SARA SILVERSTEIN: So 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 3.5% to 4%. If we have a position of around 3.5%, if for some reason the stock know 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.
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 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 3.5% to more than 4% as well and redeploy them back into the portfolio. Or, 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, 3.5% to 4%. If a position comes down a little bit on that, if there is room and the fundamentals hold, then we will weigh 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. 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, 3.5% 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, especially if the fundamentals are a little murky.
And sometimes, when we start a position with a 2, the risk to reward is clearly to the reward side, but it may not be enough to take a sizable amount of the portfolio and commit it at that particular time. Call it 1.5%, 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 ramp in 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.