J.D. DURKIN: Good morning, Action Alerts PLUS subscribers. The one and only Chris Versace joins me, as he does every Monday. Chris, thank you for being here. We are back, of course, to get all of our members ready for another busy week ahead. But first here, Chris, you did not buy or sell any stocks last week, but you did raise several price targets. Can you give us those highlights?
CHRIS VERSACE: Sure, J.D. . So you have to remember, we had some companies report last week-- Axon, Coty-- and their results were strong, very solid guidance giving us a reason to lift our respective price targets again for Axon shares, as well as for Coty. But later in the week, Taiwan Semiconductor, the world's largest chip foundry, came out and they reported their October revenue that, I mean, I have to be honest J.D. , it simply smashed expectations. Really supporting our views not only on Qualcomm and Marvell, but suggesting that yes, Apple's own guidance that it gave the week before could be a little conservative. And as a result, we kind of did some quick math, and we revised our Apple price target a little higher, as well, in Friday's roundup.
J.D. DURKIN: So at least, at face here, Chris, the market seems to sour on Coty, despite a strong result. Talk to me about more, what you think is going on there.
CHRIS VERSACE: I'm really glad that you asked that question, J.D. , because Coty is one player in the luxury market. And there are a lot of them out there. A lot that have much bigger, more diversified businesses. So I think about this similar to the way I think about technology, right? It's luxury like tech, it's a wide category, and you really have to pay attention to what the companies that you own, how are they participating in the luxury market? Is their end market different than what's going on elsewhere? So like, for example, last year in tech or even this year in tech, AI, data center continued to be strong, while in the first half of the year, smartphone, PC was weak. So it's a great lesson in know what you own.
As it relates to Coty kind of ending the week on a softer note, we had another big luxury company come out last week, Richemont, report, but here's the thing. Again, know what you own. Coty, fragrances. Coty, growing in skincare and cosmetics. Richemont, jewelry and fashion, i.e. apparel. Two very different businesses.
And when we step back and we hear what LVMH had to say, Interparfums had to say, as well as Coty's own strong guidance, we continue to be bullish on the prospects for Coty's business. Some sweeteners are the accelerated buyback they'll be doing and-- and-- the company continues to execute on reducing the balance sheet leverage. Both of those two items, I think, could give us some upside EPS generation in 2024.
J.D. DURKIN: And Chris, during last week's member's call, you broke down your GARP approach-- I think that's growth as a reasonable price. I don't if you call it GARP or G-A-R-P, but you broke it down for the portfolio. Give us the SparkNotes for members who may have missed it.
CHRIS VERSACE: So we were really trying to remind members, what it is we're looking to do with the portfolio, right? We're not a growth portfolio. We're not a value portfolio. Rather, we're a portfolio that wants to participate in areas that are going to grow faster than the overall economy, companies that are poised to deliver faster earnings growth than the S&P 500. I talked quite a bit about this, but the nutshell version is if we can identify companies that are growing faster than their end markets, delivering faster earnings growth than the S&P 500, we're going to get a one-two combination, J.D. , of earnings growth, multiple expansion. That's the magic recipe that drives stock prices higher on a sustained basis. So that's the mantra that we're going to have going forward.
The other thing I will point out is because we're focused on growth at a reasonable price, it also means that we're not going to be looking at companies that have no earnings. So that's a big initial check box for us. And there are some others that we talked about more in depth, again, on the member's only call last week.
J.D. DURKIN: And speaking of, before we move on, of course, as a reminder to our members at home, if you missed that conversation, you can catch a full replay of that November call Chris was just referencing if you head on over to the Video tab over on the AAP home page.
Let's talk Applied Materials, shall we? They will join the earnings parade on Thursday of this week. Chris, what's on your watch list there?
CHRIS VERSACE: Well, the big theme behind a lot of the semiconductor capital equipment companies is reshoring for chip capacity. Remember, it's not just here in the US, but we're, also, seeing it in the eurozone and Japan, as well. We're also going to want to revisit the prospects for China and their growing semiconductor capital equipment needs, and how that may play out.
Remember, later this week, we've got President Biden and China's Xi getting together. We'll want to watch that with an eye towards the chip market, as well. But by and large, what we want to hear from Applied Materials is two or three things. First, their end markets continue to be strong. We want them to confirm the pickup in the PC market and the smartphone market, as well. We think they're going to talk favorably about longer term applications, but we, also, want to see their backlog continuing to rise. That's going to give us a lot more comfort for 2024, potentially into 2025.
