SARA SILVERSTEIN: Good afternoon, members. I'm so excited, and welcome back to another monthly call. And this is my favorite version of the call. And it's the best time to check in on all the stocks in the portfolio, and the bullpen that you've been asking about-- both from a fundamental and a technical perspective.
So we have Chris Versace and Helene Meisler here, joining me to do that right now. We're going to start with ChargePoint, because it's everybody's favorite to talk about in the portfolio. And there's no better time with the earnings expected after today's closing bell. Start off, Chris, with your expectation for today's report. And what are the most important aspects to pay attention to?
CHRIS VERSACE: So we're looking for some sequential improvement both on the top and bottom line. The drivers for that are going to be continued private sector investment in EV charging-- something we've been sharing with members about. But we're going to want to keep our eye on a couple different things.
First and foremost is going to be the cash balance. When the company last reported, it had about $283 million on its balance sheet in terms of cash. So we're to want to see what the burn is. And that's going to help us determine if the company's path to cash flow positivity remains on track.
We're also going to want to see if they reiterate their EBITDA-positive timetable for the next couple of quarters. So that's probably the big thing, in terms of metrics, we want to pay attention to. But we also want to hear what they're seeing, in terms of the flow of funds from federal programming towards EV charging stations. Remember, that's a $5 billion investment that began earlier this year, starting to pick up, and it lasts another four years.
So we want to see, are they starting to see the benefits of that? And is the spigot, as we think, expected to widen even further over the next few quarters?
SARA SILVERSTEIN: And could any of the negativity facing Tesla find its way to ChargePoint?
CHRIS VERSACE: Well, it's an interesting thing, right? Earlier in the year, we kind of talked about when Tesla was kind of getting beaten up day after day, seemingly week after week. And there was a high correlation between that and what we were seeing not only in ChargePoint, but the other EV stocks. And our thinking was that at some point, that would start to separate.
And we've seen fits and starts of that. But I think the issue here, Sara, is at least in the short term, until we really see that flow of funding demonstratively accelerate, Tesla is going to be the poster child, if you will, for the EV charging space, as well as overall EVs. So as it goes, so, too, will some of these stocks. Again, not only ChargePoint, but some of its competitors, Blink Charging, EVgo, and the like.
SARA SILVERSTEIN: And a member with high risk tolerance, who likes the long-term thesis, wants to know if there's a situation where you call it quits on ChargePoint?
CHRIS VERSACE: So there will probably be two circumstances. The first one, which I don't think we're going to see, is all of a sudden a dramatic stop in this EV funding. Whether it's on the private sector, or from the release of federal funds. But the second thing that we have to consider is at some point-- and I don't think it's likely-- but if ChargePoint were to do an extremely dilutive offering, that would really knock us back a little bit. And I think we'd have to understand the implications of the offering, what it would do to the share count, what it might do to the burn, and other things.
But that could give us another reason at least to rethink the position in ChargePoint.
SARA SILVERSTEIN: And ChargePoint is a hard one to start on, because we have Helene here today, which is so exciting. And Helene, you don't like to speak on a chart ahead of the earnings. But what are your thoughts when you look at the EV sector as a whole?
HELENE MEISLER: Well, there were some winners and some losers. Like if you look at a longer term chart of something like, is it Lucid, or Rivian? I mean, they look OK. They haven't done anything wrong.
You look at ChargePoint, and it is literally just a downtrend. Which I just need to say something right now about a lot of these stocks that are trading near their lows as we head into September, and therefore, into the fourth quarter. I'm not a fan of seasonality, but we are heading into what's called tax law selling season. You get the mutual funds in October, and then you get, obviously, everyone else as you head into December.
And oftentimes, it becomes hard for these stocks that are down and out to have a great lift in the fourth quarter. They can have short-term rallies, but they will tend to keep getting beaten down with tax law selling, especially when you've got winters that are offsetting it. So I would put ChargePoint in that category.
SARA SILVERSTEIN: Great, thank you. And over to the consumer-- yep, go ahead. Please, Chris, do you want to respond to that?
CHRIS VERSACE: Yeah, no, I was just going to say, I totally understand where Helene is coming from. And we've said that we've had to be patient with ChargePoint. And I think Helene is right on, because people are going to look at the year-to-date decline in the position and they're going to say, I'm going to sit on the sidelines.
If we were only now starting a position in ChargePoint, I think that would influence our thinking. But we've had the position in ChargePoint, and to sell it out and maybe buy it back slightly lower, slightly higher in three months, that's not the kind of move that we want to make with the portfolio.
SARA SILVERSTEIN: Great. Over to the consumer-- Chris, in your latest roundup, you noted that AAP has a full position in PepsiCo. But you've told members who haven't jumped in that in the recent weakness could be buying opportunities. What do you like about Pepsi?
CHRIS VERSACE: So I know Helene just mentioned seasonality. I will actually take the other side of that with PepsiCo's business, which is a few things. One, when we look at the beverage business, and especially the snack business, the September to January, February time of year is the strongest part of the 12-month cycle that we call the year for that particular business, especially snacks, which are the higher margin business.
At the same time, though, we are a little concerned about the consumer-- credit card debt's over $1 trillion, the interest rates on credit cards are at the highest level in seemingly almost ever. We have the resumption of student debt payments that are going to happen in the next couple of weeks. So there's going to be incremental pressure on the consumer.
