SARA SILVERSTEIN: Good afternoon, members, and welcome to another monthly call. It's hard to believe but second quarter earnings season is underway, so we're dedicating this entire call to reviewing our positions into earnings, sharing our expectations for the back half of 2023, and, of course, answering your biggest questions.

But before all that, I want to step back and look at the first half of the year. As we look at the stock performance for the portfolio, Marvell, United Rentals, ChargePoint were some of the standouts. Chris, what went right, and more importantly, what went wrong so far this year?

CHRIS VERSACE: So let's take a look, Sara, really at the second quarter because there's a lot that happened during that time frame. We saw, as you mentioned, United Rentals shares, even Vulcan Materials shares really take off. But just stepping back, there was a lot going on there. We had those string of bank failures that obviously caused some concern for the market as well as more smaller cap stocks. We saw tighter credit start to unfold. The Fed continued to boost interest rates.

But at the same time, as we move through the quarter, the economic data continued to perform, in many cases, better than expected. And as we sit here today, GDP for the second quarter is now looking perhaps 2.4%, up from 2%, in the March quarter.

So a lot going on during the quarter in and of itself, but when we looked at Marvell in particular, there were a number of signs that said, oh geez, not only is AI being a buzzword, but their end markets, particularly cloud and data center, looked to start firm-- firming, and that happened throughout the quarter.

With United Rentals, clearly, each month of data that we got for non-residential construction really reaffirmed the notion that the infrastructure spending thesis that we've been talking about for United has been accelerating. And with ChargePoint, look, can't sugarcoat it. That was one of the propositions that really underperformed the market during the quarter.

But remember here, we're really waiting on flow of funds for infrastructure spending as it relates to EVs to start to flow. And again, as we learned really in the first quarter, that's more of a second-half story. So while we continue to see the number of EVs being sold increase while we continue to talk about the prospects for EV charging stations over the longer-term, we're waiting, really, for those flow of funds to start picking up, just like we saw with infrastructure, and that is what keeps us increasingly confident-- patient, if you will, with ChargePoint as we move into the second half of the year and into 2024.

SARA SILVERSTEIN: And it's almost easier to talk about what's already transpired, but what is keeping you up at night? What position in the portfolio are you reconsidering or is giving you anxiety about what might happen next?

CHRIS VERSACE: So probably the biggest one would be the inverse ETFs. And we've talked about this in the past on calls like this where the last thing we want to do is get flat-footed with a pronounced turn-positive in the market. And there's been some chatter over the last few weeks.

Are we in a bull market, are we not? Are we still in a bear market? We're still trapped within some guidelines or banners-- bumper guards, if you will, for the S&P 500. We're going through earnings that are going to tell us a lot about the second half of the year.

So my concern is, again, at some point, I know these will have to come off. We really don't want to miss it. That's why we continue to dig into the data day in and day out each week. But we're also watching the seasonality in the market and some other factors as well.

SARA SILVERSTEIN: And before we get to the names in the portfolio, let's talk about a name no longer in the portfolio. What happened with Verizon why was it time to exit the position at a loss?

CHRIS VERSACE: So really, what unfolded the last few days with the unknown of the potential impact from a regulatory perspective, environmental perspective, from a financial perspective on what that could mean-- not only for Verizon, but for others out there, that accelerated our timetable.

We had communicated to members that upon signs that the economy was continuing to strengthen more than expected, ones we've been getting, particularly of late, we said that we would start to rethink Verizon's position in the portfolio. So we already communicated that we weren't as bullish as we were previously, probably working towards exiting the position.

But when the news on these lead pipes and lead coverings came out, it really hit the stock, really triggered it below key support levels, and now we find that what was support is now resistance, and we sat back and we said, this is going to be increasingly difficult to work our way back. Let's cut our losses here. There are other productive areas that we've identified and continue to identify that we think we could probably have far better price return prospects than simply staying with Verizon and waiting it out.

So the lesson here, Sara, is that when we invest in stocks, it's not simply, as I say, fix it and forget it or crock pot investing. We really have to understand the evolving narrative not only around the market, but around a particular story, a particular stock, and that's exactly what happened. And we reacted when we realized that it was going to be a very, very difficult slug to work our way back to break-even.

SARA SILVERSTEIN: And you've been telling members earnings growth will be the name of the game when it comes to determining whether markets can be higher significantly in the second half of 2023, how does that change how you're approaching this earnings season?

CHRIS VERSACE: So let's talk about the benchmark there. Consensus expectations-- and I've shared this with members-- is the S&P 500 should grow its earnings by more than 7% in the second half of the year compared to the first half.

So what we want to see, particularly for newer prospects given the current market valuation, we're going to need to see companies that can grow their earnings in the second half far faster than that 7% benchmark or perhaps even stronger than what the benchmark is for 2024, which is around this mythical 10% year-over-year EPS growth.

But while that's one of the things we'll be looking for to identify new positions and double down on existing positions, we have to remember that there's all sorts of data points that we can collect from the earnings from each and every earnings season as it relates to positions in the portfolio and ones that we're contemplating.

So like for example, tomorrow, Taiwan Semiconductor is going to report, and what it has to say about the data center end markets, smartphones, PCs, automotive demand for chips as well, it's going to be very, very important for that tone for earnings in the coming weeks as companies that serve those markets report.

