Action Alerts PLUS Monthly Members Call - November

SARA SILVERSTEIN: Hello. And welcome to the live monthly members call. Chris and I are back to review the portfolio and answer some of your latest questions. But before we get to all of that, I want to spend some time on the investment philosophy that is driving the portfolio decisions. Chris, let's start with a big question. Many members have asked over the past few months just how many stocks does the club plan to own at any given time.

CHRIS VERSACE: It's a great question. We want to have maximum exposure when and where we can do to the things that are driving the market, Sara. But we also don't want to be too unwieldy for members. In the past, the portfolios had as many as 30, 32 positions, kind of not really giving us the right type of exposure that we want.

Currently, the portfolio has 26 positions-- excuse me-- all in. And we're going to continue to target round numbers. 25 positions from time to time. It could be a little higher as we're working our way into new positions or working our way out of positions we want to remove from the portfolio.

So again, round numbers. 25, but could be 23 to 27, let's say.

SARA SILVERSTEIN: And does that give you the optimal amount of diversity given the types of positions that are in the portfolio?

CHRIS VERSACE: I think it does. And it also allows us not to be overly concentrated in any one particular area, something that we have to really be very careful of because sometimes we do want to have targeted exposure to certain markets. But we don't want to be overexposed because, again, that can just bring diversification problems if things change.

SARA SILVERSTEIN: And when you're picking these stocks, how do you look at growth versus value? Or do you?

CHRIS VERSACE: Well, that's a great question because we're not necessarily a growth portfolio. We're not a value portfolio. We're a portfolio that really wants to have target exposure to things that are working in the market. So we're actually going to have a combination of growth and value.

But I think the better question is, how are we thinking about choosing these opportunities? For that, I would say that, again, we're going to take more of a blended approach. Call it a growth at a reasonable price or a GARP approach. I think that will allow us to capture well-valued growth companies that aren't overly expensive that have great opportunities ahead of us. It'll allow us to fold in value opportunities where appropriate.

But because we're going to focus on GARP, which really talks about PE to growth, or a PEG ratio, as one of its valuation metrics, it also means that we're going to be looking for companies with positive earnings. So we won't be caught in any of these profitless prosperity stories that we hear from time to time.

SARA SILVERSTEIN: And when you talk about growth, is that all you're talking about is profitable companies, or what is it that you're really looking for there?

CHRIS VERSACE: So in order to really-- for a company to catch our attention, right, its end market has to be growing. And that could be call it widely defined tech. But in reality, we know tech is a very big swath. So it's got to be, what are its end markets doing? And then we want to take a look at, are its revenues growing?

But more importantly, we want to see what we call operating leverage. And for that, it means that their profits and their EPS should be growing far faster than the revenue. Case in point, we published a note this morning to members about Axon. That's exactly what happened. The last couple of quarters and including the September quarter, their bottom line results simply crushed the revenue growth.

So we're recognizing a lot of that what I like to say operating leverage in Axon's business. So that's the first thing. But the second thing we want to do is make sure that these companies are delivering faster growth than the S&P 500. And we say that because typically when companies deliver faster EPS growth than the S&P 500, they get multiple expansion. And the great thing about that is when you have faster growing EPS, multiple expansion, that comes together typically to drive outperformance in terms of stock prices. So that's really what we're trying to capture.

SARA SILVERSTEIN: Great. So you're looking for revenue that is growing, but earnings that are growing faster, and most importantly, that are growing faster than the S&P. And then you're looking at value before making that decision.

CHRIS VERSACE: Correct.

SARA SILVERSTEIN: And as long-term investors, which we are in AAP, a lot of questions about, what is the timeline? What are we looking for when we're putting on a new position for it to reach its criteria?

CHRIS VERSACE: Yeah. Typically, it's 12 to 18 months. Sometimes the market can move faster and we have to revisit what the growth prospects. Are they accelerating? Are they decelerating? What's the company's position? Is it picking up share? Is margin growth unfolding faster than expected? So we tend to have a rolling 12 to 18 month time horizon.

Again, take a look at Axon-- we can use that-- because their business has grown tremendously this year because of the ramp in public safety spending, which is expected to continue. But inside the company, the transition from product to services, with services being significantly higher margins, is going to continue into 2024. That should allow earnings to continue to grow faster than revenue. So that's 12, 18, almost 24 months now of that unfolding. So again, while we look for 12 to 18 months, we're going to continue to revisit and reevaluate as we go forward.

