JD DURKIN: Subscribers, welcome back, my friends. Good morning to you all. Chris Versace and I are back to answer some of your biggest questions of the week. Chris, thank you, as always, for being here. Let's start with a few educational questions. We'd like to better inform our viewers, of course.
And today we're going to talk price earnings to growth, or PEG, ratios. How important of a metric is this, Chris, to you, and how do you go about your fact-finding? What should people know?
CHRIS VERSACE: Ah, the old PEG ratio. So this is simply one of the many valuation tools that we have in our arsenal. We can talk P/Es enterprise value to revenue, enterprise value to EBITDA, dividend yield, and the like. But the question I think we want to get to is, when do we trot out the PEG ratio?
And it's not something that we really use for cyclical companies. It's not something we use more for value companies. It's really a tool used to measure the valuation for growth companies. And as its name implies, we want to try and size up the P/E relative to the multiple year growth rate, whether it's for revenue, but more specifically for earnings.
And as a result, when we take a look at this we're trying to look at three- and five-year time horizons to really assess, is a stock overvalued, fairly valued, or undervalued? So I would say that's the best time to do it. But remember, too, JD, we rarely use any one particular valuation metric. We always try to triangulate to get a real sense of not only the potential upside with the position, but the downside risk as well.
JD DURKIN: All right, after last week's edition of universal display, which we've talked about before, we have a member expressing some concerns about adding another smaller company. So, Chris, talk to us a bit about how company sizing itself plays into how you manage the overall portfolio. What does that consideration look like for you?
CHRIS VERSACE: So I think there are two things to talk about here. One is the size of the position, and, of course, we always like to start out on the relatively smaller side, increasing, if we can, either on positive developments, catalysts, if you will, or on pullbacks so we can improve the cost basis for the longer term.
But I think there's another issue here, too, as it relates to universal display. It's market cap is around $6.4 billion. And when we look at some of the other larger technology companies in the portfolio, whether it's Google, Applied Materials, Amazon, even Apple, it's a relatively small-market-cap company. So I'm sure there's at least a couple of members who are scratching their heads, going, OK, I get it, but why this particular position?
And whenever we add a position to the portfolio, we try to have a very specific reason for doing so. We don't simply just add them willy-nilly. And we try to lean into structural change as often as we can.
And when we think about universal display, there is this sea change that's going on in terms of types of display technologies being used towards organic light-emitting diodes. So as we sit here today, yes, the end market is predominantly smartphones, but we see that total addressable market expanding over the next few years. So that's the reason why we wanted to add universal display.
And the timing, as we talked about earlier in the week, really stems off some improving data out of Taiwan Semiconductor that suggests the worst of the smartphone inventory problem is behind us.
JD DURKIN: All right, fair enough. Let's talk Verizon. And a subject we hit on earlier in the week, but for members who may have missed it, why did you change Verizon's rating, Chris? And what will you be following on this story as we move forward?
CHRIS VERSACE: So whatever we change a company's rating, be it Verizon or any other one, we tend to have some very specific reasons for doing so. Sometimes the shares could be bumping up against our price target. Sometimes we could be waiting for the next catalyst to emerge so we can rethink the position.
And sometimes, too, like in the case of PepsiCo, we simply build out a full position, and we're waiting for the thesis to unfold. So in the case of Verizon, remember, we first added the shares back when we were concerned about a recession. We wanted to increase the number of defensive positions in the portfolio.
And, as we talked about several weeks ago, we need to rethink that because the economy is holding up better than expected, and the probability of a recession is-- appears, I should say, to be waning. Hence, as we'd have to rethink the rationale for owning Verizon in the portfolio, we downgraded the shares to that, and we made our decision, one way or another, if we'll be keeping or getting rid of Verizon shares. That's going to hinge on the data we have coming at us that will tell us what the speed of the economy is and whether or not that much-anticipated recession might be unfolding.
JD DURKIN: And just a follow-up there a little bit, if the evidence and the conversation, the data, starts to suggest maybe a so-called soft landing not as possible and that it might be a bit of a harder landing into a recession, is Verizon the type of more defensive posture you would look to sort of bring back up and kind of re-elevate as you evaluate it later on into the year?