And then also, too, just given its nature as the largest contract fab manufacturer for chips, we're going to want to really pay attention to its comments about capital spending given our position in Applied Materials. So that's one example, but we can-- there's no shortage of reports like that in the coming weeks. So earnings season, particularly this time of year that could reset expectations for the second half of the year, it's extremely important.

SARA SILVERSTEIN: And do you have any general takeaways from earnings so far? What are you seeing?

CHRIS VERSACE: So we've gotten some earnings from banks and a handful of other companies. And I would say two general comments. One is that they have been better than expected. They reaffirmed the notion that the economy, as I was saying earlier, is on firmer footing-- far firmer footing than what a lot of people thought, myself included, two, three quarters ago.

But the other thing that we're starting to notice, we saw this with ASML this morning and a couple of other companies, is that despite rising backlog or strength in new bookings, some companies are not raising their guidance or their forward view as much as you might think, and those stocks are trading off.

So there seems to be some hesitancy-- conservatism, if you will, on the part of management teams as we go into the second half of the year. And we could see that unfold further, but so far, again, generally speaking, better than expected earnings so far.

SARA SILVERSTEIN: And let's get into the names in the portfolio that have already reported. PepsiCo marked a strong start for the club's holding last week. No doubt it was a strong quarter, but on Friday, Sarge brought up his concerns with the balance sheet. Is that a worry for you?

CHRIS VERSACE: So that's actually pretty interesting that he said that because have to remember that PepsiCo is really an amalgamation of two businesses-- beverages and snacks. And I think his comment was relative to Coca-Cola. But you have to understand the different dynamics between the businesses.

Coca-Cola is a pure play beverage business. As I just said, Coca-Cola is snacks and beverages. So when you really want to assess the balance sheet and compare it, you have to do a mixed view. And when you do that, look at other snacking companies, it really explains where PepsiCo comes in.

So on that basis, I am comfortable with it. But even some of the metrics that we have here, when we take a look at EBITDA to interest, PepsiCo way ahead of Coca-Cola. We look at net debt to EBITDA, way overhead, and its inventory turns, even better than Coca-Cola. So I would gently push back on Sarge when it comes to that.

SARA SILVERSTEIN: Lockheed Martin beat expectations and upped its revenue guidance yesterday, but the stock struggled a little bit initially. What was behind the selling yesterday?

CHRIS VERSACE: Yeah, so we got some member questions on that and we addressed that in an alert to members. And two things. Again, the company posted record backlog for coming out of the June quarter, up around $158 billion. So that gives you very good visibility, not just for the current quarter, for the second half of the year, but really over the next several years.

So the concern-- again, I alluded to this a second ago-- is, wow, if the backlog was that strong, why did they not boost their revenue guidance by more than expected or why didn't they raise the outlook initially for 2024? And they're playing it conservative, there's no question about it. They're still saying they see mid-single-digit growth in 2024 for the top line.

So I think we're going to see that conservatism play out. I suspect, as we continue to see the order book build, they will likely have to boost that target. And as I said to members, that trade-off that we saw yesterday and again today, if you're light on Lockheed Martin shares, this is going to be a great place to pick it up.

SARA SILVERSTEIN: And Bank of America blew Wall Street away with an earnings beat. What kind of takeaways did you get now that you've had a chance to look through the whole call?

CHRIS VERSACE: So coming off of the failure of those regional banks, our thinking was that there was going to be some migration of accounts, both consumer and business, and there would be a handful of large banks and some others in other areas that would be beneficiaries. And sure enough, that's exactly what Bank of America showed across its metrics.

The one thing that stood out to me is that their investment banking business performed, candidly, better than expected given the overall environment. I think that points to them taking share. Typically when we think of about Bank of America, it's really more on the institutional asset business or on traditional consumer and commercial banking side.

But we have to remember, too, that as the investment banking window eventually reopens for either IPOs or we see an acceleration, perhaps, return in M&A activity given what's unfolding with Microsoft-Activision, Avago, and-- sorry, Broadcom and VMware, we could see some accelerated M&A activity return. That would be another booster for Bank of America.

SARA SILVERSTEIN: And what about Morgan Stanley? It's been on your shopping list. Tell me what you thought about their earnings? Any closer to a buy?

CHRIS VERSACE: So I think we're-- the thing that we really wanted to see out of Morgan Stanley to call it up to the active portfolio was the a pronounced reopening in that IPO window. That's really where they get a lot of leverage. We've seen some transactions of late, we're waiting to see some others. Price and see if that confirms that the IPO window has indeed not just cracked open, but has been kicked wide open.

And I say that because if you look at the IPO backlog, there's some 200 companies waiting to tap the public market. Some high-profile, like a Reddit, others like Panera and even Yahoo potentially returning to the public stage later this year or early next year.

So there's a lot of excitement it's kind of a timing issue for us. As we saw in the company's results, though, the asset management business continues to grow very solid state, and once we get a sense-- and it could be in the coming days-- that this leverage for the investment banking business is poised to return, that'll get us off the bench with Morgan Stanley.

SARA SILVERSTEIN: And looking at bank earnings as a whole what's, the read-through to the club's position in Trinity Capital?

