Action Alerts PLUS Members Call - December 7, 2022

KATHERINE ROSS: Welcome to the December Action Alerts PLUS call. I've been busy launching our Twitter spaces, but I'm excited to stand in for Sarah today, joining Chris and Bob who are live at our spot from the New York Stock Exchange. We'll talk about the year that was and get into some exciting changes coming to the portfolio very soon. But don't worry, members. We'll also hit on some of the most pressing questions about this month, and of course, the month and year ahead.

Now, 2022 marked the first full year with you guys at the helm of the portfolio. As we kick off the call, I want to begin with a trip down memory lane and a review of some of your earliest decisions and what you've learned since.

So Chris, let's start with you. Give us the trade that stands out in your mind.

CHRIS VERSACE: So they say always remember your first. And for us, while a lot of folks might have thought about the big exit that we did almost a year ago for Facebook, now Meta Platforms, to me, it's that very first trade that we did, which was with AEO. And we exited the shares around 25.

And I was just looking at it recently. And 12 months after we did that first trade, they were actually trading around $10. They moved slightly higher, but I think that trade, not just because it was our first one, but it really showcased how we were going to be looking at the market, looking at the portfolio, and trying to do things a little differently than they were done in the past.

KATHERINE ROSS: Bob, is there a stock that you're most happy to be sold out of?

BOB LANG: Well, when we first took over the portfolio, Katherine, we were pretty heavy in technology names. And so the one that sticks out to me the most right now is salesforce.com, which we took off the portfolio well much higher than it is right now, I think around the $248 to $250 level. I think the stock is trading about $130, $133 right now.

And it was a combination of things when we exited the position. It was certainly a breakdown on the technicals and the chart. And also, Chris had identified, some of this spending is going to be slowing down over the next 16 to 24 months. And he put that out there quite sharply and firmly over a period of time, and he was correct.

A lot of that spending has slowed down. And in fact, last week's earnings call from Salesforce came out. They came out and said that some of the big deals that they've been successful at booking in the past have been slowing down quite a bit, and lead times for closing these deals has extended as well, too.

So this stock is, again, about 45% lower than it was when we sold the name. And I mean, when we decide to get rid of the name and put something else in the portfolio, we go ahead and do that or even just stick it in cash. But this was the name that I'm pretty proud of that we executed on and got rid out of the portfolio, using both fundamentals and technicals.

KATHERINE ROSS: That's a good name to call out actually, Bob, especially this week with all the executive changes that are going on there. But we'll move on.

So how has the portfolio changed in the past year? Have you had to adapt your management approach, Chris?

CHRIS VERSACE: So if you think about everything that's happened over the last year, whether it's the Russia Ukraine war, supply chain issues, the dollar, inflation, on again, off again curves over in China as a result of flare ups of COVID, it's been a challenging year. And yeah, throughout the year we've kind of navigated as more data has become available, always trying to review and update what we call our 12 to 18 month horizon and the investment tapestry that powers it.

So in mid-year or so, we really took a hard look at where we were. We had exited bunch of technology positions, as Bob alluded to. And we wound up moving into more defensive names, more inelastic names, more US-focused names, really trying to capture the expected spending coming out of Washington in 2023.

So that was probably the biggest change that we had in the portfolio. And of course, we also really tried to capture more dividend income as well.

KATHERINE ROSS: I'm kind of sure that you guys can guess what I'm going to ask next since it's December. It's report card season. And Chris, I do want to stick with you here. How would you grade your first full year of management? And can you explain what your grade-- or why you would grade yourself the way that you are?

CHRIS VERSACE: Yeah, so look, everybody likes to think that they do a better job than they do. And I don't want to fall into that trap.

I would say that there were some things that we obviously could have done better. We could communicated some of our moves a little better earlier on in the year. But again, it was a rapidly changing environment and a lot of challenges.

Having said that, though, I think a number of the moves that we made were the right ones, and we continue to make those moves and position us for the coming year. So if I review all of that, I'm going to say it was a pretty solid B+, always room for improvement.

KATHERINE ROSS: What about you, Bob?

BOB LANG: Boy, Chris stole my thunder right there. He stole my grade. I'm going to upgrade us a little bit from what Chris had us. I'm going to give us an A-, and I'll tell you why, is because when we stepped into the portfolio, we had to make a whole bunch of wholesale changes, selling some things, adding a few other items. And again, getting into a bear market, literally two months started right after we stepped into the portfolio in October of 2021.

So it wasn't easy to make those changes. And again, we slipped up on a couple of trades, which didn't work well. But we cut bait and moved on. However, some of the changes that we did make and adding lots of cash into the portfolio and introducing something new with the inverse ETFs, which has done a lot to help defend our portfolio or portfolio against higher volatility-- listen, who knew how low the markets were going to go. The NASDAQ was down at 1.36% for the year in 2022.

So I think some of the changes that we made in spreading out the risk into several different categories and sectors was something that I'm very proud of. I think that we can continue to work on that and improve on that. But I'm going to give ourselves an A-.

KATHERINE ROSS: All right. I'm looking at it right now, and you guys-- this is really impressive, especially in this market. I'm not going to lie. But you've had more than half of the stocks in the portfolio clock gains in November. So which name or perhaps names stand out to you? Can you declare a 2022 winner, Bob?

BOB LANG: Yeah, 2022, I think it was one or two of them that really shined for us over the past 2 and 1/2, 3 months. I'd say, one of our favorite names has been Axon Enterprises, which is a former TASER. We got into that name literally right before it launched. There was some areas on the chart that were extremely interesting to me. The stock had gone up to the volume weighted average price, the VWAP which is an indicator that I use very, very carefully to find entries and exit points for stocks. It blasted right through that level.