Savings increasingly look tapped out. We think that that's going to allow them, or sorry force them, to start trading down and start eating home again. And Pepsi plays right into that.
SARA SILVERSTEIN: Helene, the last time we talked, you weren't a huge fan of the chart. We have a Pepsi chart here from you. What are your thoughts now?
HELENE MEISLER: Well, you could see the uptrend line that it is struggling to hold. However, if we take measure of what looks like a double top, because you can see that that August rally sort of almost got right to the same level as the May rally, and now we've broken it-- that measures down into the 160, 165 area, where there actually happens to be some decent support.
If the stock came down there, my guess is, we'd probably start to want to have a look at it. And it probably would coincide with people starting to talk about a slowing economy. Because that's generally when people start to take a look at these staples stocks.
SARA SILVERSTEIN: Great. And let's talk about Costco, Helene. When would you be a buyer of Costco?
HELENE MEISLER: I would like Costco very much to come back into that kind of 530 area, and retest-- excuse me-- and retest that low from a couple of weeks ago. If you take a look at the chart, it often has a spike low, a rally, and another low. Even if the other low is a secondary low, like a lower low.
And so I would like to see Costco do that. And I would probably like it down there. Up here, I'm just not excited about it.
SARA SILVERSTEIN: And Chris, you did a deep dive into Costco's strategy after a strong August same-store sales. How is the company faring heading into next week's retail sales data?
CHRIS VERSACE: So we always look to compare the monthly retail sales data against Costco's own monthly retail sales report, largely because it tends to confirm that, in this environment, Costco continues to pick up what we call consumer wallet share. And we think it's going to continue to do that.
But I would also say, though, too, that similar to Helene, we do like Costco's business model. We like the company, we like the shares. But the distance to our 575 price target-- it doesn't make it really compelling here. And we recently downgraded it to a two. We would actually be a little more inclined to revisit the two rating closer to 500, call it the 500 to 515, 520 level.
HELENE MEISLER: OK, and I would just add Chris, I would love to see it at 510, because that's probably where I'd really like it.
CHRIS VERSACE: Yeah, agreed.
HELENE MEISLER: Which, it would be coordinating with your price.
SARA SILVERSTEIN: Great. Helene, what about McDonald's? You've been bearish here. What would change your mind?
HELENE MEISLER: The stock has been holding this 280 for months. I mean, you could see the big top. You don't even have to be a serious chart watcher to see that big top.
Oddly enough, the top is not that big, it's just long. And if you do a measurement, it actually measures down to 260, 265. So I've drawn in that blue line.
And McDonald's is desperately trying to break its 200-day moving average line today, which I think could bring about a little panic selling in the stock. And if you got some panic selling, and the stock came down to that 260, 265 area, it might start to look a little interesting down there.
SARA SILVERSTEIN: Great. And Chris, obviously this in the portfolio, you're on the other side of this, what is the fundamental thesis? And how does consumer spending play into that?
CHRIS VERSACE: Well, again, we touched on it a little bit with Costco, but it's the notion that consumers are going to be tightening their spending, having less disposable income, as these headwinds that I just mentioned, everything from greater credit card debt, to higher interest payments, to student debt payments, really kind of sap their incremental spending dollars.
So we do think that people will continue to eat out. They're just going to trade down. That's going to favor what we call quick service restaurants, like a McDonald's. We also have Chipotle in, as well-- another counter service. Kind of hybrid, quick service, as well.
So we do like those. But again, when we added the position in McDonald's, we started off with a two rating, saying that we'll slowly nibble-- sorry for the pun-- on McDonald's shares. But to the extent that they come in lower, less than 280, 275, even closer to 270, that's where we would get more interested and really start to build out the balance of the position.
As you can just see on the screen, we've got a little over 2% of the portfolio in there. For us, a full position tends to be somewhere between 3 and 1/2 closer to 4%. So that's what we would look to do if the shares came down, like Helene was thinking they might, and provided that the fundamentals that we're looking for continue to track. And so far they are.
SARA SILVERSTEIN: Great. And over to a favorite sector of Helene's, let's talk about Bank of America. What are you seeing here?
HELENE MEISLER: Oh, gosh, I have-- I like the banks in the spring. And then, they kind of faltered, and I--
SARA SILVERSTEIN: I thought you hated seasonality.
HELENE MEISLER: No, I liked them in the spring, and then they faltered. So I bailed out. I'm embarrassed to say, I bailed out on liking them near the June lows, which annoys me to no end. And then you can see they had the big run.
Anyway, now I haven't liked them, obviously, since the spring. But now, I'm starting to take a look at them and think, well, if Bank of America come down-- again, I'm not big on uptrend lines holding, because oftentimes, you break and it's a fake break. But I think if Bank of America can kind of hold this 27, 28 area in this correction that we're currently in, I don't know, I think it may be a decent buy for the fourth quarter.
SARA SILVERSTEIN: And I just-- so maybe I can learn something from what your decision in June was-- why did you bail on them in June? What were you seeing there, and then what actually happened? And you know, what should you have seen, if that makes sense?
HELENE MEISLER: OK, so if you take a look at all those higher lows from the bank crisis, or mini crisis, or whatever we want to call it back in March, I thought that was positive. OK, I felt like March was a good panic low. I felt like May was a nice retest.