CHRIS VERSACE: Right. So I kind of alluded to this. Trinity Capital is a BDC company, so they do venture loans to small emerging growth companies. That was the same market served by Silicon Valley Bank, Signature Bank.

And what we saw through Bank of America is, yes, consumers didn't simply sit there. They flocked to other banks that could service their needs, and I think that's exactly going to prove out when we see the results from Trinity Capital in the next couple of weeks.

Stock has moved up nicely. Would I chase it from here, from around 15 to 16? I wouldn't, but it's been a great performer for the portfolio. And the more loans that they put out, more likely than not, it means, because they're a BDC, they're going to have more dividends to pay out to shareholders. So that's the next catalyst that we'll be watching for.

SARA SILVERSTEIN: And Elevance was up this morning after reporting strong results. It's been a bit of a rough patch for this stock, but is this latest report a sign of blue skies ahead?

CHRIS VERSACE: So I think it is. I say that because-- and again, we touched on our early comments to members, they put in some incremental pricing just to overcome some of the rising costs that they were seeing. And you have to remember, too, that the choppiness in the stock really wasn't due to anything that Elevance said.

If anything, when they went on the second quarter conference parade, if you will, they reaffirmed their guidance and they stuck to it. It was an offhand comment that UnitedHealth made. But as we saw last week, they, too, were able to overcome those rising costs.

So I think that these concerns are starting to be put, as they say, in the rear view mirror for these companies. Now we can focus on the continued expansion of its various Medicare, Medicaid-- Blue Cross, Blue Shield, excuse me, footprint that will drive members and drive revenues, drive earnings.

SARA SILVERSTEIN: And you and Carley Garner in a recent podcast talked about the financial implications of seasonality. Do you expect to see recent extreme heat play into whatever guidance we get from American Waterworks?

CHRIS VERSACE: I do. And I shared this in a note with members a couple of weeks ago. Just mapping out this very seasonality that you're talking about, it's no secret-- and I think a lot of people are feeling it, especially given the very hot, very sticky temperatures that are moving across the US, water consumption is seasonal, whether it's for watering your gardens, filling your pool, or simply watering your grass.

So we will see that play out, and I do think the company will give that type of guidance. Again, positive guidance for the September quarter. We're in it now, and that is its best performing quarter of the year without question over the last five, six, seven years.

SARA SILVERSTEIN: And what about Deere? Any seasonality impact there?

CHRIS VERSACE: No, there isn't so much seasonality for Deere. I mean, we do have to watch the summer heat and what that is going to mean for the crop yields later this year for key ag commodities, corn, wheat, soybeans. So that's something that we'll be watching.

The real seasonality for it comes a little later this year once we understand what the harvest is looking like. We know, again, what the crop yields are, we have a better sense for what the pricing will be for those key commodities at that point, and a far sharper sense as to what farmer income is. That's the key determinant of the upgrade cycle for ag equipment like Deere.

But remember, too, Deere also has a small, call it 20-ish, excuse me, percent of its revenue stream that is construction equipment, and that should be performing extremely well throughout the summer into the fall because of that infrastructure spending we talked about earlier.

SARA SILVERSTEIN: And we'll hear from our first big tech position with results from Microsoft next week. Now you've said previously that you like Microsoft with or without Activision-Blizzard. Now a judge blocked an FTC injunction. Are the regulatory concerns in Europe noise in the background? What is going to happen here and how do you feel about this position?

CHRIS VERSACE: So increasingly it's becoming apparent that what you just said about it being noise is 100% true. In fact, today, Microsoft and Activision have extended their merger agreement to October 18 so they can-- excuse me-- continue to work through the last remaining issues.

But all indications are that they're probably going to make some concessions and the deal will get passed. Remember that almost every other regulatory agency has approved the deal with a lot of noise, if you will, coming off the last couple of days.

So as we move into the second half of the year. I think we're going to start getting a lot more information about what a combined company looks like. But in the near-term, Microsoft is leaning increasingly into AI, announcing some new pricing for AI tools into Office and Windows.

We had a note out yesterday saying, look, this is going to lead us to most likely have to increase our price target. We're starting to see others do that. We're going to wait till we get earnings next week so we get a real read on the other parts of the business so we don't have to make several changes in a couple of days and confuse members.

SARA SILVERSTEIN: And sticking with tech, you've said AI has become a bit of a buzzword for some companies. How important will that buzzword be come this round of tech earnings? For example, let's start with Alphabet.

CHRIS VERSACE: So to me, we always try to focus on the basics of what's going on, particularly with Alphabet. That means, of course, the search engine market share, which, by the way, hasn't really moved at all since AI has been announced, particularly with Microsoft and Bing. So I think that's a positive for Google.

We they have made some announcements with Bard, yes. We'll start to see what kind of traction that has when they report during the quarter. But we also have to focus in on Google Cloud, which, remember, was starting to turn profitable, we want to see that continue.

So will AI-- the market might focus on AI tremendously over the next couple of days, a couple of weeks, looking to see if the huge run-up in some of these stocks is worth it. Again, we'll take a different tack and when we focus on the nuts and bolts, but we will pay attention to any potential upside that might be had as a result of early traction for AI.

