Daily Rundown: August 2

J.D. DURKIN: A bit hello to members. One and all, Mr. Chris Versace and I are now back for a very special rundown. This one is dedicated to a little education, a little 101, if you will, all about his key area of expertise known as thematics.

It's one of the key methodologies that, of course, Chris uses in his management of the AAP portfolio. First of all, Chris, thank you for taking the time to do this. I think it's always good to give a little more of an educational base to our members.

CHRIS VERSACE: I have to agree. I mean, whether it's discussing fundamentals or some of the other AAP team members breaking down technicals or talking about how we value stocks, arrive at our price targets, or in this case, thematics. Always happy to impart some knowledge, some wisdom, to the members.

J.D. DURKIN: So what are thematics? And how do you go about using them?

CHRIS VERSACE: Well, that's an interesting question. There's a lot of stuff being tossed around about thematics. There's a lot of ETFs that are trying to tap into it. But the real question is, what's the right way to think about thematics? Some sit there and they think of it as some kind of kitschy, little slice of something.

I think there's a much more disciplined way to think about it, one that is actually helpful on the investing front. And the way that we look at it is very simple. We are trying to identify structural change that's unfolding across the landscapes of economics, demographics, psychographics, technology, regulatory mandates and, from time to time, stimulus spending. And the goal here, JD, is to identify the companies that have the greatest revenue, the greatest profit exposure, to these shifting landscapes. And the reason for that is really pretty simple when you think about what we're trying to do with AAP portfolio.

We're trying to find stocks that are poised to outperform the market over the longer term. So when we think about these thematic tailwinds pushing on companies, businesses, the ones that are very well positioned, it tends to drive revenue, cash flow, earnings. And when we tend to see that unfold, we also get something known as multiple expansion. And when we combine earnings growth in multiple expansion, we tend to get outperformance, or to use the Wall Street lingo, alpha. So that's really the heart of what we're trying to do.

And the other thing I'll just mention about thematics, why I like them, A, they're very recognizable and relatable in the world around us. But they also help us identify areas that the 11 S&P sectors don't necessarily cover. For example, AI, cybersecurity, data center. They're not necessarily known, standalone, I should say, S&P 500 sectors. So the thematic approach really helps us uncover kind of what's unfolding, what's emerging as well.

J.D. DURKIN: Let's talk more about those core five. Walk me through them theme by theme. Are there examples in the portfolio members may be familiar with the names, Chris, without necessarily knowing how they fit into those five different categories?

CHRIS VERSACE: Sure. So let's start off with economics. On that aspect, we're really trying to identify where the acceleration of the economy is. Remember back when we were concerned about the economy kind of rolling over, if you will, perhaps flirting with a recession. We managed to add some positions that were more economically less sensitive so that we would be able to protect the portfolio.

Here we were talking about names like the GLD ETF, Verizon, and several others. So that's one on the economic side. On the demographic side, in the past, the portfolio had positions in the aging population category, we can call it, with AMN Healthcare, but we also have one with Elevance Health. On the psychographic side, which really speaks to consumer sentiment, and really the key issue here is going to be the prevailing driving outlook for consumer spending.

We, of course, have a company like Costco. And then on the technology side, we have, of course, the shifting landscape with AI, the acceleration of Cloud and Data Center, and for that, we have the shares of Marvell. And I think there might have been one more you were asking about, JD, if I remember.

J.D. DURKIN: Well, any of the ones that come top of mind as well. I'd also love to get your sense here on regulatory mandates and stimulus spending and how this plays a role into some of the themes you were just talking about.

CHRIS VERSACE: So the regulatory mandates and stimulus spending, from time to time, we do see in certain industries the federal government put out certain standards that have to be met that tends to be a pull forward. So we're always on the lookout for those in terms of demand that correspond to that pull forward and the regulatory mandate. More often than not, these tend to be things in more heavily regulated industries or relating to certain types of standards.

But the real interesting one that the portfolio has been very well positioned before is stimulus spending. And some examples there would include the Biden Infrastructure Law, the Chips Act, the Inflation Reduction Act, just three that we can easily talk about from time to time. And in that regard, the portfolio is well positioned with its shares of United Rentals, Vulcan Materials, one of our favorites, ChargePoint, and of course, Applied Materials.

J.D. DURKIN: It's not a broadcast between you and me without, at least, one charge point reference. I suspect we'll talk about it again. Is there anything that stands out to you in 2023 here, Chris? It could be for good reasons or maybe not so good reasons.

CHRIS VERSACE: From a thematic perspective, I think the big theme of the year, just because it's such a pronounced shift and it was also something that we were able to channel into despite concerns about the economy and its speed, was the Inflation Reduction Act, the Chips Act and, again, the Biden Infrastructure Law because we knew that there was going to be incremental spending as 2023 and into 2024, 2025, unfolded. So from a thematic perspective, we were able to take a very long view because we knew these were multi-year programs. We were able to identify companies whose businesses were extremely tied to those areas of spending.

Again, Vulcan Materials, United Rentals, Applied Materials, in particular. So from that vantage point, 2023 was a great year for those names, a great year for that theme, and I think as we move into the back half of 2023, all of those are going to accelerate and we have more favorable movement in those stocks to look forward to.

J.D. DURKIN: Chris, when you're trying to identify an opportunity, are there guiding lights, any signals, things you look out for there on the horizon that might indicate to you that a particular theme is emerging? What do you look for?

CHRIS VERSACE: Wow, that's a great question. I mean, just in general, as I said a few minutes ago, one of the reasons I like thematic investing is because the signs are abundant or, as I like to say, thematics are very recognizable and relatable. Relatable in the sense that you can talk to just about anybody about them and they kind of understand because these things are unfolding around us every day, every week, every month in our lives.

So in terms of how do I identify something new, something emerging, you really want to keep your ear to the ground to what companies are talking about, where they're starting to see interest, where they're starting to see a demand from their customers, their suppliers. Are we starting to see a lot more conversation about this on corporate earnings calls? And then the other part of it, too, is just keeping an eye on, again, day-to-day life to see what the individual is, not just dealing with, but new products, new services that are coming to light and what that demand pull through might mean.

J.D. DURKIN: And, Chris, finally, how do when a trend is maybe run its course?

CHRIS VERSACE: That's a great question, JD, because one of the things that we recognize about thematics is that these are not themes that necessarily go on in perpetuity. Some of them have very finite life cycles. Some have medium and longer terms ones.

So it's something that we're constantly evaluating. But we also have to recognize, too, JD, that there's a little bit of a difference between has a theme run its course and has a stock price priced the best of the theme in. That second part is something that we look at, I won't say quite every day, but certainly every week, every month as we continue to evaluate the portfolio and position it on a go-forward basis.

J.D. DURKIN: Chris, you do a great job managing the portfolio day-in and day-out. I am always grateful for this little bit of extra insight to help make all members a little bit smarter in terms of understanding how you go about doing the good work. Chris, thank you.

CHRIS VERSACE: Thank you, JD. I really appreciate that.