And listen, people here on the New York Stock Exchange walking around, big money investors use that tool as well too, to try and pinpoint entries and exits out of stocks. So Axon Enterprises was a name that we plowed into in, I want to say, October. They had really strong earnings in November, and the stock took off right after that. I think it was up 50%, 51% actually from the time that we had taken a position in it. 30 days later, we were up almost, again, over 51%. Stellar move in just a short period of time.

So that one. And of course, Clear Secure, which goes without saying, has been a strong performer for us for the past couple of weeks. But if I had to pick out one name that I'm really proud of that we got into and we've managed correctly, it's Axon Enterprises.

KATHERINE ROSS: And Chris, when it comes to our newer members, is there a stock that they should start with?

CHRIS VERSACE: Yeah. I mean, it's always a little bit of a challenge to new members. We've got a full portfolio of 28 positions. And I can understand that they might want to wonder, OK, I'm getting started. I'm new to the portfolio. Where do I begin?

And as we look forward a little bit, the market volatility that we've seen, we think it's going to continue. In our recent notes with members, we've shared our thoughts that there's some concern about earnings expectations for 2023 and what the market multiple could be.

To us that says, you know what, CBOE Global Markets is a great name. They just came out and reported a fourth consecutive month of record options volumes. And we think that is simply going to continue given what we see ahead. So I think CBOE is a great place for members, newer members in particular, to start.

KATHERINE ROSS: And new members, keep an eye on your inboxes tomorrow for more picks to get started.

Obviously, I'm not going to let you guys off that easy. So let's go move into the laggards. Bob, let's start with you. What do you have to say about the laggards in the portfolio this year?

BOB LANG: Well, there's not too many. I mean, other than the fact that some of the technology names that we've decided to stick with, Microsoft, Google, and even Apple. But I would say the one laggard that I'm a little bit disappointed in, it hasn't performed very well, is Verizon. This is a stock we liked and was actually a strong dividend payer before we got into it. It's actually gotten stronger because the stock price has gone down. The yield is probably closer to 6.5%, 7%. And Chris had identified that 7% level was an area where the stock had bottomed last time around when the yield got up to that level.

It's got steady cash flow. And I think that this is a stock that, as we possibly go into a recession in 2023, this is a name that big investors, big money investors are going to want to gravitate to because they're going to like that big, huge dividend payment from a reliable cash flow stream that Verizon provides.

I know over the past three or four weeks, we've heard some positive news from the company, especially with the deals that they've done with Apple with the new iPhone. So I'm looking forward to seeing better things happen for Verizon. But if there's one stock that was disappointing for me in 2022, that would be it.

KATHERINE ROSS: And Chris, is there a move that you made either this month, or I'll even widen it out to being this year, that you wish that you could take back?

CHRIS VERSACE: Yeah. I mean, look, at this time of year, we take a deep dive on the moves we made in the portfolio, review our trading notebook, as it were. And if there was one position that I wish that we didn't exit, it's going to be Nucor. Because we sold around $104, $105. The position-- sorry, the shares rallied back significantly after that as a play on the Biden Infrastructure Law.

And we've got some great positions in there with Vulcan Materials, United Rentals. We probably could have held on to Nucor. And if I could go back in time and tap myself on the shoulder, I probably would have said, hey, just be patient with this one a little longer. It'll pay off.

KATHERINE ROSS: All right. Let's move on to our review of the portfolio. Now members, as a reminder, I do want to say that we will not be hitting on every single name, and that is because we want to focus on your most pressing questions. You can check your inbox every Friday for a full review of every name in the weekly roundup. But let's start with one of the most challenging sectors of the year, because I don't know how you guys feel, but I for one do not see the challenges going away in 2023. And that means that Apple is up first.

You've been eyeing the ongoing challenges within China. And looking into 2023, how concerned should members be, Bob?

BOB LANG: I think very concerned. And it seems like every other day, some bad news is coming out regarding supply chain for Apple or perhaps some semiconductor issues, or maybe even some issues with China.

So yeah, this is an area of concern. I think even more recently, there was an analyst that came out and said that he felt that some permanent loss of iPhone market share is at risk for Apple in 2023.

And you know what? When somebody says permanent, that definitely has to raise a red flag. Because a lot of their revenue is coming in from this phone. Now on the contrary, a lot of their positive revenue growth has been coming services. So we like the services growth revenue. It's a good recurring part of the business. But look, if people aren't buying devices, then they're not going to be buying the services either. So it's kind of taking a hand in glove sort of thing.

But I do like our position in Apple. We did trim a little bit. Even if we do come back a little bit, we have some room to add some more to the position. But certainly, as we head into the holiday season, I think the bar is raised for Apple to do well in this holiday season. If they don't, we're going to hear about it probably in the first week of January, much like we did in 2019.

KATHERINE ROSS: OK, let's move to Amazon. You recently added to your position on strong e-commerce. How did you weigh recession concerns and rumors of layoffs into your decision here, Chris?

CHRIS VERSACE: Well, so they're really two different things. Obviously, the fact that Amazon is looking to trim staff, rightsize their business could help rein in the cost. We know that coming into the pandemic, out of the pandemic, that was one of the things that they struggled with. And where you're going to look to January when CEO Andy Jassy probably reveals a little bit more on that front.

So more than likely, some positive news on the margin front. But on the recession front, again, two-folded answers to look at. First is going to be on AWS and Cloud. We know that companies are going to be a little more stringent in their spending. We continue to see Amazon Web Services performing well in that landscape, as companies continue to look for even greater productivity gains.

