Action Alerts PLUS Members Call - June 2023

SARA SILVERSTEIN: Hello, and welcome to the June Members Call. Back by popular demand, Chris and I are dedicating this entire call to reviewing each and every stock in the portfolio. And it's a great time for this, because we're almost halfway through the year.

Before we get into that, there's one thing we want to talk about. There's a Fed decision today. Yesterday's CPI came in, essentially, as it was expected. This morning's headline CPI cooled slightly more than expected for the month of May. Any change, Chris, to your expectation for a Fed pause?

CHRIS VERSACE: No, I don't think so, Sara. If we take a look at the data that you just mentioned, we are finally starting to see some additional progress on the Fed's fight against inflation with the May employment report. We also saw wage pressures start to tick lower.

So I do think the Fed is likely to sit back and say, look, we've raised rates 10 consecutive times. Let's let that go to work, do some of the heavy lifting for us. They can always come around and do another rate hike if they need to, citing being data-dependent. So I think we're going to get that skip today, yeah.

SARA SILVERSTEIN: And what do you want to hear from Paul today?

CHRIS VERSACE: So, given where we are with the market, we've had a nice run year-to-date but, especially, really since at the end of April. And, I think, what we're hearing and seeing is that the economy is holding up better than expected.

One of the things we're starting to take a hard look at, once again, is earnings expectations, not only for the second half of the year but the prospects for 2024.

And I think the backdrop for that is, what does Powell have to say, along with the Fed's economic forecast update that we'll get today, what is it seeing in terms of GDP for 2023? Is it being revised higher? What are we seeing for 2024?

And at the same time, what's the outlook for the Fed funds rate, not so much this year, but in 2024? Because that will tell us when are we likely to see rate cuts happening and to what degree.

SARA SILVERSTEIN: And we have a special surprise for our members. This Friday, we're going to be streaming an event from the New York Stock Exchange featuring Chris, Doug Kass, Helene Meisler, and Fundstrat's Tom Lee. They will be covering macro and market outlook for the rest of the year. So tune in for that. And that allows us, also, to get right into the stock by stock of the portfolio review.

So I want to start with what we always start with, the most asked-about name, ChargePoint. You've maintained your conviction with ChargePoint, even as GM and Ford team up with Tesla's charging stations.

And you've hit the news in a series of alerts and videos. So I want to focus more on your bull case. Convince me of why you are so confident in ChargePoint, and why you think we'll get there?

CHRIS VERSACE: Sure, Sara. So it's no secret that the automotive industry is shifting towards EVs. We've seen a number of investments by our own Ford Motor, GM, and others, even high-end companies, like Ferrari, are leaning into EVs. We've also got that incentive, particularly here in the US as part of the Infrastructure Bill and the EV tax rebate.

But the issue, Sara, simply is that as that industry transitions, it needs to, at the same time, charge those cars, whether they're at home, whether they're at work, whether they're out and about in day-to-day life. So we need to build that network of EV charging stations.

So I talked about this, I think, earlier this week, late last week, saying that when we look at the Infrastructure Bill, folks aren't saying, hmm, is this just good for Caterpillar? Is it is it just good for Vulcan Materials? No, there's a rising tide in a number of areas that will benefit as that Infrastructure Bill gets built out.

Same thing with the EV charging network. I believe McKinsey is saying we need something like half a million EV charging stations. So there's a number that need to be built. And I think that ChargePoint will continue to benefit from that, especially now that it has said, hey, we are going to lean into the Tesla connector standard, removing any concern that it's going to be left behind.

SARA SILVERSTEIN: And can you speak to why it's still ranked as a one?

CHRIS VERSACE: Sure. Sure, so when we look at the pressure that we've seen of late, given our upside to our $15 price target, it's pretty compelling, understanding that this is going to take not weeks or months, but probably several quarters to play out as that infrastructure spending or EV charging stations ramps.

This is exactly what we saw several months ago with Vulcan Materials, with United Rentals. We knew the Infrastructure Bill was coming. We were waiting for the ramp in spending. And now we're seeing it big time in the last few months of non-residential construction spending data.