And then, you see in June, we got another rally off the line. But do you see how the rally into mid-June couldn't even get to that high of late April? That bothered me, especially when they rolled over and started coming down again. And so I just said, oh, the heck with it. It just doesn't seem like it's going to do what I think it's going to do.
And then, of course, it proved me wrong. And did what I thought it was going to do. So I bailed on it because I didn't like that it made-- the setup was there, and then it couldn't make a higher high, until obviously a month later.
SARA SILVERSTEIN: Yeah, thank you. I can see that. I mean, I don't if I could do it, but I can see it.
After weakness last week, Bank of America has been a top contender for you, Chris. What would make you pick up some shares?
CHRIS VERSACE: Well, I think, like what Helene was talking about, we became bullish on Bank of America in that hole that was filled, if you will, by the mini banking crisis that we had earlier. So that was great. I think that given where the shares are today, around that 27, $28 Helene was talking about, it's right around our average cost basis, with signs that the economy continues, at least in the US, to be somewhat stronger than expected.
And the notion that we might be seeing the investment banking window reopen, that would give us some reason to revisit and pick up some additional shares of Bank of America heading into the balance of September.
SARA SILVERSTEIN: Awesome. I really appreciate that. And I appreciate you going through this. And also, I mean, reading Helene's note, it's clear, we're picking charts where there's a discussion to be had where she's seeing something. And so we're not necessarily highlighting all of the success over the last month, but I think that it certainly leads to good conversation.
Looking ahead to the bullpen, Helene, when you look forward, also, at other banks, what are you seeing about Morgan Stanley that is exciting to you?
HELENE MEISLER: I see a relatively similar picture with Morgan Stanley, in that I just feel like if it sort of comes down to that whole-- again, we don't have to hold 82, I mean, if you snap below 82 and snap right back above it, it would actually be quite, to me, more bullish than holding it. But so anything down in that low 80 area, to me, would seem like a good spot to pick it up.
The stock has been a giant sideways almost for the last year. So you haven't made any money owning it. So you know, I just feel like if it came down, it could be a candidate for a fourth quarter rally.
SARA SILVERSTEIN: Great, Chris, a rise in IPO activity is among the catalysts you would want to see before upgrading Morgan Stanley. We haven't quite seen that yet, outside of some scattered headlines. Could we see more IPOs as we head into 2024? Or is there something else that might trigger this?
CHRIS VERSACE: So if you look at the amount of filings for IPOs, yeah, I mean, the prospect for greater IPO activity is certainly there. We have several smaller IPOs this week that we're keeping our eyes on, but of course, the talk of the town, so to speak, Sara, is the Arm IPO, they're on their roadshow this week, and I think part of next week.
So depending on the success if the deal's oversubscribed, if the price talk gets lifted, that could start to crack open that window even further. Unfortunately, I don't believe Morgan Stanley is involved in the Arm IPO, so that really won't help them. But just generally speaking, I agree with Helene, you know, and we've written that 83, 84, something along those lines, that's the level where we're interested, but until we see that IPO market really open, we're going to have to sit on the sidelines. Because there's just not a lot of incremental leverage for its investment banking business, even though the asset management business continues to hum.
SARA SILVERSTEIN: Helene, do you want to talk at all about the banking sector, in general? Or should I skip to the next name?
HELENE MEISLER: You know, in general, I think they're all over the place. They don't-- you could see, Morgan Stanley and Bank of America look similar, whereas JP Morgan is still almost up at the top of its range. So I don't think you can actually talk about the whole sector-- the banks as a whole. I think could have talked about them as a whole back in the spring, but the summer sort of separated a lot of them out. And so they don't all look the same.
SARA SILVERSTEIN: And what's the big separator? Just how they're performing, or what their business is made up of?
HELENE MEISLER: Right, like JP Morgan has held up a lot better than a lot of the others. It had a much bigger rally, it went on to a higher high. So that chart, in general, looks so much different than the rest of the banks. You know, I also just want to say that most of what I'm seeing in the charts, as I went through the portfolio, is vastly different than to me what it looked like in May, or even in February, when we've looked at the portfolio the last couple of times.
And the big difference is that in May, almost all these stocks were down and out. OK, I mean, you looked at the portfolio, and the only stocks that were sort of up were some of the tech stocks. And at that, it was sort of the mega-cap tech stocks.
And so what's happened is that since-- and I remember all the questions were people complaining about this stock, that stock, the other stock, I mean, it was just nonstop whining about how poorly stocks were acting. And at the time, I said, I thought that was about to change, and I thought that we were going to start to get more money flowing into what I call the others.
And that's what's happened. And now, when I look at the portfolio, I don't see a lot of opportunity for buying. I see more opportunities where I would say, ooh, take some profits, because they've rallied so much. And so what I've been-- what I did when I went through the portfolio was I looked for names that were still down and out, which is more my style. But I look for names that were down and out, which if you think about it, may not be the greatest thing because it means they didn't participate so well. And they came down too much in August.
But to me, that's where I would look for opportunity.
SARA SILVERSTEIN: Yeah, but that's the point of the call, right? To have the conversation about the things where there's something to do, not to say, great job, Chris, on these things that really panned out. Even though they were down and out last time, we insisted on talking about them.