On the retail business, make no mistake. Amazon is one of those deflationary Death Stars. So as folks look to stretch their spending, much like we saw with the Black Friday through Cyber Monday data, they're going to turn to digital shopping. And it's increasingly hard to beat Amazon in its own arena.

KATHERINE ROSS: And it's also interesting, Chris, because we get, as you just said, such strong e-commerce sales numbers from Black Friday, Cyber Monday, even Amazon's sale back in, what, October? And we are seeing that, I think 91% of CEOs now predict a recession. So it's going to be interesting to see how consumers-- if they're not tightening their wallets now, will that happen? Or are they going to keep going to Amazon? Because as you said, it's the Death Star.

CHRIS VERSACE: Yeah, I think you're exactly right. Consumers are going to have to stretch their dollars. And as we've been sharing our thoughts with members, whether it's because they have been laid off or they're concerned about layoffs, that almost becomes a self-fulfilling prophecy of more restrained spending. So sorry, in my view, Amazon is a natural beneficiary, as is Costco for that.

KATHERINE ROSS: So Bob, that does lead to a member question that we got, which is, it too late to sell Amazon?

BOB LANG: Yeah, it is. And you needed to sell it maybe as it pushed through, the 100 day moving average, about a little less than a month ago.

I think right now, you've got to hold the stock here. And as long as that November low holds, which comes in at about $85, roughly about six weeks ago, as long as that level holds, we should be in good shape. It is well below a lot of the key moving averages over here as we wait and see what happens with holiday sales from Amazon. I think there's a lot of big money that is a little bit shy right now of the news that could possibly be coming out from Amazon, whether it's around Christmas time or after Christmas into January.

So I think they're taking a little bit of a cautious approach here with the stock. But we do know that they have the capacity to come in with some big numbers, and they have in the past in January. I just don't think that the hype is right there, as certainly with the stock. But as it relates to the stock price right now, I wouldn't sell it right here. It's too late. And just waiting for another opportunity to add some shares.

If it gets above $94, $95, I think we got a chance to get some higher prices.

KATHERINE ROSS: And Chris, we're looking at Microsoft right now. There are antitrust concerns that are being validated by the headlines that we're seeing in the news about Microsoft's potential acquisition of Blizzard, Activision Blizzard. So when you look at 2023, does that concern you about the stock?

CHRIS VERSACE: So the way that we kind of approach these big acquisitions, and we did this before, last year with NVIDIA and Arm, is we take note of the potential synergies to be had, whether it's on the cost side or cross-selling products and other revenue sweeteners, if you will. But we don't really bake them into our formal thinking, price targets, that sort of thing until, as we've learned, the transaction is consummated.

So this could be a little bit of a blow to Microsoft because it would really shore up their gaming, where they would not only have the gaming systems but they would actually have the content as well. And we know that typically, content, and gaming content in particular, has been a very big growth engine, rivaling movie studios and all sorts of other areas of content. But from our perspective, it's not really going to change how we're viewing Microsoft in the here and now.

KATHERINE ROSS: OK, and then when we look at Alphabet, it's called activist interest with some urging the tech giant to aggressively cut costs and its head count. Now, we've talked so much about a recession. So I apologize that I keep having to say recession. But if a recession does occur in 2023, is it time for Google to give up on its other bets segment, Chris?

CHRIS VERSACE: So one of the things that we're seeing now is far greater discipline emerge, whether it's going to be in spending, headcount, or what-have-you. So I wouldn't be surprised, if we do go into a recession, that Alphabet Google gets a little more religion with its other bets business. And I think that would be a welcome sign by the investment community. I we would look more favorably upon it.

KATHERINE ROSS: And Bob, how should members be thinking about ChargePoint when it seems that the stock just keeps facing downward pressure on little news?

BOB LANG: Yeah, I like the stock. And it had a huge run in the summertime and peaked just around the $20 level. And it's been coming down ever since. And yes, it just broke recently, the $11 level. I think this is a good area for subscribers to scoop up the shares. Again, the stock is down about 47% from the recent highs over here.

But it's in an area where it caught a lot of support back in May and early part of June. So $10.50 and $11.50 has been an area where we saw some heavy buying coming in, good volume trends, and we saw the stock get super oversold back in the middle part of May and bounced right off of those low levels.

Now, of course, it got down to like the high single digits and really bounced off. And made it. Again, it's a volatile name. So we have to tell our members, our subscribers here, look, you have to live with this volatility here. It's not a huge portion of our portfolio. It's in the top 10, but it's not a huge part of your portfolio.

But I still like ChargePoint going forward. I think the chart, again, is a little bit weak right now. But we are approaching oversold levels. And if we can get a move up into $12.50 and $13, we could be in good shape for some higher prices.

KATHERINE ROSS: And specifically, if you bought a call on ChargePoint, what price and expiration date would you aim for, Bob?

BOB LANG: Yeah, so I was thinking about this one, and I thought maybe going out a little bit further in time and maybe something for an at-the-money call. So maybe a $10 call option out to may or June of 2023. It's not going to cost a whole lot of money. It's about 24% to 25% of the cost of the shares. And so, it's basically 1/4 of what you would pay for the stock.

Of course, there's a time limit on it if you go out to May or June of 2023. But giving yourself about six to seven months, look, the stock made a huge run in four months and doubled in about four months. So I think doing something like that, taking an at-the-money approach to the option, you're managing your risk a little bit better and taking a shot for the stock to make a big, bold move as it did earlier this year.