So I can see that coming. Remember, too, we did a podcast with Orion Energy. And they confirmed the ramp is coming. Dollars are starting to make their way for EV charging stations. So all of that just keeps us very bullish on that medium- to longer-term opportunity and with that $15 price point, upside downside, really compelling from my perspective.

SARA SILVERSTEIN: And let's move on to AXON. Is AXON primarily a US play? And how important of a catalyst is President Biden's investment in law enforcement and crime prevention?

CHRIS VERSACE: So, today, AXON's business is primarily US-driven. They are making some inroads in Europe. And I believe that they announced a very small win recently in Malaysia. Remember, the bigger thing here is moving away from firearms towards other forms of safety, including tasers, but also body cameras, digital services, and the like.

In terms of your question about it really being driven by Federal spending, look, I can't sugarcoat it, that is a driver, no question. But as important is state and local spending.

Remember, when we upgraded AXON shares earlier this year, it was because of the strength in those two markets. So I think when you take a look at the threefold aspect of Federal, state, and local spending, that's going to be a very powerful tailwind as we move through this year and into next year for AXON.

SARA SILVERSTEIN: And I know we already talked about the Fed. But is there anything specifically you're listening for when it comes to your position in Bank of America today?

CHRIS VERSACE: So if we think about Bank of America, there's a couple of different businesses in there. The first is going to be what's it doing on the loan front? So the stronger the economy is, the better the prospects for that.

But we also want to understand what the Fed's path for interest rates is going to be, as that will impact net interest margin. I will say that, yesterday, Wells Fargo said that it actually sees better than expected net interest margin performance. So I think that's another positive for our Bank of America shares.

And just, one other thing that I'm keeping tabs on as it relates to Bank of America, granted, again, it's a smaller piece of their business, is the IPO market. And Goldman Sachs has been out saying very, very recently that they start to see some improvement in that market in starting in the second half of the year.

So that could be an added lift for our Bank of America shares. But it might also give us an opportunity to look at some other companies, perhaps revisit Morgan Stanley, that has a greater emphasis on that business. So that's what we'll be looking for, for Bank of America. But we are keeping our eyes open for other possibilities in the financial sector.

SARA SILVERSTEIN: And we've been paying a lot of attention to the consumer. How important is the next round of retail sales for Costco? Or what are you looking for there?

CHRIS VERSACE: So I always like to size up the retail sales report against what Costco has to say, because it's one of the few companies that actually gives us its own monthly data.

As members know, once a month, Costco says, hey, this is our top-line sales. And then it breaks down its various categories from a geographic basis, both on reported numbers and then adjusted which, of course, excludes foreign exchange and gas.

So it's really those core US numbers that we want to take a look at. Costco's numbers-- excuse me-- we're up 1.7% in May.

And to the extent that is stronger than the headline numbers that we get for the retail sales report for May, as well as the key line items that Costco competes in, that's going to tell us that consumers are moving their spending towards Costco, or as I like to say, Costco continues to pick up consumer wallet share. That's the key point for Costco.

SARA SILVERSTEIN: And much of the club's thesis on COTY is based on the makeup business expanding presence in China. As corporate America widely reconsiders its relationship with China, are you concerned or is it noise at this stage?

CHRIS VERSACE: So a couple of things there. China is a growth factor for COTY. Its business in all of Asia is somewhere between, depending on the quarter, 10% to 15%. So we added COTY as an eventual reopening play as it targets that market, particularly in skin care. So, of course, we're paying attention to that.

But we also have to remember, though, that COTY is expanding its presence there, like I said. But the traveling Chinese consumer who's going to Europe into other markets is also picking up COTY products. So I would say that while we're watching the relationship between the US and China, which, ultimately, I think will come around, I'm not as concerned about it.

Again, if this was Estee Lauder or another company that had greater exposure to China, I would be concerned. But, again, it's small and growing. I'm not going to sweat it, so to speak, Sara.

SARA SILVERSTEIN: And it's a big week for healthcare. What are you watching in terms of Elevance?

CHRIS VERSACE: Well, Elevance came out earlier this week when we shared this note with members, reiterating their 2023 guidance that calls for about just over 12% EPS growth. So that's a positive. And we know they'll be making the rounds this week and next week. We have this seasonal uptick in investor conferences. So that's what they had to say.