But to talk about that a little bit, because I'm sure a lot of members are noticing the same thing, and as we are-- as some of these have panned out a little bit, how do we feel about that? And Chris, let's start with you. How are you thinking about the names that have performed well as we go into the rest of the year?
CHRIS VERSACE: So there's really two things I think we have to do. One is take stock of which names have moved considerably. And we talked about that in last Friday's roundup when we recapped the month of August. Because to Helene's point, there were a number of positions, whether it was Deere, United Reynolds, Vulcan Materials, you know-- I'm trying to think what else, Marvell had a nice rebound, as well, Universal Display came back rather well. We saw some upward movement in Qualcomm, not demonstrative.
So what we want to do first is check the thesis, check the data. You know, I wrote a piece yesterday that outlined the second half, EPS expectations for a bunch of the companies, growing far faster than the S&P 500. Typically, when we see that, the argument-- kind of a trope of Wall Street-- is oh, faster earnings growth gives way to multiple expansion.
So I think we're set for some of that. But at the same time, we also have to recognize that when you see moves of 20, 30, perhaps even greater percentages, the prudent thing is to take some of those chips off the table. And I alluded to that this morning in some comments about the energy sector, oil, in particular, with our shares of XLE that have moved right around 20%.
And we've got some room upside to our price target around $98. But again, the prudent thing to do is probably to take some of those chips off the table, reinvest them elsewhere, maybe in some down and outs, maybe in a stock that we start to see the improving fundamentals. Maybe it's a Morgan Stanley, if the IPO market opens. But that's kind of the cycle that we want to do, is nurture profits, and redeploy and arguably plant seeds for what's next.
SARA SILVERSTEIN: Great. Thank you. Helene, let's go back to the bullpen. Or what about Johnson & Johnson? You added that on your list, you sent us a chart for this, let's take a look at it.
HELENE MEISLER: I do. Johnson & Johnson is one of these difficult stocks, because it's sort of got this big cloud covering over it with all the lawsuits. But at the same time, it's coming down into some support, down into this-- I don't know, I'm going to call it 156, 158. Again, I don't care if they break the line, especially if they break the line and snap back over it. I feel like that's a good clean out.
And so, I take a look at Johnson & Johnson, and I think, today, maybe not. But I think we're going to get a decent oversold condition in about another week or so. And if that stock is down in the 156, 158 area, in about a week or so, as we're getting oversold, I think it's worth a shot. Because it's got higher lows, it came all the way back up to the late December high in the summer. You know, and it's corrected quite a bit.
SARA SILVERSTEIN: Great, and Chris, Johnson & Johnson has been in the bullpen for a while, there's been a lot of negative headlines. Is this an opportunity we might look for? Or do the Medicare negotiations play into this for you?
CHRIS VERSACE: Yeah, that is certainly a factor. You know, I think, again, Helene was right, that there's been a big cloud over J&J. I also tend to think that it's more of a-- if we step back a little bit, are we going to continue to see overall health care continue to grow? Yes, we've talked about that as part of our aging of the population theme that we tend to track.
But I think, if we were to see it at the right risk reward, then maybe we would start to take a little bit of a nibble. But I just-- it's not something that we've been candidly overly focused in on. I think the defensive nature is something that's kind of kept us on the sidelines. However, if we do see signs that the economy is not growing at 5.6%, like the Atlanta Fed GDPNow model thinks, it's far slower than that, some of those defensive names could come back into favor. Perhaps that's something that would take us-- would lead us to take another look at J&J, and perhaps some others in the health care space, as well.
HELENE MEISLER: You know, I would add something to what Chris just said. Because one of the things I'm tracking, obviously, is bonds. And obviously, if you take a look at a chart of the rate on the 10-year, and a chart of energy, they almost track one for one. And not exactly, obviously, all overlays fall down at some point.
But I think bonds, maybe within the next week or so, could have a short-term peak in rates. And if that is the case, then, I think Chris is right on XLE. And I think that's where some of these defensives start to get interesting.
Because if bonds back off, people will find some-- probably it'll back off because, as you say, that Atlanta GDP maybe comes down, or there's some softening. And then, you get people starting to look at more of these defensive names.
SARA SILVERSTEIN: Great, thank you.
CHRIS VERSACE: Sara, let me just add to that. In terms of the timing, that's really interesting you say that about bonds peaking because next week also brings the August CPI and the PPI reports. And everybody's going to be focused in on that core CPI number, to see, is inflation continuing to trend lower, or given some of the other data, including today's services PMI data, is it turning? Is it flattening out, potentially turning back up? So I think next week's data is going to be critical for that.
SARA SILVERSTEIN: Great. And let's turn to Fortinet, Helene. What caught your attention here?
HELENE MEISLER: Well, again--
SARA SILVERSTEIN: Other than August?
HELENE MEISLER: Right, again, I like down and out stocks. So a couple of things. Obviously, they had pretty poor earnings, you had the big gap down, you had the typical rally after a few days. And then you came down and you didn't make a lower low.
Remember, August was a crummy month in the market, except for that last week, and/or the last two weeks. And now, it's sort of edging back up near into that gap. I think if it came down again, and I've noted-- to me, it's something like 56 or 58-- I don't know, I kind of think-- I would love to see it there's this big gap from February where it gapped up. That may be a little too much to ask that it comes down to fill that.
But I guess, if you come down anywhere into that mid-50s, it's probably viable for a rally. It's going to need a lot more work before it can do a lot, but for a rally. I think it could certainly work.