KATHERINE ROSS: On the subject of EVs, Chris, a recent Bloomberg Report did reveal that Ford as well as GM have been financing lithium and other rare metal miners, critical materials that are needed for electric batteries.

Now, I know that I'm going to get some cringes for this next question but I think it's a fair point. Is 2023 the year that Ford CEO Jim Farley catches up with Elon Musk, especially since we all know that he's got his hands full?

CHRIS VERSACE: He does have a handful. And if we do go into a recession, it could be a very challenging time. But I do think, if we look at really what they have done and have accomplished thus far, the reach to catch Tesla is a big one. But depending on the market share data that you're looking at, Ford is a clear number two in the EV space, and that's as its transformation continues to gain steam.

For me, one of the things I really want to see and understand is the real impact of this EV tax credit that goes in starting in January. To me, that could be the accelerant that really helps Ford grow and transform even faster. To me, that's probably the biggest key that I'm looking for when it comes to Ford shares. And if we see great adoption in that, that could actually lead us, depending on where the share price is, to add more Ford shares to the portfolio.

KATHERINE ROSS: I'm so glad that you brought that up, Chris, because my thought here on Ford kind of goes back to what we were talking about last spring, which is when the gas prices were astronomical because of the Russian invasion of Ukraine. And now with this possible economic downturn being predicted, I've heard a lot of talk from sources and other people and on social media saying EVs may not be the right bet to make because people are going to be tightening their wallets. They're not going to want to overspend or outspend on an EV, maybe look at a used car instead.

But your point is valid. And do you think that means that Ford and GM continuing to invest in EVs makes them not recession proof, but definitely a stock worth having during a recession?

CHRIS VERSACE: So when we look at Ford, we can use the dividend as a proxy and say, OK, we can be patient, collect these dividends while the company continues to transform. But you have to remember, too, that the average age of a car on the US road is around 12 years old. So there is this natural upgrade cycle.

So even if we hit a recession in 2023, we know that cars are going to continue to age. That probably means the average age grows to 13 years, 13 and 1/2 years, something like that. There will be a much bigger upgrade cycle.

At the same time, that EV tax credit is not just for 2023 years. I believe it's around 10 years. So when we put those two things together and we start to see Ford realize more of the synergies in its transformation, that longer term, new Ford probably has more opportunity to shine in the back half of 2023, 2024. So given where the shares are, I think we're inclined to be patient and let that play out.

KATHERINE ROSS: OK. And Bob, when we're looking at the cybersecurity sector, it's faced weakness after Crowdstrike reported abysmal guidance. You recently explained that you remain confident in your cyber ETF position. Is it time, perhaps, to revisit Clear Secure?

BOB LANG: No, I think any pullback, this is a great ETF for people to jump into, especially on the pullbacks. Look, Crowdstrike reported their revenues last week. And earnings were basically a little bit light for the whisper number. However, they guided 40% higher on revenues for 2023, which is an absurdly high number. I mean, obviously for a company this size to be reporting 40% growth in 2023 is amazing.

But this is typical of the names that are in the cyber ETF. We have names like Palo Alto Networks, CyberArk, and again, the aforementioned Crowdstrike. I mean, these companies are basically going to be needed going forward.

And frankly, when companies are cutting budgets, this is probably going to be the last part of the budgets they're going to be cutting when it comes to tightening their belts in 2023 and 2024 if we do head into a recession. Because billions of dollars have been lost to thievery from cybersecurity and cyber thieves. And look, these cyber thieves tend to stay one step ahead of everybody else. And it's the security companies such as Crowdstrike and Palo Alto Networks and the other names that are in the cyber ETF that are going to keep trying to keep pace with what they're with what they're doing and obviously, keep it one step ahead.

These companies are there to help protect not just health care and governments, but other businesses as well, too, that have seen a huge rise in cybercrime over the past of years.

KATHERINE ROSS: Now, Lockheed Martin has been on a tear of late. So why not take a profit? Do you think it's headed even higher, Bob?

BOB LANG: Well, I like Lockheed Martin. And again, it's one of these solid names in the defense sector. We did add to it at a good point in time, I want to say the $390s or $370s or something like that. And its stock made a huge run to an all-time high recently.

I'm always an advocate of taking some money off the table when you get a chance, when you get a profit. And so I think that it is a smaller position for us right now. So I think we're waiting for a little bit of a pullback here in the name. If we do get a little bit more pullback here, we're probably inclined to pull the trigger and add some more shares. But this has been a solid name for us since we got into it in the summertime.

KATHERINE ROSS: Now, Axon, on the other hand, has had a week. Why is that $162 level catching your attention here, Bob?

BOB LANG: So it pulled back quite a bit yesterday, as they did a huge funding for bonds and so forth. So I think $600 million or something like that, a convertible.

This is a good idea for this company. And this is a company that produces a lot of cash flow, but still being able to put that convertible together at a very reasonably low cost, cheap way to finance the rest of their business and their growth.

The stock wasn't at all-time highs, but it was right near it. And to take advantage of a higher rise in the price over the past 4 and 1/2 months, this is a good way for them to do it. I think buying the stock on these pullbacks over here like we've had is an advantageous way to do it. $152 area is a good, strong area of support for the stock, which we saw when it launched after earnings last time around.

So I think that if we do get lucky enough to get that pull back to that area, certainly be interested to pull the trigger and add some more shares.

KATHERINE ROSS: And Chris, do you have any concerns about reports of hiring freezes that are emerging in some health care systems?