SARA SILVERSTEIN: In recent roundups, you've urged members not to chase shares of Chipotle, warning of headwinds, including the resumption of student loan payments. How could we see that play out in Chipotle's upcoming same store sales guidance?

CHRIS VERSACE: So in the very near-term, I think the companies will continue to benefit from shoppers who are dining out, trading down from fine dining, casual dining, to what's known as quick service-- or Quick Service Restaurants, or QSR, to use the industry lingo. That's right in Chipotle's sweet spot.

Where we start to see perhaps some concern is as those student debt payments start to come due-- remember, they return in October. So that's on our radar for what it might do not only for Chipotle, but for other consumer retail-facing names going into the all-important holiday shopping season.

So in the near-term, I think we're going to see continued strength with Chipotle. Our price target's around $2,200. We could see the shares move higher after earnings towards that target. And at that point, we'll have to reassess if there's additional upside, or perhaps you'll just enjoy that great run in Chipotle and look for some other hurdle area to put the portfolio in.

SARA SILVERSTEIN: And you've had an eye on Ford with concerns it can be outmaneuvered by competitors like GM. What will you be looking for when we get earnings from Ford and other automakers?

CHRIS VERSACE: So our biggest criticism on Ford has been that when they reported the March quarter in April and you parse their guidance, despite all that they had going on, there was no sequential improvement for their operating profit. So it really raised some flags to us about where are-- what is it going to take to realize a lot of these synergies from their transformation?

And what have we seen since then? Well, we've seen prospects for tighter credit actually happen. We know that consumers are being turned down for credit card increases, they're being turned down for auto loans. We know that auto loan costs have moved higher. And just a couple of days ago, they followed suit, matching-- or sorry, following Tesla with price cuts on their EVs.

So if there's a volume question here on top of expectations that were already calling for flat profits, that's a big concern because if the volumes are less, they may not be able to even realize what they expected on their profit side. So again, this has us increasingly concerned.

We're going to wait, however. We want to see what Tesla has to say to see what the impact of their price cuts were on their margins. If they are quite worrisome, we might wind up trim-- starting to trim back out of Ford, something that we've communicated with members. Our preference is to do it between that 14, closer to $15 level if we can get there. But if you the evolving narrative says we need to do something, we'll start to do it.

SARA SILVERSTEIN: And how does this week's price cut on the electric F-150 Lightning play into all of this?

CHRIS VERSACE: Yeah, exactly, Sara. As I just mentioned, it raises some concern because if demand was strong or as strong as that they had indicated previously, why would they turn around and do this price cut? Some of it can be explained by trying to maintain market share against Tesla and others that have cut prices for EVs.

But again, if they can't get those volumes going, it's going to be very worrisome for that synergy realization. So that's-- again, I know they tried to put it off on, oh, we've got some efficiencies going and things like that, but the timing is just too suspect, Sara. And candidly, it makes us a little more critical of Ford and the management team.

SARA SILVERSTEIN: Right, that's interesting. How important is housing demand when it comes to the club's positions in the United Rentals and Vulcan Materials?

CHRIS VERSACE: So remember, the core thesis on this has been infrastructure spending, which we've monitored quite well through non-residential construction. And the housing market, as we've seen, housing starts are down you know mid-teens on a year-over-year basis.

So to the extent that we see a turn in the housing market and we start to see-- I want to get this right because there's a couple of different stats there. So if we're not just seeing housing starts rebound in a true fashion, if we're seeing the number of homes under construction each month, which is contained in that report, turn around and rebound and grow, that would tell us that there's another driver of demand for United's rental fleet and another set of uses for Vulcan's aggregates.

That would be a great positive. It would be a huge catalyst for us to raise our price targets to become incrementally more bullish on both of those names. However, as we put out in a note this morning discussing the June housing starts, not only did the housing starts number in aggregate fall compared to the main numbers, suggesting the hot numbers were a bit of a blip.

But again, the number of homes under construction at the end of June were lower than those at the end of May, lower than the end of April, all the way through such that they were the weakest-- lowest number, sorry, since the start of the year.

So I don't really think we're going to see that unfold, at least not yet. Particularly with the Fed poised to give us another rate increase next week, incrementally moving mortgage rates higher, and again, tighter credit as well as that concern about student debt payments being resumed.

So I think the housing market is probably going to be neutral to a slight drag on the economy at least for the next couple of months, maybe longer.

SARA SILVERSTEIN: And everyone will be watching Apple. After they pass the $3 trillion benchmark, many analysts theorized that the stock could be at a tipping point and questioned its future growth prospects. Could there be a downturn ahead if they deliver anything less than perfect? What are you going to be watching for?

CHRIS VERSACE: So Apple's always a tricky one. Everybody tries to read into what they're going to say, and they do have, without question, one of the best and most dynamic supply chains out there. So for us, there is data that shows that the Mac actually gained market share. There's commentary that confirms that iPhone demand is stronger than the overall smartphone market. That would suggest that Apple could put up a good quarter.

But to your point, just given the sharp move in the stock, they really have to give some nice guidance for the back half of the year, which is why, when Taiwan Semiconductor reports tomorrow, we're going to be very curious what they have to say about those different end markets. As we know, TSM is a big manufacturing partner for Apple.

