to have the Fed funds rate higher for longer as we've been riding with members, probably at least that 5.1% target that they had for the end of the year, which is as of last week's Fed policy meeting, exactly where we are.

So the question becomes, if the market multiple around that 5.1% historically has been between 15 and 17 times, as the Fed approaches that 2% target, and they start to let up on the Fed funds rate, could we start to see some multiple expansion? I think that's likely. But I also think that's more of a 2024 event than one for 2023.

J. D. DURKIN: Let's talk about AAP's long-term focus for a moment, Chris. Can you help explain how your recent exit of AMN fits into a bit of a broader strategy?

CHRIS VERSACE: So whenever we look at drivers for companies, we always like these long-term tailwinds. But we have to recognize that what's going on in the industry and what's unfolding at a particular company can sometimes be two very different things. Is the nursing shortage ongoing? Yes, it is. It's still going to be with us for at least a few more years.

But as I detailed in the note regarding AMN, they seem to be hitting-- or sorry, excuse me, getting hit a little bit harder. But the thing that really bothered me with AMN in particular is how they're using their credit lines to do their share buybacks. Now, I really don't like that low quality approach.

And what we decided to do is the stock popped last week above the resistance level of $90 that we've been talking about with members. We took our profits. And did the shares break that technical resistance on Friday? No, they did not.

That leads me to think that other folks are start thinking about some of the issues that I just talked about, again, how they're funding their buyback program, but also, the greater year-over-year decline in expectations for the current quarter. So plenty of other areas, plenty of other fish in the sea, so to speak. We'll move on and look for other opportunities to play this nursing shortage strategy.

J. D. DURKIN: Chris, I know that you picked up some shares of Lockheed Martin at the end of last week. Certainly, a name that's had a challenging few weeks. For people looking at a move like that from the outside, should they view this as a buy the dip opportunity?

CHRIS VERSACE: Absolutely, they should. When we made that trade on Friday, we talked about some of the more recent program wins, which were very, very outsized wins for the company adding to that multiyear backlog. We like that because of the visibility that it brings. It also underscores the notion that the company should be back on revenue growth in the second half of the year and in 2024. So that's a great name to circle back, pick up the shares here, buy the dip, as you say.

J. D. DURKIN: We've talked about Estée Lauder a little bit recently, you and I. That stock tanked last week after the company lowered its earnings expectations for this calendar year. They cited weakness specifically in Asian markets. That runs a bit contrary, however, to a recent report from LVMH. But is there any read through to COTY here, another name that I know you very closely follow.

CHRIS VERSACE: Yeah. So we like COTY as a play on affordable luxury and luxury. We like what the management team is doing in terms of expanding into skin care, leveraging into their premium products, as well as clean products, one of the fastest growing categories out there.

But in terms of Estée Lauder, this is really a lesson in understanding what you own because when we look at the geographic mix from Estée Lauder, very different. I believe somewhere between 35% and 45% of Estée Lauder's revenue is out of Asia. Whereas at COTY, it's high single digits, low double digits depending on the quarter, so very different. And then, when we look at what Estée Lauder had to say, LVMH had to say, even Ulta had to say about their domestic business, simply on fire. I think that sets-- sets us up, excuse me, for some great results from COTY.

J. D. DURKIN: A question on thematics here, if we can before we wrap up today's conversation. How are changing supply chains specifically for names like Apple or China, for example, playing into your ongoing thinking, Chris, as you chart the club's next direction?

CHRIS VERSACE: So that to me gets to the topic of reshoring. And of course, one of the plays we have with that is Applied Materials, which is poised to benefit from the CHIPS Act, which again, is looking to reshore US chip capacity.

But when we dig into the non-residential construction reports with really an eye towards United Rentals, Vulcan Materials, to a lesser extent, Deere, we are seeing that there's a lot of manufacturing coming back as well, not just for battery plants as it relates to EVs, but other types of manufacturing. This has me taking a look at other productivity automation plays that could also benefit from this reshoring activity.

J. D. DURKIN: Chris Versace, thank you as always.

CHRIS VERSACE: Thank, you J. D.

J. D. DURKIN: All right, folks. That is going to do it for today. Members, as always, please keep sending us all of your questions to aapclub@thestreet.com. Have yourselves a great day, and we'll see you next time.