SARA SILVERSTEIN: And Chris, what would you get you more interested in Fortinet?
CHRIS VERSACE: Well, I think obviously coming down would help. I also think that we want to see it continue to expand its service offering. The world of cybersecurity is one that just continues to morph and expand. The number of attacks continue to diversify, the number of endpoints just simply continues to grow. That's only going to accelerate.
And you know, candidly, that type of whack-a-mole across a variety of solutions is one of the reasons why we're actually playing cybersecurity with the CIBRETF. But again, we have to examine opportunities as they kind of present themselves.
But Sara, I do have a question for Helene, if I may, regarding the chart on Fortinet. If we could pull that chart up, that would be great.
So Helene, when you look at that, the gap that fell in early August, typically when we see something like that, is it true that at some point that gap will get filled? We saw that with Marvell, and some other shares, and I'm just wondering, does that thinking hold here, as well? And more importantly, giving I'm a chart newbie, am I reading that right?
HELENE MEISLER: OK, there is a school of thought that thinks all gaps must get filled. To which my response is always, there are still people from 1987 waiting for a gap to get filled in the Dow. So you know, no, all gaps must not get filled.
What I find is that, when a chart that has fallen as much as Fortinet has, and you've spent, let's say we spend another three or six months chewing away sideways, so call it between the mid 50s and the mid 60s, and you keep eating into the gap-- at some point, you'll maybe have built enough of a base that the chart will start to look like the next move up is going to fill the gap.
This gap, to me, and this is all subjective, is just too big to get filled right now.
CHRIS VERSACE: So if someone-- if a member was looking at this chart saying, oh, boy, this gap is going to get filled. You're saying, I would not hang around for that to happen?
HELENE MEISLER: I would say, you're going to need a lot of patience, and you're probably going to be frustrated quite a bit. If you're waiting for that kind of a move in the next month or so, yeah. I think. I mean, you know, obviously I could be wrong, but it just doesn't seem--
Usually, you need a market where everything is getting dragged up, and everything is going right, to fill a gap. I mean, that's what? Is that a 10-point gap from here? That's a lot.
If it were a small gap, I'd say, yeah. But it's a big gap.
CHRIS VERSACE: Great.
SARA SILVERSTEIN: And Chris, if you were to add a Fortinet to the portfolio, would you reduce your NASDAQ cybersecurity ETF, or would you be adding to the cybersecurity position, overall?
CHRIS VERSACE: Yeah, I think we would look at it as overall exposure to cybersecurity, the way we tend to look at some exposure to other aspects. Whether they be different themes or sector exposure. So we would probably, again, sit back and go, well, what's the joint exposure to the portfolio, if it was Cyber plus Fortinet? Or maybe Zscaler, or some other cybersecurity name-- just because we own one, doesn't mean that we would preclude owning the other.
But we also have to remember, though, we would want to take into account the ownership structure of Cyber, because again, it's an ETF, and it can hold, I think, 30, 40 cybersecurity names. So we wouldn't want to be overly weighted in one particular name indirectly. That's what I would say.
SARA SILVERSTEIN: Great. And Helene, I'm a Chicago native, Portillo's is one of my favorite topics, not just about stocks. It's been stuck in 18 to $24 trading range for some time. What kind of action do you want to see before buying?
HELENE MEISLER: OK, first of all, I don't even know what it is, and I meant to look it up. Is it a restaurant?
SARA SILVERSTEIN: It's like the best restaurant in all of the world, second best restaurant in all of the world. It's Chicago hot dogs and Italian beef. But it's a Chicago chain, a small Chicago chain.
HELENE MEISLER: OK, it obviously didn't have very good earnings. So it may be the best, but clearly there was something not good down there in--
SARA SILVERSTEIN: Absolutely, I'm not saying anything about the stock, just about the hot dogs.
HELENE MEISLER: Anyway, it's a stock that's been in a trading range. You had that December low, and then it's been in a trading range. Let's go back to something that I said earlier on, in that stocks that are down and out like this will tend to have a lot of tax loss selling, right? Notice that this stock had a lot of tax loss selling last December.
And then, once that pressure was relieved, it just went right back up into the trading range. That's what I mean when I say like to see a stock that breaks a trading range, or breaks a trend line that everybody's watching, has a little panic low, and snaps right back into it, because you've cleaned out the sellers, generally, like that.
So to me, I'm watching this stock to see if over the next week or two, again, till we get to a decent oversold condition, if it can sort of hold around and my notes here say that it can break this level around 18, but I wouldn't mind a move down to 17 fast that recaptures 18. And then, I think it's worth another trade back into the range.
Now, let me just also go back to what Chris just said about the gaps. Do you see how that gap in August is really like only $1? And I get that the stock is a $20 stock, so it's a little different than Fortinet.
But that's a lot easier-- I mean, it's still far away-- but it's a lot easier to fill a $1 gap than it is a $10 gap.
SARA SILVERSTEIN: Great. Chris, what do you see when you look at Portillo's? You've been wanting to keep it in the bullpen for a little bit longer after the margin headwinds that you expected in the second half. Any changes to what you're seeing, or should we wait for an opportunity to buy with the tax loss selling?