So I think we'll have a much better sense of what Apple is likely to deliver once we can receive and then digest those results from Taiwan Semiconductor tomorrow. But make no mistake, typically when Apple reports, the stock tends to trade off a little bit. Can't say that at current levels if it comes down to 185, if that's a buying opportunity, but it doesn't necessarily mean that we need to sell either.

SARA SILVERSTEIN: And Amazon's been back in the headlines. Its annual Prime Day marked another record day for sales, but also fell short of some estimates. That won't be a part necessarily-- that won't be a part of this earnings report, so what will you be watching?

CHRIS VERSACE: So we can take a look at the June retail sales data, which confirmed our thought that consumers looking to stretch their dollars would lean back into digital shopping. That's going to be obviously great for Amazon.

But we're also going to want to be monitoring its margins. Early-- late last year, earlier this year, they made layoffs. They announced other cost-cutting efforts. So we want to see that really start to be reflected in the margin profile, not just for the retail business, but also over at Amazon Web Services.

And with that in mind, comments from Micron and others pointing to a flattening out, and in some cases, renewed strength for cloud. That certainly bodes well for AWS, we'll want to see that confirmed as well.

SARA SILVERSTEIN: And yesterday's retail sales came in slightly weaker than expected. Given it's been a while since Mastercard's last SpendingPulse report, are you expecting management to get more cautious about consumer spending?

CHRIS VERSACE: So that's actually a pretty interesting question because I look for that Mastercard SpendingPulse every month. And there hasn't there hasn't been one in several months. So I actually leaned out to the company. They're no longer putting press releases out, which is a little surprising to me.

Personally, I like the data. It really gave us a lot of different data points to look at compared to the ones that we get in the usual monthly retail sales report, things like travel and jewelry and some other things. And on the other side, it was confirming as well for some of the line items in the retail sales report.

So do I think that the-- do I think Mastercard is going a little more cautious on the consumer? I don't think they're going to do that yet. I think they're going to wait and see if this much touted $400 per month on average for student-led payment is indeed the number. I think they're more likely to lean into the prospects that we might see real wage growth.

Wages have been continuing to be very positive, we're starting to see real improvement on inflation. If we can get that real wage growth, it could say that at the margin, consumer spending can hold up, that would be a positive for Mastercard.

But I also wouldn't be surprised, too, given the environment, especially given what we're seeing in some of the BNPL companies, or Buy Now, Pay Later, like Affirm and Klarna, that they might be talking a little bit more about the offerings that they have for their platform with regard to BNPL.

SARA SILVERSTEIN: And you've been following and writing about Universal Display for some time, but we will be getting its first report as a full-fledged member of the portfolio, so what will you be looking for?

CHRIS VERSACE: So when we take a look at Universal Display, remember it's a company that sells the chemicals to make organic light-emitting diode displays. They also have an IP business as well.

So the key end market for that is smartphones. Again, the leading indicator for us will be what TSM to say about that market tomorrow. We'll be looking, though, for Samsung in particular, they have an event next week where they're going to take the wraps off their latest and greatest smartphone models.

So we'll be paying attention to how big the displays are. Larger displays, whether it's just a regular format like we have in the iPhone, candy bar style as it's called, or on the flip phones that actually stretch the display, those use even more real estate, and they particularly lean into those organic light-emitting diode displays because they're flexible.

So these are some of the catalysts we're watching for, but it's going to be the guidance for the back half of the year as it relates not just to smartphone and market for Universal Display, but what they see about the TV market. But the big, big thing to focus in on is going to be any progress towards the general illumination market.

When we first introduced Universal Display to members, we said the evolution of this technology is going to follow very closely to what we saw in light-emitting diodes, which went from smartphone backlighting to automotive lighting to general illumination.

And now you can walk into a Lowe's or Home Depot or, even buying on Amazon, LED lights for your home. So that's the Holy Grail because it's the largest end market. So any meaningful update on that will be exact-- will be one of the key things that we're looking for.

SARA SILVERSTEIN: And what about CBOE? It's been bumping up against your $140 price target for quite a while. Given its 3 rating, what is your game plan here?

CHRIS VERSACE: This is a great question, and we've targeted to members that CBOE has potentially run its course. I think we're going to have a better sense as we move a little bit further into earnings season. It tends to be a seasonal time for the market. That late July, early August, we can see it move off. That might be another hurrah for options activity. If that's the case it'll warrant us keeping CBOE around to, capture perhaps that last hurrah.

But the market, I think, as the economy continues to improve, I think people are getting incrementally more bullish. That might mean that some of the hedging tools that they use that CBOE provides may not be as much in demand. So that's something that we're starting to take a hard look at.

And again, maybe there's a couple of bucks upside to our price target, but do the shares go demonstrably higher from here? Hard to see that based on what we're seeing so far. So we'll have to keep an open mind when they report, and then perhaps finally, based on the guidance, based on what the tone of the market is at the time, make some decisions.

Perhaps it means CBOE finally becomes a source of funds for other positions in the portfolio or in ones that we call up from the bullpen.

SARA SILVERSTEIN: And travel's been in focus. There's been so many troubles at the airport. I've experienced them, we're all reading about them. You've been touching on the subject in recent rundowns, but could increasing dissatisfaction with air travel start showing up in Clear's results?