SARA SILVERSTEIN: And are there any restrictions you're looking at in terms of market cap when you're picking stocks?

CHRIS VERSACE: Well, I think the way to think about that is not so much are we going to exclude high market caps. I think we're more likely to exclude low market caps. But the better benchmark to measure against, Sara, is going to be trading volume.

The last thing we want is to take a position on a company, work our way up into it over time, and then not be able to get out of it. We don't want any of those roach motel names in the portfolio. This is why we tend to look at average daily trading volumes as well when we're trying to evaluate a position and really decide if it's warranted inside the portfolio.

Typically, we're looking for something not in the tens of thousands of shares, but call it hundreds of thousands of shares. Typically, 250,000, 300,000 at a minimum. But candidly, the vast majority of the positions in the portfolio are significantly higher than that.

SARA SILVERSTEIN: And when you decide to pick a stock and you're looking at the portfolio overall, how do you decide what the position size should be?

CHRIS VERSACE: So the target position size, if you think of it this way, that in an ideal world, normalized market environment, let's call it, the portfolio is going to own somewhere between 8% and 12% cash. Call it 10%. So if we're going to have round numbers, 25 positions, over 90% of the portfolio's assets, that's about 3.6% for each position.

Now, look, we know that when we're building up some positions, it's going to take time to get there. And at the same time, we're going to want to let our winners run. Currently, we've got a couple of positions that are over 4%. I think they're very well positioned. And in the meantime, we're going to let them run while we start to catch up with some of these smaller positions in the portfolio.

SARA SILVERSTEIN: And is there a maximum position size?

CHRIS VERSACE: So, yes, there is. Typically, we've started trimming back positions when they hit over 4%. Some have run as high as 4.5%, 4.6%. Again, we want to let our winners run. However, we have to be disciplined investors. And that means that if we see a position size approaching 5%, perhaps even topping 5%, that's going to warrant some action. As we like to say, ringing the register, trimming back that position, and either helping build back our cash or potentially, depending on the opportunities at the moment, repositioning those profits into one, maybe two other positions.

SARA SILVERSTEIN: And on the other side, in October, you added panic points to the portfolio where you set a price where you're going to evaluate if a stock should stay in the portfolio or if it's time to cut your losses. I'd love to discuss with you, how do you come up with the panic points? And how do you use them?

CHRIS VERSACE: So when we first established the panic points, we recognized that we were in a volatile market. We were going into the September quarter earnings season. And we expected that if stocks potentially disappointed just a little bit, they were going to be hard hit. And, well, that's exactly what we saw.

If you were a stock that reported earnings that missed consensus by a penny, fell short in your guidance, you were going to see your shares fall 10%, 15%, sometimes 20%. And we didn't necessarily want to get knocked out because of that. So what we did was we purposely set our initial panic points rather wide. Rule of thumb, about 15%.

But as we said to members at the time, our plan as stocks rebound, particularly those in the portfolio, we're going to look to inch up our panic points. And we've started to do that. And again, just harping on Axon. We did that again today, taking that from 185 to 195. But again, when they hit the panic points, that doesn't mean we're selling. It's the time to take a hard, hard look at whether this particular stock should remain in the portfolio.

Have things changed is always the big question. Case in point, we did see that with the shares of Universal Display. That was the one panic point that we have triggered, if you will. But it wasn't because it hit the panic point. It's because when Samsung guided for the current quarter, it gave a very tepid outlook for the business. And while we tend to focus on smartphones, from an end market perspective, TVs is the largest end market for organic light-emitting diode displays. That gave us a lot of concern about what lies ahead for Universal Display.

SARA SILVERSTEIN: And we'll get into our specific ETFs that we're holding later. But how do ETFs fit into your broader strategy?

CHRIS VERSACE: Well, there's a couple of different ways that we use ETFs. We like to use them for some broad-based exposure. We're doing that right now with CIBR. We don't have to pick any one particular cybersecurity company because we know that, overall, cyber spending is going to increase. Indeed, we continue to read about all sorts of attacks, which we think are only going to continue as we move further into our digital lifestyle, if you will, and as IoT and other connected points continue to grow.