CHRIS VERSACE: Well, I think Helene's comments, as they tend to be, are spot on. We did like Portillo's quite a bit. We added to the bullpen before we added McDonald's, and we opted to go with McDonald's at the time. Remember, McDonald's has a bigger international exposure, the dollar headwinds we're looking to become tailwinds, so there were a couple of different reasons that we did that.
Also, two, to be fair, McDonald's is simply just a far larger, more liquid stock, and we tend to like that. So do we like Portillo's? We do. Does it fit the notion that it's a little more affordable for the average American family than some other fast casual restaurants? Yes.
Is the food good? Yes. You can attest to that, Sara. Are they continuing to expand their footprint? Yes, they are. That's always one of the things we want to see for restaurant stocks, is that growing footprint, it's a time-tested strategy. Whether days of yore for McDonald's, or Starbucks, or Dunkin', or even Dutch Brothers more recently.
So we do like that. I think we just need to understand what they're seeing, in terms of weighed pressure, and food input costs, which were two of the items that really surprised when they reported leading to that weaker than expected earnings report.
SARA SILVERSTEIN: Great. Thank you. Let's take a broader look at the markets, get both of your expectations for the weeks and months ahead. Chris, heading into this past earnings season, you repeatedly stressed you're laser focused on earnings expectations for the S&P in the second half. With the June quarter behind us, what did you find out, and what does it tell you about what's headed our way?
CHRIS VERSACE: So the June quarter was actually slightly better than expected. So with the benefit of hindsight, the consensus numbers for the June quarter, again for S&P 500 earnings, they actually were slightly higher. Yet, when we did our analysis, we saw that earnings expectations ticked lower for the second half of the year. Not huge, like around 5-plus, 5.9%, it had been plus 7.1%. But again, that was yesterday.
And then, we come into today, and we hear companies, United, Alaska Airlines, saying, oh, boy, we're really starting to feel the pinch of higher energy costs, oil, jet fuel. And I think we're going to hear a lot more of that in the next couple of weeks. We also saw again in the services PMI report, speaking to not only that, but just the impact of higher wages, as well, I think that when we see companies making their rounds at these investor conferences, we could see comments about margins maybe not being quite as robust as previously expected.
That would tell me that we see a little more pressure on second half earnings expectations. And the thing is, the market, in and of itself, is trading around 20, depending on the day, 20, 21 times forward earnings. That's above the 22-year high average, from a PE perspective.
So it kind of tells me that we need to be choosy here, whether it's focusing on companies that are growing their earnings far faster than the market. Something I talked about several minutes ago. Or we just have to wait for stocks to kind of get repriced, and then pick up those opportunities when and where they make sense.
So that's kind of what we'll be watching over the next couple of weeks. Investor conferences, earnings coming up, and I think the word for us is to be patient and let stock prices come to us. Like we're doing right now with, say, McDonald's.
SARA SILVERSTEIN: And outside of earnings and the economic data, we're seeing strikes with UAW now threatening to follow Hollywood, actors and writers. How could this interact with the economics that we're seeing? Any fallout from that?
CHRIS VERSACE: Well, I think the key to watch there was what happened with the Teamsters and UPS. And it was, by all accounts, simply a monster win for the Teamsters. But think of it this way-- UPS is going to pay higher wages, but they also have to continue to deliver margins and profits to investors, as well as dividends. Which probably means at some point, we're going to see them either have to really tighten their belt elsewhere, or further price increases.
And against that backdrop, UAW and the big Detroit three, it's likely to be the same thing. Candidly, that was one of the reasons why we exited out of Ford Motor shares earlier in the summer between high 12s and low 13s. Which, in hindsight, now looks to be a very smart move.
So there will be ripple effects there. But the concern I have with those is, does it extend inflation pressures? That's the big concern that I have. And again, when we layer on what we're seeing from the data earlier today, energy prices, that could be the case.
The bigger question to me is going to be, does it mean the fed has to raise rates one more time? Or are they just likely to keep rates where they are, for the mantra, longer than expected. Which, at least right now, seems to be the middle of 2024.
SARA SILVERSTEIN: Helene, nobody is watching the markets as closely as you're watching the markets in updating your charts every single day. And it was such a pleasure to get to see those in person. We know you're watching the bank stocks. What other sectors are you paying attention to?
HELENE MEISLER: Well, let me just-- on the overall market, I just want to start with, we got intermediate term overbought in the middle of July. And obviously, you saw the result in August. You got short-term oversold, and then we've had the rally. And now, the typical pattern is, we've come down, we had the rally, and now we should come down again.
And on this secondary leg down, which can break the August lows, can come to the August lows, doesn't have to get there, you know, I'm not big on what level we have to be at on the market. It should lead us to a more intermediate term oversold condition.
I expect that to show up about another week or so. I'm targeting mid-September. And so if we can get there, I think what would happen is obviously on this leg down, sentiment should get pretty bearish, and we should get pretty decently oversold. Which should generally lead to yet another rally.
Overall, my big picture for the market hasn't changed. I still think we're in a big trading range up and down, up and down, up and down, up and down. I've written about this for months, for a year, maybe. So I don't think anybody has to get excited-- new bull market, new bear market, I don't think that has to be front and center right now.
So with that being said, I'm watching the banks on this leg down, and I'm watching the utilities on this leg down, and staples. And that's because I think those three groups have been most affected by the rise in interest rates that we've gotten this summer. And if they start to hold, or at least the selling starts to dry up, that probably means rates are peaking for the time being. And that, I think, is what can help a rally come about.
