J.D. DURKIN: Good morning, subscribers, one and all, Chris Versace and I are now back, one of us far more festively dressed than the others. But we do have answers to some of your biggest questions of the week. Chris, thank you for being here, as always. Let's kick things off with a question about our ratings system. Chris, we have one member wondering why Morgan Stanley is rated at a 2 when you initiated the position. What say you?
CHRIS VERSACE: Well J.D. , when we kind of rolled up our sleeves, did the valuation work just given where we were at the time that we were calling the shares up, we saw upside to about $95. It would-- limited upside relative to the starting position. As a result, we could see upside, again, to around that $95 level. But there was also the chance of downside risk below that.
So we opted, instead of going full chips in as it were with a 1 rating, to initiate with the 2 rating. But we are continuing to watch the developments there. Again, since the Fed kind of initiated a dovish tilt, we could see the investment banking window, particularly the IPO window, start to reopen in 2024. That would be a reason for us to revisit not only our price target for Morgan Stanley, but the rating potentially as well.
J.D. DURKIN: I like that phrase, a dovish tilt. Just a slight dovish lean given the comments of last Wednesday. We do have a member who is looking to better understand, Chris, why is the club owning PepsiCo? Can you break down your general thesis as well as your latest thoughts on Pepsi?
CHRIS VERSACE: Yeah, I mean, first and foremost, Pepsi is about a high quality company as you can get. They've been boosting their dividend each and every year for almost 50 years. So that tells you that it is a prudent steward of the business.
But remember where we are, J.D. . We are seeing folks that are still contending with the pain of higher inflation. Data is showing them tilting back towards leaning at home. And we're currently in the seasonally strongest quarter of the year for PepsiCo's business. And again, that's great for their high margin salty snack business that should drop a lot to the bottom line.
So for the foreseeable future, we're going to continue to own this name. What would cause us to possibly rethink that? Well, it would have to be something along the lines of that the economy simply explodes to the upside, real disposable income is exploding, and people are re-embracing with a vengeance eating out.
Now just given where we are in the expectations for GDP to slow in 2024, the odds of that happening are probably less than 50/50. We just continue to see good prospects for PepsiCo to grind out and deliver, just like they have over the last several years.
J.D. DURKIN: All right, Chris, now let's assume that I'm a member and I sit there on any given day. And I say, man, I would really love to revisit Chris Versace's thesis for any particular stock in the portfolio at any particular time. Chris, what would you tell me to do? Let's remind our viewers where they can go about getting that kind of information.
CHRIS VERSACE: Sure, so there's a couple of places. Typically whenever we initiate a position, whether it's in the active portfolio or even the bullpen, we'll lay out our investment case. So you can certainly find all of that in those particular alerts. But we also recap the investment thesis every week in the rundown.
You know, typically in the rundown, for each portfolio position, we have not only the quick write-up as to what happened over the last week, but we also, like I said, recap that investment thesis. And then we have some helpful links down at the bottom as well. So for existing members or even newer members that are looking to revisit the why behind each position, that's probably the best place to start.
J.D. DURKIN: All right, well, sources familiar with the situation tell me we somehow only have a few trading days left of 2023. I don't know how that happened. I swear it was just January. But given that we are at the end of the calendar year, Chris, we have a member wondering if they should consider closing their positions in our inverse ETFs in order to take advantage of, of course, the seasonal phenomenon of tax loss harvesting.
CHRIS VERSACE: So I think this is a great question because I'm sure a lot of members are thinking about our inverse ETFs for a variety of reasons, whether it's harvesting some tax losses or just seeing the strong surge that we've seen in the market and thinking is it time to throw in the towel on these things? So remember, members, we had said that when the Fed starts to get more dovish in their language, this dovish tilt that we alluded to earlier, we would seriously start to reconsider owning the inverse ETFs in the portfolio subject to the market's technicals.
So did the Fed deliver that dovish tilt? Boy, they sure did. And the market's really leaning into that. It's exploded even higher over the last few days. But as we've shared in our alerts with you, that has only pushed not only the S&P 500 and the NASDAQ further into overbought territory, it's done that with the McClellan oscillators. The market mood is complacent with the low VIX and extremely greedy.
All indications are that, yes, the market rally is likely to continue as we move into 2024. But there are some concerns, growing concerns, I would argue, that once we get there, we could see the market start to give back some of these gains. Again, the market is priced to perfection. We could see some wobbling, even before then. And for those reasons, we want to continue to hang on to our inverse ETFs.
Remember, the market is overbought with an RSI over 70. As we're taping this, it is currently well above that. A more normalized market has a reading closer to 50. If we see the market's RSI come back to that level and we have that dovish tilt, that would be the opportunity to exit those inverse ETFs.
J.D. DURKIN: And that's why we follow those ranges 30 to 70 so closely on the RSI side. Talk to us a bit about the club's cash position. Chris, you and I were talking a little bit about this last week. We have a member who's wondering if you are still expecting that pullback at some point in January given the rally that we've seen just over the course of the last few days since the Fed decision.
CHRIS VERSACE: Yeah, I mean, look, that's the follow-up to what we were just talking about. We have been preparing as the market melt-up continues, as the market becomes increasingly overbought. We do recognize that at some point, from a technical perspective, the market is going to normalize. And we want to be ready for that.
As we've been writing, we want to take advantage of the opportunity to buy quality companies that are going to deliver superior earnings growth in 2024 and beyond at better prices. That is why we have the cash. That's also why we've started to slowly call up a couple positions from the bullpen. But we've also added other positions to the bullpen.
We've got our shopping list. We know the price points for more recently added companies to the bullpen, like a Labcorp for example. We've talked about levels at which we would get more aggressive in Morgan Stanley, where we would buy back the shares of Bank of America and others. So we are preparing for that, no question.
J.D. DURKIN: All right, Chris, given the time of year, we will conclude this week's questions portion with one we just honestly didn't get to during last week's members call with you, me, and Helene. What portfolio holding has you the most excited as we head into 20-- excuse me, into 2024?
CHRIS VERSACE: So in 2023, United Rentals was probably our best performer. We talked about it earlier in the week, you and I, J.D. . We talked about it on the December members call. And the reason for that was just the spigot that is opening up for non-residential construction and the possibility of a return for residential construction. So I'm going to stick with that. But not United Rentals, just given the strong run it's had, the stock that we think is going to be very well positioned to capitalize on all of that and deliver that superior earnings growth that we look for is Vulcan Materials, ticker symbol VMC.
J.D. DURKIN: VMC, all right, my friend, what a year it's been. Great to do these with you. Merry merry, happy and bright, great insight as always, Chris. Thanks for taking the time.
CHRIS VERSACE: Happy to do it, J.D. . J.D. to you, your family, friends, loved ones, happy holidays, Merry Christmas, and members, the same goes for all of you.
J.D. DURKIN: To each and every subscriber and member watching at home, absolutely, Chris. Thank you, members. As always, don't forget, you can still send us any and all questions you have. You could do so by sending those questions on over to us at email@example.com. Thanks for watching. And we will see you again soon.