So if one particular holding in the CIBR ETF has a problem-- and we've seen one or two of those unfold this earnings season-- it doesn't disrupt our position. Again, we like that broad-based exposure, but we can also use ETFs as we used rather successfully from the end of June until the end of October to help hedge the portfolio. And with that, yes, I'm referring to our inverse ETF positions, better known as SH and PSQ.

And again, those are tactical positions. We use that to hedge the market when we see signs of uncertainty, volatility. Would be great to make some money on that. But remember, they come in at very specific times. And the goal here is to help reduce the volatility in the market portfolio.

SARA SILVERSTEIN: OK.

CHRIS VERSACE: Yeah.

SARA SILVERSTEIN: Sorry. Well, to that point, I was going to say is what is the target exposure of the portfolio? I think it's so easy for us to measure it against just the straight S&P. But you are looking to change your exposure and then also find alpha with stock selection, correct? So what is the exposure you're going for? And how much does it change?

CHRIS VERSACE: So again, in a normalized environment, we want to be roughly 90% invested. Now, that's going to change from time to time. Sometimes, it will depend on, are we seeing enough opportunities that meet the criteria that we laid out earlier in the conversation? What's going on in the market? Is there some concern that there's a big pocket of uncertainty unfolding? Are we overbought? Are we oversold? There's a lot of different things that kind of go into that decision.

So from our perspective, it can shift. That's when we may use our inverse ETFs. But by and large, over the long term, again, the goal is to be 90% invested relative to our benchmark, which is the S&P 500.

SARA SILVERSTEIN: And overall, what is the target long exposure of the market? And what is the range?

CHRIS VERSACE: Right. So typically, we want to be 90% invested with the portfolio. That would say that we should be benchmarked roughly 90% of the S&P 500. Again, we would have on average about 10% cash on hand. Could that fluctuate? Could we be invested to low 90% or maybe high 88, high 80 percentiles? Absolutely. But in times, if we start to see the economy decelerate on a pronounced fashion, we might have more cash. We might even continue to hold or call back in or perhaps even build up our inverse ETFs depending on what's unfolding in the environment.

SARA SILVERSTEIN: And so with the inverse ETF, where do you put our exposure to long the market?

CHRIS VERSACE: So when we look at, again, trying to be targeting 90%, those are technically long--

SARA SILVERSTEIN: 90% invested.

CHRIS VERSACE: 90% invested.

SARA SILVERSTEIN: No, I know. I mean like a beta to the S&P. Like a beta, not long positions.

CHRIS VERSACE: OK. So if we're looking at that-- sorry. Brain fog. What I would say is that our beta is going to be less than that of the market. So typically, the market has a beta of 1. Our target would be, particularly if we're holding our inverse ETFs, it's going to be less. Call it 0.85 to 0.9, something in that range.

SARA SILVERSTEIN: OK. Great. And so are you gauging performance, how much you outperform the S&P 500 given our intended beta?

CHRIS VERSACE: So the way to look at it-- so most people are going to sit back and they're going to say, oh, the benchmarks the S&P 500. But it's easy. And I understand that people are going to do that. But I think there are a couple factors that you need to take into play. One, as you just pointed out, is our beta is going to be a little bit less than the market. So we need to adjust for that.

The other thing is we're never going to be fully invested like the S&P 500 is. That index has no cash. So the rule of thumb that we would use is our target relative to the S&P 500 is to capture about 90% of its returns, again, over time.

SARA SILVERSTEIN: OK and before we jump into the portfolio, what do you think your biggest wins were since we last spoke last month?

CHRIS VERSACE: Well, the market has had a really pronounced turn in the last couple of weeks. The S&P 500 is up 6 to 6% plus. The NASDAQ is up a little bit more. But over the last month, I think some of the bigger names that we've seen have been Chipotle. It's up 15%, 16%. Qualcomm is up roughly 10%. McDonald's has really turned around. That's up about 8%.

And then there are some other names in there. And I think-- don't hold me to this, Sara-- but I would say that just about half of the portfolio over the last month is outperformed that 1.1%, 1.2% gain in the S&P 500.

SARA SILVERSTEIN: OK. And given the time of year, I want to start with our stock review a little differently and look at the consumer economy, which I know you love, as we head into the all-important holiday shopping season. Overall, how much weight does the consumer have when it comes to your overall market outlook?