CHRIS VERSACE: No, not really. I mean, our two main plays in there are going to be Elevance and AMN Healthcare. The reality is, when we think about AMN in particular, given the staffing business that they have, there's a tremendous amount of job openings that are still there. I believe the ratio is still north of 2 to 1 in terms of the need for healthcare staffing.

So even if they slow a little bit, there's still going to be a shortage. And remember too, the longer term thesis on this is tied to the aging population. I tend to joke about some of these things, Katherine, but as there is no fighting Father Time, and as we continue to age, we're going to have increased demands for these types of services.

And candidly, it's something I'm very close to because I'm dealing with that right now with my 90-year-old father. And when I visit him, I hear continually about the challenges for them to hire qualified people to work at the facility that he's at. So I think this is going to be an area of continued, as we say, pain point investing, and one that we're likely to stay with for some time.

KATHERINE ROSS: Now, we've touched a little bit on Costco, but I want to circle back with you, Chris. Now, it is set to report earnings tomorrow after the bell. I'm sorry, I said circle back. I realized that after I said it. How important are gasoline sales to Costco in the larger scheme of things?

CHRIS VERSACE: So when we look at Costco, there's really three factors at play. So there's going to be what they're doing on the retail sales. We see that in the monthly comp numbers. The other big driver is membership income, great, great differentiator in their business model. And of course, that means paying close attention to opening of the warehouses.

So when we think about gas prices, they're a nice business for Costco. They don't make a tremendous amount of money on it, but they do draw people to the stores. More often than not, no one's going to go to Costco and fill up the tank without going in to get something else. So I think it's a natural attractor for other spending.

So again, it's a nice to have. It's not necessarily beating people to the doors. But again, it helps around the margins. It's a positive.

KATHERINE ROSS: Chris, you know me well enough to know that when we talk about a Chipotle, I've got one question that is always on my mind, and that this stock has been able to manage food inflation far better than most other stocks in this category. So will that continue in 2023?

CHRIS VERSACE: So Katherine, I totally missed it. I assumed the natural question would be a bowl or burrito? But OK, we'll go with food inflation.

So the company has done a great job of passing through price increases. And as we've said with members, when we see the protein complex, but other key inputs for them, whether it's going to be dairy related with cheese, for example, avocado prices, when they come down, we're going to see a very nice transition in the story to one of price increases to overcome inflationary prices to the benefit of these price increases driving margins.

And we're already starting to see some of that happen. Fun food fact, if you will, chicken breast prices are down some 70% since the start of June. I think that's going to start to pay some dividends in 2023, most likely the first half, as they lapse prior chicken contracts.

So I think they're going to continue to do extremely well, especially if we see a slowing environment. We're already seeing data confirm our perspective on this. What we have said is, we are given food inflation, and now in a slowing environment, we're likely to see people shy away from sit down restaurants, kind of take your Darden's, if you will, and adopt more quick service restaurants. And the data is starting to show that. So continue to like Chipotle.

KATHERINE ROSS: OK, Bob. And when we look at a stock like Deere, do you think that we should be taking profits?

BOB LANG: Yes, absolutely. And boy, if there's one stock that that's performed extremely well for us since we got into the name, it was one of the first names that we added to the portfolio when we first took over in 2021, it's Deere. And this stock, while it got hammered a little bit in the summertime, it has really been moving like a champ since the fall. I think it's moved up from about $330 in the late part of September to where it is right now, $440, 33% to 34% move in just about 2 and 1/2 months, stunning move for a stock the size of Deere.

But they did give some really strong guidance for 2023. And their financing seems to be in place. They haven't really been needing to raise any capital, which is a great thing coming into 2023 and 2024.

So I think that as maybe, perhaps if China ever does open up-- I mean, they've been talking about that for weeks and weeks and weeks. And one of these days, they're going to open up. And there's that opportunity to sell more equipment out there in China.

But I think what Deere is trying to tell us is that there's plenty of business here domestically in the United States and elsewhere in Europe, the rest of the world. And nobody really seems to compete with Deere right now. So I think that this is a company that's really on the cusp of doing some great things, especially over the next several years.

KATHERINE ROSS: Let's continue with you, Bob, because with a P/E of 40, is there a potential upside for Vulcan Materials that's already been reflected?

BOB LANG: So this is a stock we got into more recently. And the stock's made a nice run, for about $145 area up to some resistance at about $184, $185. I do like the name. Again, this is another stock that is going to take advantage of the infrastructure law that was passed last year from the Biden administration. So again, another name that we have in the bullpen is Mariano Materials. And this is a stock that Chris and I, we both looked at these two names and felt that Vulcan was the one that was going to push higher. And indeed, it has pushed away from for Mariano Materials. So we did make the right choice on that particular stock.

We think that this stock has some opportunity to get through the $200 and $220 level. There's some resistance up there. But we like this name. It's been moving real strong over the past several weeks. Good, strong volume. Indicators are up there. And we did hit an overbought reading just a couple of weeks ago, but it's pulled back a little bit. I think that this pullback is good opportunity for subscribers to add some more shares.

KATHERINE ROSS: And when you're looking at URI, what do the senior notes that expire in-- or that are due, I should say, in 2029 mean for the company, Bob?

BOB LANG: Yeah, I like the fact that URI did this. And why is that? Because they're basically looking to finance some of their purchases and their business over the next, what, eight years? I mean, come on. I mean, they're probably getting a really cheap rate over the next eight years for these senior notes that they sold instead of having to sell stock. I mean, the stock has been on a tear. Why wouldn't they sell shares? But I think it's a they went with the cheaper route in selling bonds, selling notes, and again, to help finance their business.