However, as we're sitting here, the shares are trading off some 6% or 7%. That's really tied to what UnitedHealth had to say in that, apparently, some of it the older generation, if you will, that's been putting off certain procedures, like hips and knees, they're actually starting to come back in.

And it's interesting because, on the one hand, this says that they must be a little more comfortable with the economy willing to finally spend on these initiatives. But I also think it's more of a timing issue than anything else. And, to be candid, we're seeing the whole sector fall off, whether it's CVS, UnitedHealth, as I said, and others.

So from my perspective, with United-- sorry, with Elevance reiterating its guidance and the shares below where we last picked them up at 4.43, this is a good chance for members that missed our pick-up to do it now.

SARA SILVERSTEIN: And what about members that did get in during your pick-up, now that, I mean, Elevance is rated a one, does that mean that we should add to it on today's dip?

CHRIS VERSACE: Yeah, I think that's 100% correct. If members are underweight where we are in terms of a position size, you should absolutely be truing up to where we are using this 4.30, 4.35 level to do so. The risk-reward there is, again, extremely compelling.

And this is a position that we're going to take a look at after today and say, boy, do we have some room to add some more Elevance? And I think we do.

SARA SILVERSTEIN: And you often talk about following the data when making portfolio decisions. What does the data look like when it comes to Deere?

CHRIS VERSACE: Oh, boy, that is a great question, especially timely too. Because, yesterday, we had an alert. We were talking about the latest monthly tractor and combine sales.

When we get this data, we have to parse it, of course, understanding the seasonal factors, but also the puts and takes between the data, tractors in particular, small horsepower, large horsepower tractors, which have been up very, very strong year-to-date with another solid month in May. As I wrote in the alert, that's the bread and butter business for Deere. So they should be recognizing a lot of operating leverage.

But, in addition, we also pay attention, as members know, to crop prices, particularly corn, wheat, and soybeans. as those prices go, so, too, do farmer income. Farmer income is the driving force behind spending on ag equipment.

And then, the third component that we touch on as it relates to ag is the monthly WASDE report that tells us about the crops so we can gauge some forward view, if you will, on where those key ag commodity prices are going.

And then, also, too, with Deere, they have a relatively decent sized construction equipment business-- small relative to the ag, but still overall a decent size. So when we look at non-residential construction data, that's going to tell us what's going on in that business.

SARA SILVERSTEIN: And AAPT team member Bob Lang discussed the death cross forming in United Rentals in our forum. What are you thinking there? What's the game plan?

CHRIS VERSACE: So I'm very happy to report on United Rentals, that it has had a significant move since we had our last members call. And I think folks are coming around to buying some of that non-residential construction data that we've been talking about, also recognizing that as we move past the winter months and into the summer and spring, the construction season tends to be seasonally strong.

That's been great for our shares. They're up over the $400 mark now. And the push-pull on that is, as you can see on the screen, it's lifted the position size well over 4%.

So we might have to do some prudent trimming here. That's probably our next move with United Rentals. And, again, given our 4.65 target vis a vis the current stock price, we'll have to start to question our one rating, maybe downgrading it to a two.

SARA SILVERSTEIN: And Vulcan Materials has continued to trade at or near its 52-week high. What are you looking for to help it get to your price target of 2.35?

CHRIS VERSACE: So I would just rewind a little bit. And I just said, with United Rentals, that the non-residential construction data is strengthening, particularly in the key categories relating to the Infrastructure Bill. That's obviously going to be very good for Vulcan Materials.

We continue to track the weekly railcar data, which also has been favorable for Vulcan Materials. And I think that's going to continue probably pushing the stock price eventually to our price target. The bigger question to me is, as the data continues to strengthen, is there upside to that 4.35 price target? And, there, my sense is, there's at least some, perhaps a little more.

SARA SILVERSTEIN: And the communications sector came under fire earlier this month with rumors that Amazon may dip its toe into the mobile services for Prime members. Amazon has denied the report. But does it highlight a vulnerability for Verizon?

CHRIS VERSACE: Look, that's an interesting question. Because it would take a lot for Amazon to move into that. And how would they price it? Would it be as a MVNO, or a mobile virtual network operator, riding on someone else's network? There's a lot of uncertainty in that.