CHRIS VERSACE: Oh, the consumer is big. If we take a look at the US, the consumer is indirectly responsible for 2/3 of GDP. So you really have to pay attention to what's happening with the consumer. So we go out of our way to try and understand what the consumer balance sheet looks like, where consumers are spending. That's why we really tear into the monthly retail sales report.

But we also do some things that not everybody else does, which is we actually do some of our own homework. We go out. We're in the world. We're taking a look at where people are shopping. Is it at discount stores? Is it high end stores? And all of that. So we try to have a 360 view on the consumer because it is critical, especially for this time of year.

SARA SILVERSTEIN: And we won't have October retail sales until next week. But so far, the consumer has remained strong. You've noted in recent weeks that despite the impact of student loans and dwindling savings, consumers are just becoming more selective as to where they spend their money instead of spending less as their budgets tighten. Do you expect this to continue into the holidays? And does AAP have the right stocks for this environment?

CHRIS VERSACE: So I do expect that to happen. We learned last night that consumer credit card debt is at an absolute record level. We know that the corresponding interest rates are extremely high. We're starting to see delinquency rates rise as well, particularly for those folks that have auto loans or student debt loans as well. So I do think we're going to see that continue.

Let's remember too that while the pace of inflation may be slowing, that doesn't mean that prices are necessarily falling. So I do think that combination is going to have consumers continuing to be selective. And I think that's what we're going to hear next week when we start to hear from Target, TJX, Walmart, and others. Oh, sorry. Hang on. Hang on. And you asked, do we have the right stocks in the portfolio--

SARA SILVERSTEIN: Yes.

CHRIS VERSACE: --for that. And the answer is 100% we do. In particular, Costco, it speaks right to that. Amazon, holiday shopping sales are expected to continue to outpace on the digital front than brick and mortar as consumers look to continue to search for deals, which you can do much more quickly online than you can in person. So we continue to like Amazon for that.

And with consumers feeling the pinch of all of these things, they're still going to want to eat out, but we continue to see them trading down. We continue to like Chipotle for that. And we continue to really like McDonald's for that as consumers shift away from sit-down casual dining.

SARA SILVERSTEIN: And when we do get to the retail earnings reports, what are you most looking for when gauging what to expect in this upcoming quarter?

CHRIS VERSACE: Well, look, I expect that we're going to hear a lot of the consumer's balance sheet is strapped, consumers are having a tough time. They're being, as we've been saying, more selective. So to me, it's really what the aggregate says because that's going to tell us what the second half of the current earnings season really has to say.

And if the retailers come out and they warn, which I think is possible, it means that earnings expectations for the S&P 500 in the current quarter are going to tick lower. And that's just something to be mindful of, and again, as we think about our portfolio and we want companies that are growing faster than the S&P 500.

SARA SILVERSTEIN: And I know you already touched on Amazon, but is it going to be a winner this holiday season?

CHRIS VERSACE: So our last call, Sara, asked me what my favorite pick going into the end of the year was. And I said Amazon. It has performed extremely well since then. And I'm going to stick with Amazon.

SARA SILVERSTEIN: Great. On the other hand, you trimmed your price target on Mastercard to 410 on weaker consumer spending, or the prospect of it. Putting the completely different business models aside, why does it seem like Mastercard and Amazon are telling different stories about the consumer?

CHRIS VERSACE: Well, I think Amazon really speaks to stretching those dollars. So people are going to gravitate towards that. With Mastercard, it's more the concern about overall spending being weaker. So, yes, people aren't going to use cash. They're not going to use checks any more. We're going to use cards. We're going to use mobile payments.

Transactions are good for Mastercard, whether they're credit or debit. The concern is that the volume of overall transactions is lower. But not just here, also outside the US, particularly in Europe, where Mastercard has a very strong toehold. We did just learn that September retail sales in the eurozone fell year over year. That's a little concerning for Mastercard's business.

And candidly, if the shares of Mastercard continue to move higher, call it towards our 410 price target, we might start to trim back some exposure, given concerns about the consumer that we already talked about.

SARA SILVERSTEIN: And speaking of holiday shopping, we should talk about every dad's favorite store Costco. Is now a good time to get a position in Costco? And is there a price people who are looking to build a position-- this is a member question-- should target?

CHRIS VERSACE: Are you calling me out as a dad because I love to go to Costco? I'm just curious.