CHRIS VERSACE: That's a great question. Our thesis on Clear has been and will continue to be the expansion of its footprint, whether it's with new airline partners like Alaska Airlines, or if they continue to win gates at existing airports, or add additional airports to their lineup.

And they've continued to do that. And I have to say, I understand that members are frustrated with it. The market is moving, the stock is languishing around 24 or $25. So the key here is, when the company reports, because they don't make a lot of noise, unfortunately, they don't do conference presentations, they don't do interviews.

So the catalysts are either going to be from their partners, which have been very positive out of Delta Airlines, United airlines as well. And we'll see what Alaska has to say when they report coming up. But for now, we're going to-- I hate to say this, we're going to have to sit and be patient.

But as long as people are continuing to travel, that pain point is going to help win over folks for people that want to cut through the congestion and the hassles. That is a positive for Clear Secure.

Oh, and one other catalyst that we'll watch for is going to be what American Express has to say about travel because they have a very close relationship with some of their premium cards. So we'll be wanting to see what American Express has to say about new signups for that particular reward.

SARA SILVERSTEIN: And Applied Materials will be the first of the club's positions to report next month of the chipmakers, but we've already heard from Micron. The semis tend to benefit from all rising tides, lift all boats. Looking at Nvidia particularly, how important is it to look at reports across the industry and what will you be looking for when you look at Applied Materials?

CHRIS VERSACE: So the big thing for Applied Materials is it's our play on a couple of things. One is the continued overall growth in chips. As I have joked from time to time, it's not cotton. Chips are the fabric of our digital lives. And we continue to see new applications emerging, including AI, as well as continued growth in chip content, not only in smartphones, but in autos, in appliances, and other end markets.

So there's that aspect of it. But there's also the driving force that is the reshoring of chip capacity not only in the US, but also in the Eurozone and in Japan. So these are the reasons why we own Applied Materials. As far as the catalyst that we're watching, ASML, one of their competitors, reported this morning and they pulled in $4 billion in net new orders.

So we are starting to see those flow of funds happen. I think we really want to see continued bullish comments on capital spending. That's going to be from Taiwan Semiconductor tomorrow, but Intel reports next week, and others.

So for us, I think the question is, at what point do we see a disconnect between the share price and the fundamentals so that we can actually start building up our position in Applied Materials? It's had a fantastic run since we added it, but we are a little light on the overall exposure, and that's something that we would really like to increase as the tipping point, if you will, hits for this reshore spending.

SARA SILVERSTEIN: And we'll also hear from Marvell, which joined many chipmakers soaring in the first half of the year. Given the prevailing "chips can do no wrong" attitude, what could trigger a sell-off? Anything less than perfect or are they in good shape?

CHRIS VERSACE: I think they're going to be in good shape. Again, we've gotten incrementally positive comments on data center and cloud. Those are some of their core end markets. The network business could potentially be a little weaker just given some softer comments about spending from customers at Nokia and Ericsson.

But I do think that the largest end market is data center, to the extent that, again, I hate to sound like a broken drum, but if Taiwan Semiconductor gives us some good commentary, reaffirming what we've already heard, I think we're going to start to see Marvell shares move higher. We might have to readjust our price target from around 62 to potentially higher.

So that would be a good move. The question that I would struggle with, just so members are clear, is will we see enough upside in any price target increases to warrant revisiting our current rating on the shares? So I doubt it would get to a 1, maybe a 2, but we'll have to see based on what develops.

SARA SILVERSTEIN: And COTY has been on your shopping list for quite a long time. You've been telling members you would get interested closer to $12. Could its upcoming report be the catalyst that you need?

CHRIS VERSACE: So as much as I would like to say so, Sara, they held an investor meeting very recently where they upsized their targets, where-- and then earlier this week, they're selling a stake in one of their businesses to help reduce debt faster than expected.

I mean, this management team, I gotta be honest with you, they're doing everything right. So I suspect that it will be another good earnings report. Could it drag the shares down to 12? I don't really think so, but if it does, we will be right there to snap them up because the continued progress on their deleveraging is going to drop more EPS to the bottom line.

The inroads that they're seeing with their prestige brand, the focus on skincare, and of course, there's the longer-term drivers which are going to be in Asia, but more specifically on China, that-- remember, it's a very small piece of the business today, and they're going to leverage their prestige business to grow that there, and we know that plays right into the Chinese consumer.

So I continue to like the name for the long-term, but if they do get to 12 after that earnings report, we will be picking up some additional shares.

SARA SILVERSTEIN: And ChargePoint will be among the last of our stocks to report second quarter earnings. Obviously this is a stock closely watched by our members and us. What are you watching when this report comes out? What should our members be watching?

CHRIS VERSACE: Well, let's talk about leading up to that report because I think that's a lot more important. So there's going to be companies in competing in the space, whether it's Blink Charging, whether it's Tesla later this week, or even Orion Energy Systems and a few others out there, They tend to report-- obviously with Tesla reporting later this week, they're way in advance of ChargePoint.