And I think we would need to know more before we started flashing the warning lights. But with the cable operators moving into offering wireless, is it something that could happen? It could. But, again, Sara, I think we need to know more before we jump to any conclusions.

SARA SILVERSTEIN: And one of the members wants to know, is it time to revisit Verizon's one rating in the portfolio?

CHRIS VERSACE: Now, this is actually a great question. It's something that I've been thinking about, but probably not for the reason some members are thinking. And where I'm going with this is, if we remember when we added Verizon to the portfolio, we were concerned about a slowdown in the economy, a recession, if you will. And we said, boy, that business is rather sticky.

Because if you think about how consumers operate, they are not-- especially in today's increasingly connected world-- going to turn off their cell service. So very, very sticky service. We also like the dividend yield.

However, the data of late seems to suggest, as I touched on earlier, that the economy is hanging on stronger than expected. We're starting to see some other positive signs that perhaps that soft landing is likely to emerge.

That has us rethinking Verizon's position in the portfolio overall, not as a one, not as a two, but whether or not we want to continue to hang on to the shares, or are there better opportunities in other names that might be a little more economically sensitive that we could see greater upside with over the next six 12, 18 months. And my sense is that could very well be the case.

SARA SILVERSTEIN: And looking at Clear, what's the most important factor or thing that you're looking for, for that stock to be successful?

CHRIS VERSACE: So there's a number of different levers there. But if I had to narrow it down to one, it's going to be the continued growth in their airport partners. They're around 52. They're targeting 75, so another 23 to go.

And we've talked about this, and I've written about this in alerts. It's very similar to Costco's expanding warehouse footprint. The analogy here is that as Clear opens up more airports, it's allowed to attract more members, driving its subscription business model.

The second thing, if I could sneak it in, is waiting for their TSA pre-check service. Because that actually has the ability not only to attract new customers but be a bolt-on offering driving subscription revenue.

SARA SILVERSTEIN: And much attention has been paid to NVIDIA this year. Applied Materials has been a slow and steady gainer, supplying equipment to top chipmakers, including NVIDIA. Has it become a bit of a sleeper agent in this AI boom?

CHRIS VERSACE: So it's an interesting question. And let me just say upfront that if there was one thing that I could go back and do, it would have been picking up more shares of Applied Materials when we first added them. As you can see on the screen, the weight is just about 0.6% of the portfolio. It's our smallest position. And I really wish that we had been a little more aggressive at the time.

But in terms of your question, Sara, it is a sleeper on AI. It's also poised to benefit from the Chips Act.

But I think if you step back and you think about a lot of the disruption that's happened and is going to continue to happen, whether it's AI or mixed reality, as we're seeing with Apple's Vision Pro headset, and more likely than not competing applications from others out there, or we think about the roadmap towards self-driving cars, or just chip content in all aspects of our lives, yeah, that's a great driver for Applied Materials long-term.

SARA SILVERSTEIN: And we are now in the twos, which I should have announced before we got there. But one of the largest positions in the club cybersecurity ETF, Palo Alto, was recently added to the S&P 500. How important is this to the broader theme of cybersecurity or for this position?

CHRIS VERSACE: So when you think about the 11 sectors that the S&P 500 breaks down into, there is no cybersecurity position. There's tech. And tech carries a wide array of things there, hardware, software, chips, monitors, stuff that goes into digital infrastructure. It's really a catchall category.

So the fact that they are acknowledging this with the add really, I think, validates the importance of cybersecurity in the portfolio. And I think it's a very positive thing for our cyber shares. Look, as we continue to move into this increasingly digital world, the downside of this great connectivity, this great productivity that we have, is that we have more vulnerable attack points.

So I've said it before, say it again. We need to have cybersecurity in our portfolio. And, in this case, cyber gives us one of the best well-rounded pieces of exposure to that.

SARA SILVERSTEIN: And when you look at Mastercard, what is driving that stock's performance? And what are you looking for there?

CHRIS VERSACE: So if we think about the nature of Mastercard's business, it's a payment processing company. So there are two big things that we want to watch. One is just overall spending, whether it's consumer or enterprise spending, whether it's in the US, Europe, or China, or other parts of Asia, what is going on in terms of spending?