SARA SILVERSTEIN: No, it's my dad and my husband. We don't live-- I mean, the closest Costco to us is over an hour away. And I think my husband pretends to golf so he can go to Costco. So all dads I know.

CHRIS VERSACE: All dads love to make to use that time horizon for them, Sara, a pilgrimage to Costco. Yes.

SARA SILVERSTEIN: Exactly.

CHRIS VERSACE: So Costco has been a strong performer for us. We continue to think that they're going to take consumer wallet share this holiday shopping season. And they'll continue to do it into 2024 as they continue to expand their footprint. But this is always a question that we get. Where would we really pick up more shares of Costco?

If we take a look at it, the 550 level looks pretty solid for support. That would be a good point to do it. Again, our price target is 600. If we do see Costco continue to take more share than expected during the holiday season or-- and this is a big-- or should they announce the much-anticipated membership price hike, that would give us reasons to rethink that $600 target, most likely higher.

So that would be another catalyst perhaps for members to get involved. But in the meantime, the shares pull back closer to 550. It's a good pickup.

SARA SILVERSTEIN: Great. And you cover Coty's strong results in an alert to members. But we do have a member wondering about your thoughts on the equity swap it announced.

CHRIS VERSACE: So they've been doing this from time to time. And it's really tied into their share repurchase program. So I use it more as a vehicle to fund that repurchase program. And the great thing, Sara, is not only do they talk about aggressively buying back stock in the next couple of quarters, they're actually targeting meaningfully reducing its overall share count to around 800 million shares over the next few years.

That's going to drive a lot of incremental EPS for Coty. And, you know what, I'll tell you this. The management team, or the newer management team, behind Sue Nabi has simply been executing on all cylinders. I don't want to be those folks that falls in love and fawns all over a management team. I'll just simply say that they are executing on that plan. And this is an extension of that plan. And so far, we have no reason to doubt that they will do that.

SARA SILVERSTEIN: And I've been watching Coty and other cosmetic competitors since you initiated the position in early February, while Coty is relatively flat, Sally Beauty Supply and Estee Lauder have been pretty much cut in half. What exposure were you trying to get with Coty? What makes it different? Why that name?

CHRIS VERSACE: Well, we wanted exposure to the beauty market. It's a growth market. There's factors tied to aging in the US and Europe. There's the affordable luxury aspect to it. There's also longer term growth prospects in Asia, particularly with skincare. So there's a number of different reasons for that.

We picked Coty because of the transformation that was starting to happen. Candidly, Coty was a name that we first picked up in stocks under 10. I think it was around $3 or $4 when I was co-managing that portfolio. And it was a great performer there, going from $3 or $4 to around 9. And when we had the opportunity with AAP, it was a name that we wanted to include.

But the key here is understanding the differences in companies that touch the same end market. And what I mean by that, Sara, is when you look at like Sally Beauty, they have a very small beauty business. They have a lot of other businesses in there that includes various products like heaters and fans and all this other stuff. Not really a true comp for Coty. But we do like to pay attention to what it says about that small part of its business.

The same is true with other luxury good companies. LVMH, for example. Big luxury conglomerate. They're selling jewelry, alcohol, and leather goods and all these other things. But we do dial into what it says about its perfume business. And just to touch on Estee Lauder real quick, I know that that stock has really been hard hit. It has some very different and very specific issues given, A, it's exposure to China, which is very small for Coty. And Estee Lauder really relies heavily on the international travel market, particularly in Asia, which is also very, very small for Coty.

Those are some long-term opportunities. And I think the management team will address them when the time is right. But for now, the real power behind Coty is the core prestige fragrance business. And as we saw with their earnings last night, raised guidance, and what I think will be a strong holiday season given their lineup. They are killing it, Sara.

SARA SILVERSTEIN: And both Chipotle and McDonald's reported earnings as California's new minimum wage law takes effect. And you're worried about price hikes and potential price hikes. What are you thinking about there? Sorry, I won't even give you a chance to have a sip of water.

CHRIS VERSACE: So I do think that both companies are going to boost prices in California. When you're facing a minimum wage that goes from $20 an hour from 15.50, they're going to have to. But I also think, though, that we're going to see these companies and others like them really start to embrace more automation, perhaps even AI. Earlier this year, we did a podcast call with a company, Presto Automation, that is helping drive the use of AI inside of drive throughs, kind of cutting out the human labor element, helping these companies save, but also driving productivity as well.