This is another beneficiary of the infrastructure law that passed last year, much like Vulcan Materials. And we think that United Rentals is going to benefit greatly from that, even if we head into a recessionary period in 2023.

KATHERINE ROSS: So Chris, the fun of getting to return after a while is that I get to bring up some questions that you've previously been asked, but I'm curious to see what your standpoint is now. And that leads me to ask about oil. Obviously, it's been a volatile year. There's increased uncertainty across the globe. Will XLE be the club's only oil play, or would you look to add a specific oil stock?

CHRIS VERSACE: So generally speaking, almost everything is on the table. It just depends on where we are, where are we in the cycle of the economy, what are the supply demand factors.

And just remember that oil is one aspect of energy. So there could be another energy area that we might be looking at. But I would say that it's certainly possible that in 2023, there could be a different energy play in the portfolio.

KATHERINE ROSS: Could you give us a hint? If you're looking at different-- do you have any idea, I guess I should ask, if there's another energy adjacent sector that you would look at?

CHRIS VERSACE: So yeah, there is. I mean, I think one area that we would look to entertain considering if we do have a recession come into play, if we're still concerned, perhaps, about the dollar and considering the landscape of Europe and China, looking at an electric utility, maybe it's a ConEd, for example, something like that. Great dividend. We know that people are going to continue to pay their electric bills. That could be one area that we would look at.

And again, just to be clear, I'm not saying ConEd. I'm just using ConEd as an example.

KATHERINE ROSS: That's fair and it's noted. Now Bob, is Barrick Gold a gold alternative if you can't trade ETFs?

BOB LANG: Well, I've looked at the miners. And it seems that the metal, the GLD ETF, which is the one that we have in action in this PLUS portfolio, seems to move much better and much cleaner than the miners. And I don't know why the miners don't tend to do well.

Most of these companies are unhedged right now, which means that they are pure gold plays, Barrick Gold being the largest one. They did a merger a couple of years ago, so they're with Gold Corp and American Barrick. So their views adopted the symbol of GOLD.

So there's other good names. There's Newmont Mining as well, too. But I think that buying the ETF, buying the metal, the GLD is probably the better way to go. And even though GOLD does pay a dividend and the GLD does not, I still think you're going to get better performance by just buying the metal rather than the miners right here. So I do like the miners, so don't get me wrong. But I think at this point in time, I think buying that metal is better.

KATHERINE ROSS: Bob, when you're looking at the hedge positions within the portfolio, when would you add to any of those?

BOB LANG: Well, I kind of was looking at those last week and wishing we had done that when the S&P 500 and the Dow industrials had tagged that 200-day moving average, because that seemed to be an area of strong resistance. Certainly, many people were looking at that as an area where the markets could turn upwards.

But on three or four different occasions in 2022, when we hit that 200-day moving average, it was rejected soundly. So we did lose a little bit of our profits off of these two inverse ETFs, the SH and the PSQ. But we're back in profit motive for the last couple of days.

So where would I buy these things? I would certainly look to hedge and buy more of these inverse ETFs if we do get a little bit of a modest rally up. Now, we could be heading down into the end of the 2022 time frame and making some new lows. So we may miss an opportunity. So if we do get a couple of rally days over the next week or so, I would certainly look to add some more.

We do have plenty of protection on right now. I don't if we're going to add too much. But if we do get another chance at that 200-day moving average again, Katherine, I would say that's the time to pull the trigger and start adding some more shares.

KATHERINE ROSS: Traditionally, Chris, it's not the most wonderful time of year for a utilities company, which leads me to ask, why are you still holding onto AWK?

CHRIS VERSACE: That's a fair question. The prime season for American Waterworks is when we consume water most. That's going to be the second half of the second quarter and the third quarter. We start to slow down in the fourth quarter.

But when we look about the economic outlook, if we're concerned about a slowing economy, really concerned about a recession, are people going to stop consuming water? The answer simply is no. It's one of the key things that we have.

And we know that American Waterworks, along with some other water utilities, continues to invest in their utilities, which means that they continue to look for incremental price increases that tend to get approved. They also continue to have a rising dividend policy.

So these are all the characteristics, we think, that in a slowing economy or recession, that more investors are going to flock to. We're just glad that we're already there.

KATHERINE ROSS: I would love to get a tally of how many times throughout this call so far that we've said recession or slowing economy, because I bet you it's already like triple digits. But we'll move on.

Now that we've dug into the names that you guys own, let's take a look at what potentially could be on the horizon with a review of the bullpen. I want to open up the conversation with Disney, which is another name that you guys exited back in 2021. However, Bob Iger is back in the hot seat. So Chris, what would you need to see from him before you'd consider adding Disney back to the portfolio?

CHRIS VERSACE: Well, I think the first thing is going to be the real economic landscape because, Disney has done a wonderful job at hiking prices for the parks. And so far, demand has been strong there. The near term question is going to be around profitability for Disney+.

But as we look into 2023, the risk is if we do get a recession, are people going to be attending the parks like they were this past year? And I think I think the answer to that is no. And that concern has really kept us on the sidelines. If however, the signs that a recession is not unfolding or it's not as deep or as long as some people, including ourselves, might be thinking it could be it might be, that's the time to start taking another look at Disney, perhaps at lower levels.

KATHERINE ROSS: OK, and the Semis have been another trouble spot in 2022. What would you need to see before you consider upgrading a Marvell or an NVIDIA from the bullpen, Chris?

CHRIS VERSACE: So if we take a look at just the last couple of weeks, we've heard renewed concerns about inventory. Micron just came out, I think, last week saying that the pricing environment is far worse than it expected based on the guidance that it gave in late September. So sounds as if the worst has yet to happen.