So, so far, spending seems to be holding up better than expected. But there is an overarching theme that we need to think about with Mastercard which is, while we here in the more mature economies are very much adept at using cards, credit, debit, or increasingly mobile payments, or other forms of digital payments, there are parts of the world that aren't as savvy in using those modalities. And we're starting to see that happen.

So there's still some legs left for this secular shift from, believe it or not, cash-- and I personally don't know who uses it-- checks towards these other forms of payment. And more payments on those network is more revenue for Mastercard. So that's the way we think about the company.

SARA SILVERSTEIN: And let's talk about Chipotle. As it nears your price target of $2,100, are you considering a trim? What are you looking for there?

CHRIS VERSACE: So we have liked Chipotle quite for some time. And the key for us over the last several months has been all that pricing action that it took in 2022, turning into margin levers as food costs, in particular, start to come down. And that's really starting to happen.

But you're right though. The shares are starting to bump up against our 2,100 price target. And at that point, I think we would continue to ring the register, trim back the position. I spoke on the Daily Rundown yesterday about a company that we recently added to the bullpen, Portillo's, ticker symbol-- excuse me-- PTLO.

And I think that's a company that we're still doing a little more work on it in the bullpen. But that could be one where we take some of the winnings from Chipotle and cycle them into a new position in PTLO shares.

And with that in mind, for members who are watching, if you didn't listen to the podcast with the management team, I really suggest you do it. It's a great deep dive. You'll know the ins and the outs of the business as well. And I think when the time comes that we make the decision to add PTLO to the portfolio, if we do decide to do that, you'll be very comfortable understanding the rationale behind that.

SARA SILVERSTEIN: And I do not know very much about Portillo's, the business side of things. But I do know that it's one of the best restaurants in the country. So I am a Chicago native, and Portillo's is fantastic. So that would be exciting.

Gold, can you talk a little bit about how the price of gold is moving right now, and what you're thinking about our position in the SPDR gold trust?

CHRIS VERSACE: Great question. Gold's been up year-to-date. But if you look back, really, since early May, it's really started to pull a bit lower trade-off, if you will.

And I think it has to do with the notion that we touched on earlier, that inflation is coming down, the fear of recession isn't quite there yet, but there is still some geopolitical tension out there. But two of the three drivers behind gold seem to be falling to the wayside.

So this, too, is another position, similar to Verizon and maybe one or two others in the portfolio, that as the need to be a little more defensive might fall by the wayside, this could be one that we're thinking about lightening up and, perhaps, using the proceeds to move into more interesting exciting growthy areas of the portfolio.

SARA SILVERSTEIN: Great. And debts, I mean, defense spending has been top of mind. It played a big role in the debt ceiling negotiations. Do you expect any impact for Lockheed Martin based on everything that transpired there?

CHRIS VERSACE: My understanding is that the budget is clear that they will get the increase. But even if we look outside of US spending, just given what's going on-- or continuing to go on, I should say-- between Ukraine and Russia, as well as other NATO countries having to rebuild their defenses, the outlook for defense spending remains rather bright.

And we do like Lockheed Martin for that. And if the shares drift below from current levels, it's a great place to pick up. We did that in the last few weeks. And, again, I would suggest members who may not have did that, great place to do that.

SARA SILVERSTEIN: And we've gotten a lot of questions about the club's inverse ETF position. So let's talk about PSQ and SH. Can you talk about what the role is that these inverse ETFs play in the portfolio, and what you're thinking about them now, and how that will go moving forward?

CHRIS VERSACE: Sure. So a second ago, Sara, when we were talking about gold, I said, there might be two other positions that we have to rethink as the concerns about the economy, the concerns that have kept the market volatile most of 2022 and the start of 2023 start to fall by the wayside.

And, candidly, that's PSQ and SH. And the whole reason that we added them to the portfolio was to protect us in a volatile market, helping blunt downside pressure.

The issue here, however, with these two positions is the strength that we've seen in the market has the S&P 500 trading around almost 19 and 1/2 times. That's the 52-week high for that barometer. And it's not too far from the peak that the S&P has traded over the last two decades.