I think we could see some more robotics, more automation. And candidly, this is one of the themes that we're starting to look at as we get ready to wind down 2023 and enter 2024. How can we capitalize on this pain point? That's what we're looking for.

SARA SILVERSTEIN: And we've heard a lot about the Ozempic effect. It's been a focus of media for weeks. And so far, other than a few things like Walmart, we haven't really seen it play out. Is this something that's just fun to talk about? Or do you see this actually coming into play?

CHRIS VERSACE: So I think in the near term-- I was talking with JD because he asked a question similar to this. And the reality is that those headlines came out in a very nervous market. And of course, they're going to get a lot of attention. There's a lot of new new thing tied to this.

But to your point, Sara, when we look at the results from Chipotle, McDonald's, we look at Hershey, we look at Mondelez, snacking companies, we look at our own PepsiCo with their snacking business, there really has been no impact to that. I do think that there's some side effects that kind of need to be factored into our thinking about this in terms of overall adoption.

But again, the drugs are relatively new. We don't necessarily know all the side effects. We don't necessarily know how long people will be on them. So I think, at least in the short term, medium term, a lot of this is overdone.

SARA SILVERSTEIN: And moving to tech, we've heard from all of our Magnificent Seven that the portfolio owns for earnings. What's your general take on how tech is holding up with 2024 on the horizon?

CHRIS VERSACE: So generally speaking, I would say that they've held up better than expected. We are seeing better growth prospects, both in their reported results, but also ahead for the most part. Again, Apple is one of those names. It's right up there on the screen. There is some concern about its revenue growth in the near term, call it the next quarter or two. Yes, the current quarter will benefit from a full quarter's worth of new iPhones and growing services. But before too long, we'll tend to see that seasonal drop off in the iPhone business. So we got some questions as it relates to Apple, especially with the shares bumping up against our $185 price target.

SARA SILVERSTEIN: And especially with the change to the price target too. So if we can bring that back up. You recently cut the price target on Apple. So can you talk a little bit about that?

CHRIS VERSACE: Yeah. I mean, it got to exactly what I was kind of alluding to. We took it down from 200 to 185 just because over the last couple of quarters, we've seen slower and slower top-line growth out of Apple. That's a little concerning. Excuse me. And while the mix of the revenue continues to be favorable with the higher margin services growing, overall revenue growth, like I said, has really started to slow.

And we might get a little bit of a bump here during the holiday shopping season, particularly for iPhone. But then the question becomes, OK, we start moving into the first half of 2024, what's going to reignite Apple's revenue growth on a year-over-year basis? Yeah, we'll get some refreshes for iPads. The Mac line was just refreshed. The jury's out on the Vision Pro. So we need to see something else from Apple, Sara. So we're going to be in a little bit of a holding pattern for that, I think.

SARA SILVERSTEIN: And Microsoft, you upgraded it to a two after strong earnings. But you left room to upgrade it further. What kind of synergies do you need to see from the Activision Blizzard acquisition?

CHRIS VERSACE: So remember, Microsoft is in the midst of really investing rather heavily in its AI efforts. It talked about that the middle of the year. And that's continuing to happen. So we want to see synergies from this holding in of Activision that kind of offsets that so they can really get back to margin expansion and delivering outsized EPS growth. That's really what we want to hear.

We also want to understand candidly, what's the long-term strategy for Microsoft in gaming now that it has Activision? Are there other content plays there? How is it going to fold in its advertising business into the gaming market? These are some of the things that I think could have some big implications in a good way for Microsoft. But they haven't really talked about a lot of that just yet. So those are things that we're going to want to see.

SARA SILVERSTEIN: And you've noted repeatedly that Wall Street's negativity after Alphabet's earnings is overblown. What is the Street getting wrong? And how long do you think it will take for them to get it right?

CHRIS VERSACE: Sure. So look, everybody focuses on sizing up what Amazon, Microsoft, Alphabet, and some other cloud providers have out there jockeying who's faster this quarter. Oh, they're winning share. All of this. And typically, folks tend to look at it on a year-over-year basis. I totally understand that.

But we have to make sure that we triangulate around the data. And what I shared with members is if you looked at Alphabet's Google Cloud business in the September quarter compared to Amazon, compared to Microsoft, it was actually the fastest growing cloud business on a sequential basis. So in the September quarter compared to the June quarter. And I think a lot of that was lost.