So what we want to hear-- and while everybody on-- Tesla is going to be focused on the number of EVs sold, which, of course, the more EVs that are sold, the larger that EV charging pain point becomes, we're going to want to hear some comments from them about EV charging, flow of funds from infrastructure spending. That's the same thing we'll be listening to when Orion Energy reports, when Blink reports as well.

That, to us, is going to be probably the biggest point of confirmation for ChargePoint. We know ChargePoint has one of the largest, if not the largest, array of charge points, no pun intended, across the US. We know it's looking to accelerate that. That flow of funds is the biggest catalyst that we and others have been waiting for to really materialize in force.

And it's been pushed back it's a second half of the year event. We'll be looking for confirmation from that. And as a result, when ChargePoint reports, we will want to see that baked into its guidance for the second half of the year. That is what we'll be looking for.

SARA SILVERSTEIN: And Costco saw a headline, same store sales drop again in the month of June. How is that influencing what you're thinking about into earnings later in the reporting season?

CHRIS VERSACE: So you got to be careful with Costco. So they report a headline number, but they also report their comp sales ex-gas, ex-fuel, which is better barometer for the way that we digest the retail sales report. And when you look at that June report, US comps were up 2% compared to 0.5% year over year for straight retail only in the June retail sales report. It tells us that Costco is continuing to gain share.

So I think they, too, will probably put up some good numbers. And to the extent that we might be a little more concerned about the consumer, Costco is exactly where you want to be because consumers don't want to stretch their dollars they're going to Costco. And we want to continue to capture that. I think that we're going to wait for this aspect of the thesis to play out through the balance of the year. We're likely to continue holding Costco shares.

And before we move into some outlook for the quarter, we have a few member questions on our ETF position, starting with our inverse ETFs. You've been hanging on to these for a little while now. What do you need to see before making an exit?

Yeah, so I touched on this earlier in the program, but just to be clear, we really want a sense that we're exiting that bear market. The extent that earnings expectations could be stronger than expected would be one clue that we're looking for. We're also closely monitoring some seasonality in the market as well.

We touched on that with Carley Garner on the recent podcast where she was saying that going into the early part of July, it tends to be a bullish time for the market. Second half, however, doesn't necessarily seem to be the case. In fact, over the last-- I think it's 15, 16 years, typically late July, early August, you tend to see a sell-off in the market.

So we'll be navigating that. We do want to keep that hedging exposure until we're rather confident that that worst of the-- worst of that, and perhaps a bull market is indeed emerging, is clarified and codified to us before we make that move.

SARA SILVERSTEIN: And summer is often a time that we go away from the market a little bit or it seems like there's some of the activity, like you said, is a little bit softer. Is this a good time or a bad time for someone that has too much cash on the sidelines to add to their portfolio?

CHRIS VERSACE: Wow that's a great question. And I say that because, just given my comments about the seasonality a second ago with the second half of July into August, and as I look at it on the calendar, we're July 19, so not saying that it's absolutely going to happen, but the odds of it happening are far better.

The other thing, too, that I would be wary of, just some comments, and I shared them this morning, one from Charles Schwab, that it saw during the second quarter a disproportionate amount of buying going on compared to selling. And then Bank of America also said that it saw something like $70 billion come into global equity funds over the last several weeks.

That certainly explains some of the continued lift that we're seeing in the market. My concern here is that if we don't get that earnings growth for the S&P 500 that has to be better than what the market is looking for, you look at the current multiple for the market, north of 20 times on 2023 earnings, the question becomes, where does the market go from here?

So I would hesitate before say going chips in and putting all that cash to work. I think there'll be opportunities to pick up individual stocks on a piecemeal basis, and I would suggest that members follow our lead because that's certainly what we intend to do.

SARA SILVERSTEIN: Great, thank you. The Fed is widely expected to raise rates next week and Wall Street is unlikely to be shocked. Do you expect another hike in the next few months? How could a surprise impact our portfolio?

CHRIS VERSACE: So yeah, you're 100% correct. We can take a look at the CME FedWatch Tool, I think the prediction is 99.8% that next week's rate hike is coming. We'll want to watch the language following the June CPI/PPI reports, but as I explained to members, when you trace those data points back, particularly on a-month-over month basis, they've been moving kind of wildly over the last several months.

And I think the Fed is going to say, look, we've been head-faked before. We want to be certain that we have finally gotten inflation licked. Still too early to cut rates, but perhaps we're closer to the end of boosting the Fed funds rate. So that's likely what we're going to hear next week, but we have a lot more data coming at us in the form of not only July and August PPI/CPI, but we'll also get the PCE price index I think two more times before the September meeting.

So we're going to have a lot of data, and I think we'll zero in on the prospects for a rate hike in September as we move through the summer. If we don't get it, though, if for some reason the market thinks and the Fed delivers on the notion that, hey, we're done, then all of a sudden you're going to see a pivot in the market.

I think that will help folks wrap their head around where we're going to go in terms of the economy. But any call on that at this point, Sara, I have to be clear, is going to be premature. We need to see the data first.

SARA SILVERSTEIN: And would that be the biggest wild card that we have to face for the rest of the year or is there something else, too, that's too soon to call?

CHRIS VERSACE: Yeah, it's too soon to call, but I would say that's a wild card for sure. But I think the other thing is, there's been a lot of talk in the press, but even here in our conversation, about the impact of student debt loan repayments coming back online. So the other potential wild card to watch is the return of that real wage growth that we talked about a few minutes ago.