So there is some concern there. So we might hang on to these two positions a little bit longer than, say, Verizon or GLD as we look to reorientate the portfolio. But at some point, I do expect that we will be trading out of PSQ and SH. It's, how do I say, it's top of mind for me, because, as I've said before in previous monthly calls, the last thing we want to do is get caught flat-footed.

And while I'm sure some members are looking at the move in the NASDAQ, or the move in the S&P 500, going, hmm, this could be the time. Tell me what to do. We do have to recognize that we're bumping up against those peak valuation metrics.

So, for me, the key here is going to be, as I mentioned at the very top of our conversation today, let's get a better understanding on the economy. Let's get a better understanding on earnings prospects for the back half of the year and for 2024. And as those start to crystallize, we can make a smarter decision about the exit for PSQ and SH.

SARA SILVERSTEIN: And to that end, are you ready to say that we're in a bull market?

CHRIS VERSACE: Oh, that's a big question, Sara. I think we need a little more confirmation there. One of the podcast conversations that I had in the last few weeks was just talking about breaking out on this 3,800 to 4,200, 4,300 range on the S&P 500.

And the thought was, we might break out, but then we're going to have to come back and retest. So we want to see how that retesting goes if we do test positive. And, again, the economy and earnings outlooks are firmer and better than we had thought three months, six months ago. Then we might be ready to say we're in a bull market.

SARA SILVERSTEIN: Why does the club prefer American Waterworks to its competitors?

CHRIS VERSACE: Oh, well, there's a couple of different competitors out there. There are some that are smaller than American Waterworks. Remember, it's the largest public water utility in the US. And its business is all domestic. And there are some other players outside.

Typically, the one that gets tossed around is Veolia. But the difference there is Veolia's largest end-market is France. And I think we would rather stick with the US market, a lot better data, don't have to worry about currency. You don't have to worry about any other type of labor laws or anything like that. So that's the rationale-- excuse me-- behind American Waterworks.

And we are entering the seasonally strongest part of the year for that business. We should see a lot of nice EPS leverage. And I do think where we are, that 145, 146 level, there are those members who are still not underwater but underweight in AWK shares, this is a great place to pick them up. Price target's 165.

SARA SILVERSTEIN: Great. And let's talk about Trinity. How economically sensitive is this stock? And what economic factors most drive its rise or fall?

CHRIS VERSACE: So let's talk about that and then throw a little asterisk as well. So Trinity is a business development corporation. So it's going to lend capital to growth stage companies. So the extent that the economy is stronger, I think, you'll see more growth stage companies looking for more capital. That's without a doubt going to be a positive for Trinity's business.

But, remember, though, too, that because of the failures of some of the recent banks that we saw, Signature Bank, Silicon Valley Bank, there was this hole that needed to be filled. And I think Trinity Industries-- Trinity, sorry, Capital-- is able to backfill into that, capturing some share as well.

So while the economy-- we're concerned about the economy. That was the reason why we stepped in a very, very singular scenario.

However, I would say, that as the economy looks like it's a little stronger than we thought, there could be upside to our price target for Trinity. And that's something we'll be watching as we collect more data in the coming days and weeks.

SARA SILVERSTEIN: And what is your outlook for oil prices, and gas prices, and the energy select SPDR fund that the portfolio is in?

CHRIS VERSACE: So there's always two aspects that we have to talk about whenever we're thinking about commodities in general but oil in particular. Those are, of course, supply and demand. So on the supply side, look, we're seeing another round of production cuts. That's probably efforts to prop up the oil prices.

But to me, the greater thing that we have to watch is going to be demand. And, earlier this week, we learned about a new round of stimulus in China as they look to jump-start that reopening. We'll have to see how that goes.

My sense is that they're going to continue to toss more stimulus until they get that economy where they want it to be. That would, of course, be positive for oil. China is one of the largest importing-- one of the-- excuse me-- one of the largest importers of oil on the planet.

At the same time, there is the US economy, which we've been touching on several times. Again, here, if it's a little stronger than expected, that bodes well for oil demand. But the other thing, too, to watch is this return to the office, which seems to be getting even more traction the further we get from the pandemic. That could spur, at the margin, incremental demand for gas.

