Daily Rundown: June 26

JD DURKIN: Let's do it, AAP members. Good morning to each and every one of you. Chris Versace and I are back ready to get you prepared for a busy week ahead. But as always, let's start with a look at last week's highlights. Chris, thank you for being here.

On Thursday you initiated a starting position in Universal Display. Some members may have missed that. So for those who did, give us a quick breakdown, if you can, of your overall thesis. And why was the timing finally right to upgrade that particular stock to the portfolio?

CHRIS VERSACE: So last week we finally upgraded the shares of Universal Display, ticker symbol OLED, which is a company that specializes in making organic light-emitting diode chemicals. But they also are an IP or an intellectual property powerhouse in the space, and that allows them to ink high margin royalty deals with the likes of various display manufacturers around the globe. We kind of liken that push, pull very similar to what the Qualcomm business model.

Chips and licensing, it's a wonderful combination at the right price. And again, we've been eyeing these shares for some time. And we've kind of held off because of the excess inventory in the channel and their largest end market, which today is smartphones, but promises to be other end markets as well. Yes, there are tablets. There are wearables.

But the big opportunity is going to be an automotive lighting, as well as, eventually, in general illumination. And by that I mean the lights that we have around us. If you think about it, light-emitting diodes or LEDs have replaced conventional lighting, and we're on the path to that upgrade cycle towards organic light-emitting diodes as well.

So what was the catalyst to get us off the bench, to answer your question, JD? Well again, we've been trying to monitor those excess inventories in the channel for smartphones. And it was really the strong sequential data reported by Taiwan Semiconductor for the month of May. I believe their revenue was up high double digits, and of course smartphones is their second largest end market.

So that starts to prepare us for the second half of the year, which tends to be seasonally stronger for smartphone volumes. But at the same time, if we go back to CES 2023, there were a number of newer smartphone models, tablet models, wearable models that should be employing organic light-emitting diodes. So it's a bit of a long winded answer, but that's the reason why we finally called up OLED to the portfolio. And this is one we're going to look to as the shares, should they come under pressure, it's one that we're going to look to build out over time.

JD DURKIN: I like that ticker symbol as well-- OLED. Let's talk Applied Materials. You had your eye on that name, of course, amidst the White House visit from Indian Prime Minister Narendra Modi. Any update on that position, Chris?

CHRIS VERSACE: Well, we continue to like Applied Materials. And again, candidly, this is one of those positions that when we initiated it, we were hoping to scale into it. Unfortunately, the shares ran quite strongly from the 110 to the 130, 135 level. Candidly, it's a good problem for us to have, but we do still wish we could have picked up more.

What are we seeing as a result of that conversation? Greater chip investment in India. That augments what we're seeing not only in Japan, here in the US with the Chips Act, but also in the Eurozone with the Chips Act. And it continues to paint an improving picture for semiconductor capital equipment demand. So of course, we continue to like that for Applied Materials.

JD DURKIN: So we will hit on a majority of member questions on Wednesday of this week, Chris. But we did have a few members reach out wondering why the story changed with Verizon following the downgrade last week. Talk to us a bit about what happened there, and what will you be following on this name this week?

CHRIS VERSACE: Sure, so remember that during the July members-only call, we kind of discussed the notion that the economy is holding up better than expected, and the odds of a recession appear to be lessening. And if we go back to when we added Verizon to the fold inside the portfolio, it was really because we wanted to have a more defensive position in the portfolio. And we liken that for its wireless business, but we also at the time really liked the near 7% dividend yield.

And make no mistake. Those are still the attributes that we subscribe to for Verizon. But the question we have to ask ourselves is with the outlook and perspective changing compared to six, eight months ago, is this a position that we still want to be hanging on to as we move forward into 2020-- the back half of 2023, sorry, and into 2024? That's why we really downgraded it to a three because we're trying to assess is it still worth holding on to?

Not saying that we're going to get rid of it just yet. I think we need to understand what the real pace and speed of the economy is and whether or not one of the most highly expected recessions is likely to unfold in the second half of the year. And if it's not, then we'll start to make our next move with Verizon.

JD DURKIN: It's been a while, Chris, since we've had our last hindsight is 20/20 check in. Is there anything last week you wish you could have done a little bit differently if you got the chance to?

CHRIS VERSACE: So we can always say, oh geez, we started that position in Universal Display, and of course, the market ended on a weaker note. But I'm not going to beat ourselves up because we do realize that we can't catch the bottom of every stock position every time. And as we communicated to members, we know the levels at which we'll get more aggressive in the name.

So you know barring that and maybe being a little more careful and articulate the thoughts on Verizon a little better, JD, I would say those are probably the two things that would be fair constructive criticism, and I wish we could have done maybe a little smarter last week.

JD DURKIN: All right, I appreciate that. Thank you for the context. We do have a little bit of a quieter start to the week, at least in terms of economic data. But Friday will be PCE day, of course. What are you expecting this time around, Chris, and what data will you be watching ahead of game day?

CHRIS VERSACE: So when we get the PCE data for May, of course, we're going to be focusing in on the core data, watching-- wanting to see what progress, if any, we see compared to the last few months. That's likely to solidify expectations for what the Fed is going to do. But remember, folks, we're going to get a tremendous amount of data the following week and the week after in the form of all the ISM data for June.

We'll get the June employment report where we'll be watching job creation, wage gains. We'll get the same from ADP. So while this upcoming number is a preferred metric by the Fed, it'll be one piece of the inflation puzzle that we'll be watching.

JD DURKIN: Oh, yes, we love the inflation puzzle. Speaking of puzzles, anything else on your radar this week?

CHRIS VERSACE: Yeah, midweek the Fed's going to release the results from the latest bank stress tests. So given our position in Bank of America, we're going to want to pay attention to that, see if there's any shifting around in capital requirements. But typically after this is when the banks announce any dividend hikes that they might be making. So that has us ears up for midweek.

JD DURKIN: There we go, ears up. These are my ears putting up so members know we're paying attention. That's going to do it. Chris Versace, thank you as always. Thanks for watching to you at home. We'll see you next time.