How long do I think it'll take? Realistically, it's going to take until we get the next earnings cycle and Google delivers yet again on that, or perhaps they've had some big deals that were kind of lost in the shuffle, didn't close during the September quarter. Management talked to some of that on the earnings conference call. That could give us a better print for Google Cloud when they report the current quarter.

SARA SILVERSTEIN: And weakness in the chip stocks has been a major focus for the last few months. Do you expect that narrative to continue into the end of the year and into 2024?

CHRIS VERSACE: Well, I think if we step back, the larger part of the weakness was really the down draft in the NASDAQ. And what was happening there was more probably tied to the Treasuries and concern about what the Fed was going to do. And we started to see those names rebound following Fed Chair Powell's more, as we said earlier, neutral comments about monetary policy. Treasuries have backed off.

When we look at the chip market, I think we've got to take note of what the end markets are. Clearly, we're seeing signs of improving smartphone demand. We're hearing signs of improving demand in the PC market. And prospects for the data center market look very favorable for next year. And of course, we're going to continue to see it continued-- Continued. Continued. God, I got to use a different word. We need to see further growth in AI chips. And I think we're going to continue to see that. So I think the outlook for 2024 on the chip side is better than it was in 2023.

SARA SILVERSTEIN: And so far, Qualcomm is the only one of AAP's chips to report earnings. And the strength of the smartphone market had you feeling pretty bullish. We won't hear from Applied Materials until next week. And Marvell won't report until December. What should we be watching in the meantime?

CHRIS VERSACE: So a couple of different things. With Applied Materials, we've had several other competitors report. Lam Research in particular had a very nice report and guidance. But we're also going to want to hear, more importantly, what Taiwan Semiconductor says with its October revenue. The reason being is that if these end markets that I just talked about and others are continuing to grow, it's going to mean that past a certain point, chip capacity is going to get tight. That means we will need to see incremental spending for semiconductor capital equipment.

And remember, that's in addition to the reshoring efforts that were announced several quarters ago and are going to really start to kick in late this year, even more so in 2024. So those are some of the things that we're going to want to hear from Applied Materials. With Marvell, we talked about what NXP Semiconductor had to say yesterday, tying that into Marvell.

We also shared that given when Marvell reports at the end of November, we're really going to want to hear what Cisco has to say about its networking business. And that report will come next week.

SARA SILVERSTEIN: And we have a question from a member that while we're waiting for those Marvell earnings. How does Marvell's PE ratio play into the stock's valuation?

CHRIS VERSACE: So I saw this question. And I'm really glad that you flagged it because if I remember the question correctly, it kind of pointed to Marvell having a negative PE. And I was a little surprised at that because we obviously know what Marvell stock price is. 51.52. So I was kind of lost on how a negative PE came about.

And what I realized is that there are a lot of sources for information out there, Sara. So we really have to stick to ones that the market uses. So we want to use earnings expectations, particularly current year, forward year, not trailing 12 months. For those sources, the ones that we tend to look at are ones that you can find, whether it's on Bloomberg, whether it's on FactSet.

But for members that want to take a look at that, the easiest place to find them, candidly, you can go to The Street's home page because when you get a stock quote, they list out those numbers from FactSet, I believe. There are other sources that have them as well. But that's the data that you want to look for. Current year, forward year EPS estimates. And get them from a good source, again, whether it's Bloomberg, FactSet, or something like that.

SARA SILVERSTEIN: And strengthening construction and farm spending has been a huge part of your bull case when it comes to United Rentals, Vulcan Materials, Deere. But the prospect of margin improvement has kind of rained on that parade, at least when it comes to your price targets. What exactly is going on? And what are you looking for?

CHRIS VERSACE: So let's take it in reverse order with Deere. So the company hasn't reported yet. But we did hear from two competitors, both AGCO and CNH Industrial, with CNH reporting just yesterday. And in the comments, management was talking about more normalized inventories. Remember, over the last year, all these companies were dealing with supply chain issues. That afforded them very nice pricing as a result.

But as the dealer inventories normalized, it means we're going to see some incentives come back in. That could really offset some of the pricing power, more into 2024 than this year. So that is really what we're trying to capture. And here's the thing. If we're jumping the gun on this, it's actually a good problem because if margins turn out to be stronger than expected at Deere, that means EPS will be stronger than expected. It'll give us a reason to revisit our price target and potentially hike it back up.