SARA SILVERSTEIN: And for the market in general, is rates what will break us out of that trading range for the market overall, as well?
HELENE MEISLER: You know, I suppose. I think-- I don't want to say I'm in the higher for longer camp, because I feel like that's gotten very crowded right now. But I think when you look at a very long-term chart of interest rates, where we are now, I'm going to call-- let's call it the 3% to 6% range-- that's where we've lived for most of the last how many decades.
And so perhaps, all that time that we spent below 3% was an anomaly over the last 10-plus years. Just like all that time we spent in the '70s and early '80s, up in the teens was an anomaly. And so when we talk about interest rates peaking and going back down, I'm not thinking that we're going back down to 2%. I'm thinking maybe you back off to 3, 3 and 1/2, something like that.
So I think anybody who's looking for interest rates to go back to zero where we were for so long, I think they're going to be waiting a long time.
SARA SILVERSTEIN: Great. And Chris, what are you looking forward to learning in September?
CHRIS VERSACE: The next two weeks, three weeks, we've got the big investor conference season. It's the time where company management teams are able to give us potentially some fresh information about their businesses. We've got economic data for July, August, we're starting to get some tea leaves for the month of September.
How does all that get rolled up into guidance relative to what we had several weeks ago? So that's to me, that's the big learn to be had over the next couple of weeks. You know, so it's a lot of conference call transcripts, and a lot of calls to listen to, I'm afraid.
SARA SILVERSTEIN: And Chris, any expected move in either direction, or how will the markets' move in either direction impact your view on the inverse ETFs, your portfolio hedging? I know, we keep coming back to this.
CHRIS VERSACE: No, no, that's fine. I'm happy to talk about it. Because it's always interesting in that if you listen to the comment that Helene just made about the market kind of moving in-- not to get all math geeky, Sara-- but in that sine, cosine type of line movement, up and down like a wave, exactly when we start getting questions about, geez, what are we going to do with these inverse ETFs? When are we going to exit them?
That almost seems to perfectly coincide with them going back to work for the portfolio, just like we're seeing now. And we've been kind of talking about waiting for a clear sign of what is to come over the last several months, in terms of the economy, the monetary policy. And as we saw, our thinking was as we saw that start to emerge, we could start to let the inverse ETFs go. Because we would have potentially firmer footing.
Well, here we are, you go back to my comments earlier about having to-- again, more data coming at us next week, wrote about the last couple of days, the market really trading data point to data point, based on what it learned last. I think that we're not there yet. I'm hoping, perhaps, that when we get past maybe the September Fed meeting, that a firmer road, clearer path, if you will, will start to emerge.
But you know, again, we have some data to go to get there. So for now, candidly, it sounds a little like a little bit of a dodge. We're just going to continue to hold the inverse ETFs and let them do what they do when they do it for us.
SARA SILVERSTEIN: Great, I'd like to end with some member questions, some more educational topics, broader portfolio theory, and throw in some of my own. I'd like to start-- we've been talking a lot about tax loss selling. We have a portfolio with AAP. I'd love to hear what the strategy is, or what recommendations you both have for how individuals and our investors should think about that, whether they're holding the AAP portfolio, Chris, to you, or Helene, just in general?
Chris, let's start with AAP.
CHRIS VERSACE: So just a general comment, you always have to remember when you're going to do tax loss selling, you need to match long-term gains, long-term losses, short-term gains, short-term losses. I don't think that we have oh so many of that in the portfolio on the short-term side. So I'm not sure that we're going to do that.
You know, but we'll evaluate that as we get a little bit closer. On the individual side, I think you've got to delineate between are you going to throw in the towel and sell a position, or are you able to use the pressure-- because the fundamentals remain intact, and you could actually reduce your cost basis?
That's, I think, something that you're going to have to puzzle through. And we'll be writing something on that for members in the coming days and weeks.
SARA SILVERSTEIN: Great. Helene-- oh, Helene, do we still have Helene? OK, we'll be right back with Helene. But Chris, let's talk about position sizing. AAP obviously is looking at things from a long-term perspective. And with our members in mind, let's think a little bit about a full position of a stock, and a member is asking if AAP would suggest adding to that position when you have a chance to lower the cost basis, maybe because of tax loss selling like you were just saying.
What do you do then? Do you have it too big? And what is too big?
CHRIS VERSACE: So the rule of thumb that we strive for is that 3 and 1/2 to 4%. If we have a position of around 3.5%, if for some reason the stock pulls back-- maybe it becomes 3.3%, 3.2%, that gives us a little bit of extra room to buy some more. In fact, we recently did that not too long ago with PepsiCo shares.
You know, again, we were talking about them earlier, they have come down fundamentally. We continue to like them. The size in the portfolio came down, as well. We had a little room to take advantage of that.
So from time to time, we will do that. I think the other side is worth pointing out, Sara, is when a stock gets much above 4%, that's when it starts to become kind of an almost an outsized position for the portfolio. Typically, we like to kind of trim some of those profits that allow it to go from that 3 and 1/2 to more than 4%, as well. And redeploy them back into the portfolio-- where depending on the outlook for the market, we want to maybe build up our cash position in the near term and look to redeploy that later on.