And the other thing we want to hear is pricing in the backlog remains firm. If not, getting stronger. That's a great leading indicator for margins over at Applied Materials.
J.D. DURKIN: Yeah, certainly. It's also a big week for retail-- a very big week for retail. Any other reports on your radar there, Chris?
CHRIS VERSACE: Oh, my goodness, J.D. . How could there not be? We've got everybody from Home Depot to Target, TJ Maxx, Ross Stores, Gap, BJ's Wholesale. So we are going be kind of sifting through all of them.
The reason being is we know that consumers are increasingly selective. Where are they spending? What are the things that they're spending on? We have our concerns about apparel, so we're not really in that market, but we want confirmation that consumers are kind of either going higher end or going more on the low end to stretch those disposable spending dollars.
But I, also, want to hear what they're saying about their digital shopping. Remember, a lot of these companies did some late October early sales, kind of pulling the holiday shopping scene forward. What did they see there? And how does that impact what they see for November, December, and January?
J.D. DURKIN: Last week in terms of overall economic data, a bit quieter. Hopefully, people enjoyed the break because that won't be the case for very much longer. This week, CPI, PPI, retail sales, like you just mentioned. Where else will you be putting your attention, Chris? That's already a lot to focus on just a few days.
CHRIS VERSACE: So we're going to hit all three of those. We also have October housing starts late in the week. But for us and I think for the market, the big data point to focus on is going to be the CPI. More specifically, though, it's going to be the core CPI. We know gas prices have come down. I'm sure members are feeling that nice little extra, positive action in their wallets when they go to tank up their cars and drive around, maybe doing some early holiday shopping season.
But it's going to be core CPI that the Fed focuses in on. That's what we will be focusing in on. And here's the deal. It's expected to come in unchanged compared to September, hanging around that 4.1% level. And if that's the case, J.D. , and we see a print that's little changed, perhaps even moves in the wrong direction, I think, that's going to give the market some pause because it's not going to be in line with the current expectation that the market has, i.e. this Goldilocks narrative that we've been writing to members about.
J.D. DURKIN: Yes, the Goldilocks. We love our narratives, don't we? Now given the market's strength over the past week or so, could any deviation on the data be seen as a big problem for that Goldilocks narrative, Chris?
CHRIS VERSACE: Yeah. Absolutely, J.D. . Because the market's expecting the Fed is done, but remember what Powell came out and said last week, they will not hesitate if the data starts to move the wrong way or says that yes, you need to do more, Mr. Powell and the group of Fed heads. And if the core CPI comes in again 4.1%, that's going to lead the market to rethink that, oh, maybe, it's not a foregone conclusion that the Fed is done. And with large-- with the mega cap stocks a little overbought here, could give the market some pause, rethink some of the run that's happened, but for folks that are sitting on the sidelines with cash that we are, that could be a good problem to have.
J.D. DURKIN: And as if all of that were not enough, hello, government shutdown watchers. We'd be remiss not to mention, of course, November 17, the deadline for Congress to avoid, yet again, another government shutdown. This laddered CR thing is weird. It's kind of a different conversation. But so far, Wall Street, Chris, has largely ignored the political messiness, the headlines as of late out of Capitol Hill. Could it be different by the end of this week, you think?
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CHRIS VERSACE: You know, Wall Street tends to ignore it until it can't ignore it, right? Which means that if we go down to the wire, which I think is what's probably going to happen, if there is a deal, OK, great. What are the details? How long of an extension do we get? But you know, J.D. , I agree with you, that this latter approach, it's a bit funky.
And my understanding is the White House is already saying, no way, folks. We're going to veto this. So it does mean that the House might have to go back to the drawing board with an even more compressed timetable. If that happens, I do think the market is going to be a little-- a little nervous about it, especially after the Moody's downgrade, which, to me, really spoke to the fact that, look, Washington, you have got to get your act together. Let's do this.
J.D. DURKIN: Yeah, that's right. We did see that lowering of US credit rating to negative from stable, big headline here to kick off a busy week. That's going to do it, unfortunately, because I could do this with you for at least another hour. We'll have to leave it there. Chris, thanks as always, my man.
CHRIS VERSACE: Thank you, J.D. .
J.D. DURKIN: Members, thank you, each and every one of you, at home for taking the time to watch. We will see you again soon.