So I think the outlook is going to be favorable. We just might have to endure a little bumpiness in the next couple of weeks.

SARA SILVERSTEIN: And Alphabet is a two-rated stock. Most of the tech that is in the portfolio is three-rated. What is different about this position?

CHRIS VERSACE: So we upgraded Alphabet to a two when the shares pulled back. Because the thought was, oh, it's being left behind on the AI front. And they had a little blunder early on with Bard. That weighed on the shares.

And that's really when we stepped in and said, look, we know that Alphabet is going to figure this out. They have to. They're going to shore up their competitive position. And when you look under the hood, they're clearly not a company to be left out of the AI fight.

And, sure enough, we've had several announcements since then. But some new ones even today that we shared in our morning alerts with members.

But at the same time, though, they are-- when you look at their business model-- the head and shoulders champ when it comes to digital advertising. And we know that companies, even though they may be calling back their spending, they're continuing to lean into digital advertising, because that's, increasingly, where consumers are. And those companies want those-- I hate to say this term, Sara-- they want those eyeballs.

So for that reason, we really like Google, especially as it continues to tweak its YouTube offering. And then, at the same time, too, the data on cloud has been favorable. And the company is now looking at a profitable Google Cloud business. That removes some of the EPS drag. So a number of reasons why we like Google.

SARA SILVERSTEIN: And now we can move on to the threes. We've had a lot of questions about why certain stocks are rated threes. And so, maybe you can help explain why a three rating isn't necessarily a bad thing, and maybe using Apple as an example, given the new highs after the developers conference.

CHRIS VERSACE: Sure. So let's step back. And what is a three rating? So a three rating is a company that we're in a holding pattern with waiting for this next catalyst to emerge, or it could be a position that we've fully built out and we're just waiting for the thesis to play out.

And in the case of Apple, there was a lot of concern about the smartphone market in the first several months of the year. Again, we were tracking data, whether it was from suppliers like Qualcomm, Skyworks, or Taiwan Semiconductor, and reports of excess inventory out there. So we were concerned about that.

And at the same time, we were also concerned that we may not get the lift that the market was hoping for at the developers conference with the Vision Pro headset, which has a sticker price of around $3,400, $3,500. That's a hefty, hefty price tag for a brand new product for Apple. We weren't really sure that we would see the adoption of that.

And I think we were-- even though the shares have moved higher-- I think the call on that was correct. And I say that because we're already hearing about follow-up for the Vision Pro, not necessarily the second iteration, but even the third iteration, leading us to say that this looks far more like the Apple Watch, where it was something that didn't really take off into the third iteration when the price point came down, and it had cellular connectivity built in.

That's something that the Vision Pro doesn't have. There's a side pack that you have to have. So I think the better days for the Vision Pro are ahead. In terms of what we're watching for on Apple, it's going to be the second-half ramp of the iPhone, in particular. And for that, we'll be watching what TSM has to say in its monthly data over the next several weeks.

SARA SILVERSTEIN: And Amazon is up close to 50% year-to-date. What kind of catalysts are you looking for there?

CHRIS VERSACE: So we have liked Amazon, because our thinking is that consumers were going to re-embrace digital shopping. And we have seen that. But the bigger issue has been on Amazon Cloud. The numbers have been good-- not as good as what we've seen over at Google, what we've seen over at Microsoft.

So the question is, are they losing some share? I think we want to see them retake that. But at the same time, Amazon has had to trim the fat. We want to see some margin leverage there.

Once we see that one-two combination, I think we'll see earnings expectations move higher for Amazon. That will allow for us to, perhaps, boost our price target. As that happens, we can start to rethink, perhaps, an upgrade for Amazon.

SARA SILVERSTEIN: And let's go straight to the other side of that, Microsoft. What are you looking for there? And is there any AI opportunity for them for upside?

CHRIS VERSACE: Oh, I mean, look, the shares have been a stellar performer. So I would say that a lot of expectations thus far for AI are baked into the share. So now we need to see them really ramp out the tools, ramp out the offerings, and show the growth that has been attributed to that hopium of AI.