In terms of Vulcan, in terms of United Rentals, again, just taking a little more of a cautious stance here. Nothing in the fundamental data, construction spending, or any other non-residential construction data that we've seen or activity that seems to suggest an imminent slowdown. We would much rather be in the position to have good news force us to raise our price targets.

SARA SILVERSTEIN: And you've said our inverse ETFs remain in play, at least for now, with the potential volatility on the table. But this has been the case since we initiated these positions in 2022. What are we looking for to take these off and stop hedging our exposure to the market?

CHRIS VERSACE: Great question. We've talked about it. The strategy remains the same. What we said last time on the monthly call, Sara, was we would look to revisit the inverse ETFs that are SH and PSQ when the Fed adopts a more dovish tone. And what have we seen? Well, the last time we were here, the Fed was still more hawkish than not. Last week, Fed Chair Powell adopted a more neutral stance.

Again, that doesn't mean that they're done raising rates. Excuse me. As he said, monetary policy is in a better place. I think the key for that is going to be what we see in next week's inflation data with the October CPI, PPI. If we don't see a lot of traction, I think that's going to renew concerns that a rate hike may not be off the table., but it may not necessarily be on the table. But that's going to be a little different what the market has been thinking over these last several days. So that'll be a key data point that we're looking for. But ultimately, when do we let go of the inverse ETFs? It's when we start to see a definitively more dovish Fed.

SARA SILVERSTEIN: And one of our members asked specifically, how do the losses in our inverse ETFs weigh into the decision to keep them in the portfolio? And I think this is a really important to address because I do think look at these differently.

CHRIS VERSACE: You're 100%, Sara. We know that these are not stocks that we own necessarily to go up. I know that sounds kind of counterintuitive. We're looking for them to limit the overall impact of the market, either its volatility or when it is going lower. Again, we shared with members a note on this that exiting October, the best performers, not necessarily that they made the most money, but the best performers in the portfolio from late July into the end of October were our inverse ETFs.

Again, that's the job that we have assigned them. And it's a job that they do well in a very nervous market. And again, once some of these issues that are driving that uncertainty in the marketplace, the questioning, as those start to fall by the wayside, particularly with the Fed being more dovish, that's the time to revisit owning them.

And again, we haven't seen that yet. Data we get next week could bring us a little closer to that. It could also push that timetable out. We're going to continue to evaluate the positions and holding them as we get more data.

SARA SILVERSTEIN: And you look at gold and oil in the same way that you look at our inverse ETF positions, and have they performed as you expected?

CHRIS VERSACE: So gold a little bit because it's more of a defensive position. Oil, no, not so much. The oil position was really predicated on supply cuts and the US economy being stronger than expected, something we clearly saw with the initial GDP print for the September quarter, but also the potential for China's economy to rebound as more stimulus from that government as those benefits had.

Now, we haven't really seen that. We have seen Saudi Arabia continue to reiterate their supply cuts. So I do think that as we start to get on firmer footing with the market, less uncertainty, we'll start to revisit gold along with our inverse ETFs. Oil is a different animal altogether. And if we don't necessarily see the global economy picking up, or conversely, if we see it decelerating at a faster rate, that would give us a reason to rethink owning the XLE shares that we do own.

SARA SILVERSTEIN: And with a potential government shutdown on the table November 17, outside of the impact on the economy, is this a risk to Lockheed Martin or Axon?

CHRIS VERSACE: So there's two ways to think about that. Are we seeing Lockheed Martin continue to win new programs, some major sizes of hundreds of millions of dollars from defense-related agencies? Yes, we are. Are we continuing to see it when orders from governments outside the US? Yes, we are. It's more headline risk than anything else, Sara.

If we do see a government shutdown-- we're continuing to monitor the developments in Washington. It sounds like the House and the Senate might be able to get their act together. My bigger concern on that is, yay, we get something. But most likely, it means we'll be revisiting this in early 2024. Call it January. Rinse, cycle, repeat. We'll go through this again. But we're going to continue to focus on the rising backlog for Lockheed Martin.

SARA SILVERSTEIN: Great. Thank you so much, Chris. We'll end it there for another month. Please continue sending any and all feedback and questions to aapclub@thestreet.com. And we're looking forward to hearing from you.