And what we've shared with members is typically when we look at these end markets, we want to see them start to stabilize first. So when are PC inventories done falling? When are we seeing prices for memory stabilizing? That's the time to really take a hard look at those opportunities. And that's what we'll be waiting for.

KATHERINE ROSS: So, Chris mentions a hard look which leads me to go to you, Bob. What's the right place, what's the right price to re-enter in NVIDIA?

BOB LANG: Yeah, so if we get a little bit of a pullback towards that $115, $120 area and we stabilize there, that's an area that we caught some support on more recently, I'd be interested in taking a look at it again. Look, I mean, as long as the fundamentals are not there, it doesn't really matter what the technicals say at this point in time. They're not going to be favorable.

We saw a big breakdown in NVIDIA back in the summertime. And this is when Chris and I raised the alarm bells and said, look, you know what? It's time to unload some of this. And we did it before the last earnings report. And sure enough, that was a good move for us in August and we got rid of the rest of it afterwards.

But I think probably if we get down to that $115, $120 level, stabilize, kind of go sideways for a little bit for a couple of months, it might build a nice base there and start attracting some bigger money, bigger investor money at that level. But unless it stops going down, that's not anything I want to be interested in.

KATHERINE ROSS: Now Chris, you have Kellogg in the bullpen. What would it take for you to bring in that name to the fold, especially if, as we've said 10,000 times now, there is a recession, and more people end up turning to eating at home versus going out?

CHRIS VERSACE: So that's actually one that Bob and I were talking about earlier today. When we added it to the bullpen, there was very specific reason that we did, and it was the announcement that in 2023 the company would do splitting it into three. And Bob and I have had some experience with this in the past with a prior portfolio that we manage when Raytheon was split into Raytheon Technologies, Otis Elevator and Carrier.

And that's an interesting play, picking up three companies for the price of one. And I think as we get closer to that event happening, we could see Kellogg coming to the portfolio.

But make no mistake, Katherine. You're 100% correct about the benefits to having Kellogg the key core business as it is today in the portfolio. And remember too, that similar to PepsiCo and even Campbell's Soup, which we don't own but similar to PepsiCo, they both had some great pricing power that they put in play. And similar to my comments on Chipotle, if we see some continued improvement on input costs, that's some nice benefit to margins in the coming years. So a number of reasons for us to look at Kellogg.

KATHERINE ROSS: On the subject of outlook, we are facing quite a degree of uncertainty as we look into 2023. I do want to branch out now and look at the market and the economy as a whole. And I want to do this by starting with a member question and going to you, Bob. What are your thoughts on tax loss harvesting?

BOB LANG: Yeah, so this is the time of year where we normally see investors start looking at their portfolios and say, which ones are good to kick out because they've underperformed and they could possibly provide some benefits against some of the gains that have been taken earlier in the year on some stocks. So this is a time of year where we do see a lot of names just tossed to the side of the road.

And it happens in good years, it happens in bad years, as we've had in 2022. So it doesn't really much matter when these stocks are done during the month of December. It creates a lot of volatility, a lot of desks are cleared out as we get closer to the holidays as well, too. So again, that's going to create a little bit more volatility.

A lot less interest in these market makers to take shares off of people's hands. But still, I think this is a good time of year to start looking at your portfolios and say, which ones didn't do well for me this year? And then start cleaning those things out and start making your list for the ones that are going to do well that you want to add in the new year ahead.

KATHERINE ROSS: And obviously, Bob, we're still waiting for the Fed next week. But based on what we've been seeing, what we heard from Jerome Powell a couple of weeks ago, do you think that there's potential for a pivot in 2023? Or do they have to continue on this rate rising cycle?

BOB LANG: Well at some point in time, the Fed is going to pivot. And they have to wait until the data is moving into their camp, into their favor. And I think in my opinion, I think it was a little bit premature to think that inflation has peaked and is starting to come down. We need to see more than small incremental movements in monthly inflation data to feel that the Fed has won the war here against inflation.

I do think that higher rates are certainly in our future. I think at the current rate at, 375 3.75% on the Fed funds is far too low. And I think the Fed was looking at 4.5% to 4.75% by the end of the year. So do the math. I mean, that means another 75 basis points coming in the next meeting. Now of course, they may have pivoted away from that extreme move at the last statement that Powell made on November 30th, which maybe leaning towards a 50 basis point rate hike instead of a 75.

According to the markets right now, it's a 75 basis point rate hike, has about a 25% probability. A 50 basis point rate hike has about a 75% probability. So a three in one chance of getting there for 50 basis points. So that would bring you up to 4 and 1/4.

I do think the terminal rate, as Chris talked about more recently, that's the most important thing that we're looking at right now. It's not necessarily how many steps it takes to get there. It's actually getting there to that terminal rate.

And I think that terminal rate is going to be higher than a lot of people are expecting right now. I think it's going to be somewhere between 5.5% to 6%. And again, with the possibility of a recession coming in 2023, that's going to put a lot of pressure on the Fed to make sure that they get this right. And I know they've talked about this quite a bit. It's just going to be a very, very difficult road to get inflation down to their target of 2%.

It's going to be a while. And I think even more Fed governors have said recently, it's going to take at least till 2025 before we get to our goal. And that's 2 and 1/2 years away from now. So I think the job of the Fed is certainly not a job. I'd like to be on right now. I do watch them very, very carefully and closely, but certainly not a job I would like to have right now. I think we're in a difficult situation here with them and the markets as well.