But at the same time, too, we also want to see the turn in the PC business. That's one that there have been excess inventories out there. We've heard some reports that the mid part of the year could be the turning point. We'll want for confirmation on that. But we'll be also looking for other signs from some of its partners, HP, HP Enterprises, for example, and others in that PC chain.

SARA SILVERSTEIN: And Marvell was on your mind yesterday as it benefited from Oracle's cloud and AI strength. We have members asking why maybe we didn't take some profit-taking as it headed higher?

CHRIS VERSACE: So you have to remember that, a few weeks ago, we actually did take some Marvell chips off the table after that strong initial run. And I believe we did it somewhere around $62, $63. So that's where the shares are right now.

We're continuing to hear, it seems like, Sara, every day, there's another wave of AI announcements. And, again, we touched on that on some of those latest ones this morning, given what AMD said yesterday, what Accenture said yesterday, and, again, that Alphabet announcement that we touched on.

So I do think that we're going to see the shares move a little bit higher. But with them back at levels where we last trimmed them, we are watching that. And it could be something that we're inclined to take some action on. Don't want to spill all the beans there.

SARA SILVERSTEIN: And Cboe has been slow and steady in 2023. But it did take a little setback in May. What are you looking for to get it to the price target of 140?

CHRIS VERSACE: So the key driver for that business is going to be its options business. That means we need to see some volatility in the marketplace. And, really, we've seen volatility fall over the last four to six weeks, most ideally seen in the falling of the VIX to levels that we haven't seen in 16 to 18 months. So I think that's what we need to see.

The positive with Cboe is that they report data every month. So as we look forward to their May data, their June data, we'll have a sense of what the quarter is looking like. And then we can make a more informed decision.

And at that point, too, we'll have a much better sense, again, as I feel like I'm a broken wheel here, talking about the economy and earnings expectations for the back half of the year and forward.

As we put all that together, we'll be able to see if we can hit that 140 level for Cboe, or perhaps we might need to trim our price target. And if we do, that might give us some reasons to rethink why we're owning Cboe in the portfolio, if we're owning it at all.

SARA SILVERSTEIN: And let's talk about Pepsi. We're about a month out from the next earnings report. What are you looking for in the meantime?

CHRIS VERSACE: So if we take a look at the monthly retail sales report, we'll get a sense at what people are spending, the food at home, food away categories in particular. The great thing about Pepsi, much like I talked about with Chipotle earlier, is they were very aggressive in terms of pricing last year. We're seeing that transform into margin levers this year.

I think that is going to help prop Pepsi up. And we're here around the 180 to 185 level. Our price target is a little higher-- much higher than that, actually. And, I think, the shares have traded off because the market has been not really focused on the earnings leverage and the margin leverage that Pepsi can deliver.

And I think it's going to turn out to be a sleeper win for the portfolio. I think when we did this call last month, Helene Meisler was saying, around the low 180 level is a good place to pick up Pepsi. I agreed at the time. I still agree with that. And that could be something that members want to revisit.

SARA SILVERSTEIN: And let's end on Ford. The stock's response to some strong news has been pretty lukewarm. One of our members wants to know, what will it take to upgrade Ford?

CHRIS VERSACE: So the last big thing that we talked about with Ford when they reported was what we called out is either overly conservative guidance or concerning guidance. Because when you parse the quarters for its 2023 operating income, there wasn't really any growth baked into that. So what we're trying to ascertain, again, is how conservative that might be.

For that, we're going to have to really pay attention to the monthly data. Here, what are we talking about? If Ford, of course, releases their own auto sales. We'll want to compare them against other companies and the official government data that comes out to see if they're gaining share or losing share. To us, that's probably the biggest thing in the near-term.

The shares were range bound between 11 and 13. They're obviously north of that. So we're enjoying that.

The question for us, though, is as we get the answers to some of these questions that we're looking at, what is the incremental upside to be had with Ford? If there's more, than we'll adjust our price target, adjust our rating. If, on the other hand, not so much, then we'll have to make some tough decisions.

SARA SILVERSTEIN: Chris, thank you so much. That will do it for another Monthly Call. We'll be back on Friday with a special live event for all members. Chris will chat about his outlook for stocks for the rest of the year. But we'll also hear from Doug Kass, Helene Meisler, and Fundstrat's Tom Lee. Thank you for joining us today.