Daily Rundown: July 17

J.D. DURKIN: Good Monday morning, members, one and all. Chris Versace joins me now to help break down everything you need to know before a very busy week of earnings. Chris, good morning.

Before all that, of course, I do want to talk about the major telecoms coming into focus the last few days after a new story from The Wall Street Journal reported major phone companies knowingly used and then left behind lead-lined cables across the US. That happened decades ago, according to the story.

Telecom has said it's been unable to confirm that reporting. But for people who are seeing this headline this morning, Chris, what do you think this means for Verizon?

CHRIS VERSACE: Well, I think it's another concern that we have to factor into our thinking. Is it one that impacts the operational aspects of Verizon? No. But it's one that could result in perhaps a charge or some other remediation.

Like I said, it's another reason that we're kind of going to take another look at the shares of Verizon. As we've been touching on in the last few weeks, and especially again in Friday's rundown, when we revisited the rationale why we first put Verizon shares into the portfolio, it was much earlier in the year when we were concerned about a slowing economy.

Obviously, the economic data has been stronger than expected. Current GDP expectations for the June quarter are actually higher now than they were for the March quarter. And we're starting to seriously rethink about the rationale behind continuing to own Verizon shares.

The risk that we see is that perhaps they're dead money, especially with the Fed funds rate likely to be inched up yet again next week. To us that takes the allure of that more than 7% dividend yield off the table. And at the same time, we are seeing a lot of other folks coming around to this way of thinking.

We talked about a downgrade for AT&T last week. And they received another one this week. So it might very well be time to move on from this position, repurpose the capital into something that might be a little more productive for the portfolio.

J.D. DURKIN: Chris, you know what they say about hindsight. Is there anything that you would change when looking in the rearview mirror?

CHRIS VERSACE: We didn't do a lot last week. We added to the shares of Universal Display and Bank of America ahead of the June CPI report. I think looking back, that was actually a pretty good move on our part, especially since the thesis behind Bank of America was reaffirmed by the comments from JPMorgan and Wells Fargo that reported their earnings on Friday.

If there was one thing, though, that we could have done different, I might have been, again, whispering in my ear last week, oh, that come down and the shares of Elevance, that might have been a great opportunity to tell members who were underweight the shares, please take advantage of this.

The fundamentals are there. We think that UnitedHealth's earnings on Friday are going to be solid. And that is exactly what panned out.

J.D. DURKIN: All right, Chris, let's talk about earnings for the next few days. We got BofA joining the earnings party set for release tomorrow on Tuesday. You did a little buying ahead of that report. Talk to me about what you think you'll be looking for most closely come showtime for Bank of America.

CHRIS VERSACE: So we're coming off the heels of these better than expected reports from Wells Fargo, JPMorgan. So we're going to be looking for confirmation that those tailwinds are also playing out through Bank of America. That's probably the biggest thing that we're looking for to shore up our conviction in the position.

But we're also going to want to hear what they have to say about the consumer, about consumer credit, and about loan growth because all of those will speak to the tone of the economy for the back half of the year. And I'll also be quite curious to hear if they say anything about the return of student debt payments and how that might impact the outlook for the consumer.

Again, something that starts in October and could impact the holiday shopping season.

J.D. DURKIN: What's your story for Morgan Stanley this week, of course, one of the bullpen names? Anything there you're following you would want members to keep track of?

CHRIS VERSACE: Well, we've got a couple of IPOs that are expected to price this week. And the whole thing that we're waiting for here is to see the operating leverage start to return for Morgan Stanley's investment banking business. That can come in the forms of M&A or really in IPOs.

And a couple of weeks ago, we saw the IPO window start to open. But the question is, was that just a crack? Or is it going to widen even further? And as we shared in this morning's opening comments, even JPMorgan's Jamie Dimon said that the tone of the IPO market is really going to hinge on what we see develop this month.

So of course, we'll be watching those particular transactions and any others that come. The rationale here, again, is there is a very large IPO backlog. But the question is, will it remain backlog? Or will we start to see these deals come to market, giving that operating leverage that we're looking for?

J.D. DURKIN: Chris, tomorrow we'll also hear from Lockheed Martin. Of course, our good friend, Sarge Guilfoyle, recently called that a winner among the defense stocks. Talk to me about what you're expecting from LMT. And do you agree with Sarge's assessment?