CHRIS VERSACE: That is a great point to make, and the answer to that is a hundred percent yes. And I'm really happy that you brought that up. Because this is an evolving nature, right? Most of investing is evolving. Very rarely is it "fix it and forget it" or what I call crock-pot investing.
We're always trying to get the next set of data, company managements, whether it's hard data, soft data, or just conversations about how the landscape is evolving. And as that happens, we will, of course, correct as needed, in the case of Verizon, should that come to pass.
JD DURKIN: All right. Talk to us a bit about the criteria you look at when deciding when to exit a stock, especially when there might not really be anything fundamentally wrong with the company itself, but you just feel like it's the right thing to do at the right time.
CHRIS VERSACE: So generally speaking, we will do this for two particular reasons. One is that it's either hit or significantly exceeded our price target. At that point, we have to ask ourselves, the valuation is really stretched, are there any catalysts on the horizon that could lead us to potentially upgrade our price target and keep our position in play?
And if there aren't, then we have to take a very hard look at it and make that decision. But the other decision factor tends to be, is the thesis still intact? And, again, just to go back to Verizon, defensive position, the question is, will we need it? Unsure at this point. That's why we're rethinking it.
If it comes to pass that, oh, the economy is accelerating in the second half of the year into 2024, that's very different thesis point from what we originally used to pick up Verizon. But, again, as you pointed out, if the data bends the other way, and a hard landing or recession appears far more imminent, then we'll have to make that decision as well.
JD DURKIN: All right, let's talk ChargePoint, our favorite topic, as always. First of all, what are convertible senior notes? That's number one. Number two, how do the $300 million notes that are expired in a few years play into your long-term view?
CHRIS VERSACE: So whenevr we take a look at a company and its balance sheet, we knoww from time to time companies are out there raising capital to fund their future growth, whether it's organic growth or M&A activity, what have you. So just generally speaking, convertible senior notes are a form of debt that at a certain price point convert into equity shares.
Is this a unique structure to ChargePoint? Hardly. There are hundreds, if not thousands, of companies out there that have used them. So for us, we really want to zero in, with ChargePoint in particular, on the conversion price and what that means.
Typically, the conversion price is higher than the current stock price. It means that the investors behind the notes are bullish on the story, and they hope to convert into equity. That probably gives them far greater upside than simply pulling the notes back at a certain point.
JD DURKIN: One quick follow-up on ChargePoint. Talk to me about location. How does ChargePoint-- or does ChargePoint, rather, have the real estate to compete with the charging stations of a name like Tesla?
CHRIS VERSACE: So this is actually kind of an interesting question, right? So I'm going to flip it around a little bit. So at the end of last year, for every individual charging point, there was something like-- or charging station, excuse me-- there were around 50 EVs on the road in the US. And as we continue to see EVs become a greater part of the overall mix of new auto sales, remember, we do have that nice tax credit to help spur that along, as well as the fact that we're seeing more models come out at lower price points from our own Ford Motor, GM and others.
So I do think we're going to continue to see a rising tide in overall EV mix, especially as they become more affordable. The larger question is, how far can we go until we are really feeling the pain point on that? So I think the location is a good question. Location, location, location.
And, of course, distribution, distribution, distribution. They all matter when we're thinking about retailers and other business models. I don't want to get so caught up on what the number is today. I think the better question is, what's the number looking like at the end of 2024, as the infrastructure bill really kicks in in the coming quarters?
And we don't know that number yet. I think it's pretty simple to say it's going to be far higher today than it was at the end of 2022, and that is what matters. And that's what the progress will be focusing on.
JD DURKIN: That is a killer round of member questions. As always, Chris Versace, thank you.
CHRIS VERSACE: Thank you, JD.
JD DURKIN: Members, to those of you watching at home, please keep sending us your questions. We love them so much, and Chris wants to answer them, I promise you. I can't speak for him, but I'm pretty sure I'm right.
Send us those questions to AAPClub@thestreet.com. Have a wonderful trading day. Good luck out there. We'll see you next time.