To the extent that real wage growth surprises to the upside, that could give the consumer more legs than previously thought. So what will we be watching? Again, we'll be watching the inflation data. If there's continued progress on it, that will be one indicator we might be getting real wage growth.

But we'll also want to watch the employment report and the ADP monthly employment report for what it says on year-over-year wage growth. So again, more data to watch, but that would be the other thing that could really surprise to the upside for the market in the back half of the year.

SARA SILVERSTEIN: And during our live event last month, you weren't ready to call this a bull market. It sounds like everything is dependent on earnings growth, outperforming. What does it take or where does that have to land in order for us to be in a bull market in your opinion?

CHRIS VERSACE: So in order for the market to drive-- and we won't say higher. We'll say demonstratively higher. We're going to need to see that earnings growth rate north of 7%-- again, for the S&P 500, second half of the year to the first half and/or confidence that the market can really deliver on a 10%-plus EPS growth number in 2024.

And I think-- my suspicion is, Sara, that we'll get our guidance as earnings season comes on. We're going to get, like I said, a lot of data, we'll have conferences in early September. As we move from August to September, we'll have a much better sense as to how likely those prospects-- excuse me-- really are. So for now, not yet, but I would say that we're probably closer than we perhaps ever been.

SARA SILVERSTEIN: And where do you-- I mean, I know that that will inform a lot of our decisions, but where do you think earnings will come in? And further, where do you think the S&P is going to end at the end of this year just based on what we know now?

CHRIS VERSACE: Oh, OK, so let's unpack the crystal ball, shall we? So--


CHRIS VERSACE: I think it's-- two things. I suspect that the earnings growth will probably come in a little less than that 7%, at least based on what we've seen thus far. There are some other things that could allow for the strength to emerge as we go through the back half of the year. The dollar, for example, or the economy picking up even more steam than is currently expected, so we'll have to watch on that.

But based on what we're seeing right now, that 7% just might be a little bit of a stretch. In terms of the S&P 500, could we end up a little higher than where we are now? Possibly, but I wouldn't be surprised, Sara, again, based on where we are today, if we've seen the best of the move so far this year.

But remember, though, the opportunity for us inside the portfolio is not necessarily the S&P 500 because we don't buy the market. We're buying individual stocks that are designed, we believe, to outperform the market, not over the short-term-- one month, six weeks, something like that, but over the medium to longer-term. And I think we've got a great array of prospects in the portfolio to do just that.

SARA SILVERSTEIN: Great. And I have another surprise for you based on what we talked about at the live call last Month we talked a little bit about Meta and you talked about the Metaverse possibly coming back at some point in the future. I was just wondering if you had any take on Threads making Meta real player before then.

CHRIS VERSACE: So that's a great question, and I have actually been thinking about Meta as a result. We've been seeing and hearing about how advertising revenue is vacating Twitter. We know that advertisers will want to go where eyeballs are. We know, for example, that Google is overhauling its YouTube short videos and they continue to have great share in search.

But if advertising dollars are leaving Twitter, you have to ask yourself, what other social media platform might they be going through? So this was very interesting with the launch of Threads. So we'll see. I know that the usage has come down a little bit. It may not be the new-new shiny thing, just the new shiny thing, but my concern-- and I don't think I'm alone in this-- is that if people are migrating from Instagram to Threads, what does that mean for advertising dollars either in Threads or at Facebook proper?

So it's a little bit of a conundrum for me. As a user, do I like Threads? I do. I really wish they had a desktop application because that's where I spend most of my time. But it's something that we're going to watch. This could be an interesting thing. If there isn't cannibalization and Twitter continues to lose advertising dollars and the economy performs a little better than expected, meaning that advertisers might loosen the purse strings and spend a little more, does that make Meta shares a little interesting for us and perhaps the bullpen? Yes it does.

SARA SILVERSTEIN: Great. And looking at the bullpen, any top contenders in there for a potential upgrade?

CHRIS VERSACE: The ones that I've been sharing with are still the same. There's Morgan Stanley, for example. Portillo's. We're still waiting for some more data on the split from Kellogg into two companies. That'll be the catalyst where we likely bring that up.

But I will share with you, Sara, that there are some other names that we're eyeing for the bullpen. One just-- we parsed together some of the comments that I made earlier today on the call, and it may not surprise folks to think that we're potentially eyeing a McDonald's for the bullpen.

We think about where cash-strapped consumers are going to go, we think about the weakening dollar, McDonald's starts to get a little more interesting to us, especially since some of the QSR data of late seems to be picking up. So that might tilt into favor for McDonald's.

SARA SILVERSTEIN: I love that. I had McDonald's for breakfast this morning in support of moving it out of the bullpen.


SARA SILVERSTEIN: Thank you so much, Chris.

CHRIS VERSACE: Sure thing, Sara. I was quickly going to ask, did you-- were you loving it?

SARA SILVERSTEIN: Yes, yes, I was. I really needed it today, so thank you. And that will do it for our July call. We'll return with another call, but not until the first week of September as Wall Street leaves the summer months behind. As always, thank you so much for watching.