CHRIS VERSACE: Yeah, so of course, we absolutely agree with Sarge's point that Lockheed's a winner. That's why it's the one defense company that we have in the portfolio. In terms of the company's reporting, they've been racking up a number of wins, some very high profile as it relates to defense spending not just inside the US, but outside the US as well.

So the key for us is going to be the guidance for the second half of the year. Really what we want to see is this backlog start to translate into margin leverage not just in the second half of the year, but really for 2024. That's, again, the one big thing that we'll be looking for.

J.D. DURKIN: Chris, let's talk Elevance. We'll get that name this week as well, maybe a little bit of a point of concern from some members last week, as analysts cut their price targets largely on fears of higher than expected costs in healthcare.

Of course, we already heard from UnitedHealth. So what are you thinking for the report for Elevance?

CHRIS VERSACE: So again, we can understand the concern that members had last week. Other folks were trimming their price targets. But I think as we discussed, most of those price targets were vastly higher than our $550 target. And as they were coming down, they nicely bookend our target.

And again, the fact that UnitedHealth made some comment during an earnings conference two months ago or so about rising costs, the fact that they came out and despite those higher costs showed tremendous operating leverage and raised their expectations, I think that puts us in a very good position with Elevance.

Remember, right around the time that this comment from UnitedHealth was kind of weaving its way through the market, Elevance actually reiterated its guidance for 2023. I think that puts us in a very solid position for their earnings report. And again, hindsight being 20/20, I do wish that we had taken a more aggressive stance with members, particularly those that were underweight, saying be advantageous here, take advantage of this, the short term blip because as we saw on the back of United's earnings report, Elevance shares traded back nicely.

J.D. DURKIN: Chris, any reports outside the portfolio that maybe you're paying closer than usual attention to or anything you'd want to flag for our members?

CHRIS VERSACE: So it's going to be a busy week. I know we're starting off today with next to no earnings reports. But there are going to be more than 300 coming at us this week. So if I had to narrow it down outside of the portfolio, there's really going to be three, JD.

The first is going to be Taiwan Semiconductor. This is going to be a big, big earnings report for a variety of areas of tech, whether it's PCs, smartphones, data center, or even AI. And here what we're looking for is what the company has to say principally about the back half of the year.

Is the worst of the PC inventory situation behind us? Will we see the second half traditional ramp in smartphones unfold? Is AI as big as people were expecting? And again, is the second half outlook for data center stronger than the first half?

So again, what Taiwan Semiconductor has to say is going to be a very, very big report. The second one will be ASML. They're a semiconductor capital equipment company. So of course, we'll be paying attention to that relative to our shares of Applied Materials.

And in particular, we know that there are programs for reshoring semiconductor capacity, both in the US and in Europe. And we will want an update on where we stand in the flow of funding for those projects. So that's going to be what ASML has to say.

And then just as it relates to the EV space, normally you and I would be talking about ChargePoint. But today, we'll be talking about Tesla because they do report this week. And a couple things here. One, what are they seeing in terms of volumes for EVs? Are consumers still interested in scooping up EVs?

We're looking for what they say about the back half of the year on that. We also want to understand what they may be seeing about the usage of EV tax credits. And then finally, are they seeing private funding and public funding for the buildout of EV charging stations? That in particular is something we'll be looking for as it relates to ChargePoint.

J.D. DURKIN: Chris, not a ton by way of new economic data. But I wonder if there are any priorities that you have that you'd want members to keep an eye on as well?

CHRIS VERSACE: You're right. I mean, it's a pretty light week for economic data. But the one report that we'll be looking at is the June housing starts report. Remember, the May report was unbelievably and surprisingly strong, kind of flying in the face of higher mortgage rates.

So we want to see with a little bit of hindsight and this fresh data, was that a blip? Or is it really the start of something else that we need to pay even more attention to as it relates to the economy but also, for the portfolio?

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

CHRIS VERSACE: Thank you, JD.

J.D. DURKIN: As one final programming note, we will be back with another live call. It'll take place this Wednesday, the 19th of July. Be sure, as always, to join Chris Versace and Sarah Silverstein live at 12:00 Eastern time. Thanks for watching. We'll see you soon.