So again, just for us, 3 and 1/2 to 4%, if a position comes down a little bit on that, then, if there is room and the fundamentals hold, then we will wade deeper in, yes.
SARA SILVERSTEIN: And when we're looking at the AAP portfolio, how do you decide how much weight to give any stock? Does it have to do with the opportunity? Or are you also looking at the makeup of the portfolio, and how it correlates to the rest of the portfolio? What are you thinking about?
CHRIS VERSACE: So there's a lot of factors that go into it. Typically, it really comes down to the two biggest ones, I would say, for us, are how does it fit in with the overall rest of the portfolio? We don't want to be overexposed in any one particular area. At the same time, while the rule of thumb is, again, 3 and 1/2 to 4% for a position size being full, we want to take our time and build it in the right way.
We're not willing to chase the position, you know, especially if the fundamentals are a little murky. And sometimes, when we start a position with the two, the risk to reward is clearly to the reward side. But it may not be enough to take a sizable amount of the portfolio committed at that particular time, call it 1 and 1/2%, 2%.
So we would like to see stock kind of come down a little bit, and then continue to build up the position. Something that we did a little bit with McDonald's, something we did a little while ago with some other names.
The flip side is that we do get greater clarity on the fundamentals. And if they are improving, then we'll start to put that capital to work. That was something we did late last week with Qualcomm, when we got yet another piece of data from Broadcom that confirmed the seasonal rampant smartphones is unfolding, and the likelihood for Qualcomm's earnings outlook for the second and a half of the year is indeed conservative, like we've been thinking.
So hope that helps.
SARA SILVERSTEIN: Yeah, absolutely, and Helene, we got Helene back. We moved on-- I don't know if you wanted to talk about tax loss selling beyond just how it impacts the market, how it impacts the individual positions. But also if there's anything that you do there, or you look to get in on? Or if it's just opportunistically because of what's happening with other people?
HELENE MEISLER: Well, to me, it's just as we get late in the year, I like to see what kind of names are working down there. And if there becomes an opportunity, and are they getting too oversold that they make a good setup for, if you will, January.
SARA SILVERSTEIN: Great. And when you think about a portfolio overall, I'm just catching up on some of the topics Chris and I covered, how do you think about position sizing? And I know, Chris's AAP portfolio is very long term, and you are generally moving quicker than that. But how do you decide how much of a stock to buy, regardless of how long or short you're looking at it for?
HELENE MEISLER: Well, if there's a big base, like a base that's six months or a year, then you're more likely-- there's an old expression, the bigger the base, the higher in space. So if you've got a stock like that, you're going to want to tend to be positioned higher more than you do if you're just looking at a stock that's just for a trade.
One becomes an investment, and one is a trade. Most of what we've looked at today, to me, is all trade. Not investment.
SARA SILVERSTEIN: And what-- is it like three to one investments, that's how you size your portfolio? Or is it 10 to one?
HELENE MEISLER: Oh--
SARA SILVERSTEIN: Allocation size.
HELENE MEISLER: I would say, oh, gosh, you kbnow what? I wouldn't even know. I'd have to think about it. But I would say, no, it's probably-- that's a good question. I would say it's probably four to one-- four to one. Is where I go.
But there are certain names you just kind of always own, and maybe you trade around.
SARA SILVERSTEIN: A good base. Great, any last advice Helene, since we lost you for a second, as we head into the rest of the year?
HELENE MEISLER: I am sorry.
SARA SILVERSTEIN: No, no, it's great. Now I just to get to ask you more questions. Any final thing that you're looking for? What's the single most important thing or the single most frightening thing as we head into the rest of the year?
HELENE MEISLER: Oh, definitely, for me, right now it's interest rates. And I know that Chris mentioned CPI and PPI next week. I think inflation is a little bit of a problem, in that it's gone up because of energy.
As a matter of fact, I remember when I liked energy back in the spring, and nobody else liked it, and then all of a sudden, I came back from vacation in late July and everybody was gung ho on energy. I said, be careful what you wish for, because everybody's loving energy at the same time. They're all talking about inflation falling. And I'm not sure that the two things exist together.
So I think may have a small uptick in inflation. But I think right now, the bonds are more apt to move not necessarily on inflation, but on whether or not the economy is picking up or slowing.
SARA SILVERSTEIN: Great-- go ahead.
HELENE MEISLER: No, I was just going to say, so I, to me, I'm much more focused on whether or not the 10-year can really scream much higher over four and a quarter, or is it going to stall out somewhere in this area. I'm of the mind that sometime in the next week and a half, we're going to see the bond stall out in this area, and this area may be four and a quarter, it may be 430, you know, but somewhere over here, I'm of the mind that we're going to get enough is enough on the bonds.
SARA SILVERSTEIN: Great. Chris did you want to add anything to that last sentence?
CHRIS VERSACE: No, no, no--
SARA SILVERSTEIN: Great, yeah.
CHRIS VERSACE: I would say this, if that happens, then I think that's a positive for the market, without a doubt.
SARA SILVERSTEIN: Great, then--
HELENE MEISLER: And it would tend to happen as we're getting oversold.
CHRIS VERSACE: Right, right.
SARA SILVERSTEIN: It's all coming together. Thank you both so much for a fantastic call. We'll be back for another live show in October. Until then, catch everything you need to know every trading day in your alerts. Thank you so much for watching.