KATHERINE ROSS: You and me both, Bob. I'm [INAUDIBLE] for my job. Chris, let's go to you. Gosh, I know that you know what I'm going to ask you and I'm so sorry, members, that I have to say this word again. But the market has weighed in a recession, pretty much, in 2023. Now, if that doesn't come like 91% of CEOs think it will come, what does that mean for the portfolio?

CHRIS VERSACE: Well look, we always have to update what we're thinking right as we get more data in place. So we've shared with members our most recent thoughts about the November ISM data, both on manufacturing and services. And we continue to look at that data, as well as S&P Global data, what companies are saying. So we were constantly looking ahead, as we've shared.

We also tend to look at the probabilities of what could happen. What's the probability of a recession, what's the probability of it not happening, for example, in this case? And if we get signs on an evolving data basis that it's not likely to happen or it could be less severe than people are thinking, that means we might have some opportunities to wade into other areas of the portfolio, maybe not as domestic, maybe ones that are more growthy in nature.

So it's one that, again, Bob and I talk is as they hear on the podcast. We have a lot of thoughts and a lot of things to review. And the podcast is just one of those conversations. We chat most days, I think several times a day, to be honest. So again, this is an evolving landscape. But if it turns out that it doesn't happen, we will have some room to maneuver. And that would be a great thing to have.

KATHERINE ROSS: Bob, for me, outside of the executive speak that we've heard from multiple CEOs, what really stands out is analysts expecting light profits or lower earnings next year in 2023. If that happens, would you recommend taking some profits at some point?

BOB LANG: Yes, and we've been doing it pretty consistently all year long. Listen, at the end of the day, what are we? We're risk managers here, and not just Chris and I, but all of our subscribers. We're risk managers here.

So we have to understand, it's all about managing the risk in our portfolio. And if you have profits, then you farm those profits, you take them off the table. This is no longer the game of buy and hold. It turns into a game of hope and pray. And hoping and praying that your portfolio is going to start moving is not a good way to operate.

So I tell people all the time here, we're moving our feet. We're in the moving business, not the storage business. So we have to look at our risk and look at what we have in our portfolio. And if we have a gain of like 50%, like we had on an Axon, even if it was a small position, we're taking money off the table, period, end of story. That's just what we're supposed to do.

And again, this is a way for us to continue to grow our portfolios. And at the end of the day, that's what it's all about whether we're in a bull market or a bear market. It doesn't really matter what conditions that we're in.

So yes, the answer to your question is, absolutely. We'll be taking profits when we have them, when we feel it's necessary to just start trimming some profits off the table. And even if a stock's not performing for us, we'll remove that as well, too.

KATHERINE ROSS: Now obviously, Chris, over the past year, this market has turned into a different kind of beast. And you can take that quite literally if you look at the bull versus bear, right? When you're looking at a retired investors, should they approach this market differently?

CHRIS VERSACE: That's a good question because retired investors, they're living on their nest eggs. They need to keep that capital and preserve it. But at the same time, we know that our-- we're simply living longer, which means that they do need some avenues of growth in there.

So on the one hand, what we've done with the portfolio, going to more defensive names and more dividend payers, was in part thinking about those class of members that we have. But I do think that when the time is right, members will have to wade back into growth, and that includes the retired members. Because again, they need to grow that nest egg.

So I think that it's been a challenging time for them. But as we look forward, I think we're going to have some opportunities that present themselves, provided we're patient. And I think the message for all our members, but again, just regarding to the question for our retired members, we're here to help and we're going to help you navigate these challenges. So please stick with us.

KATHERINE ROSS: Let's say that despite what a lot of people, a lot of talking heads, especially, are saying about Jerome Powell and his soft landing, let's say Jerome Powell is able to get us to a soft landing. If that happens and we don't get a recession, are you being overly cautious in your approach, Chris?

CHRIS VERSACE: So right now with 24%, 25% cash, I can kind of see that argument. But we also know that based on our analysis, earnings expectations are likely to come down. If we look at where the market multiple was the last time we saw the Fed funds rate where it's likely to be in January, the S&P 500 peaked out 17 times but bottomed out, more importantly, somewhere between 14 and 15 times 2005, 2006. So we're constantly revisiting the assumptions that the market has for itself, testing what's the potential downside.

So if that scenario unfolds, Katherine, I think that if we remain where we are, then yes, we probably will be a little too conservative. But as we're seeing the last four days, the market is kind of playing out the way that we thought it would. And that actually gives us opportunity perhaps not to be quite so cash heavy when the time is right.

KATHERINE ROSS: OK, I'm going to turn this into a little game, then. And you guys both get a turn. But based on maybe wanting to spend cash or maybe you just want to add to a position that's already in the portfolio, Chris, give me your top stock pick in or out of the portfolio in 2023.

CHRIS VERSACE: So there's a lot of areas that we see some strong spending. And it's kind of a catch-22, that question, Katherine. Because if I saw a great opportunity outside the portfolio, how come it's not in the portfolio?

But luckily, my pick is actually in the portfolio. That's going to be one we talked about earlier. That's Vulcan Materials, again, a big beneficiary of the Biden infrastructure law. And no matter what they're building as part of that, it could be an airport runway, it could be a dam, it could be a street, it could be a highway, that's all going to drive demand for aggregates. And the Vulcan has done a wonderful job in taking price action this past year and likely to do more of that as the demand for its products rise, as the infrastructure law really kicks in.

And remember, folks, that's not a one year bill, a two year bill. That's a multi-year bill. So there's a lot of earnings leverage to be had with Vulcan in 2023 and beyond. That gets me very excited about the name.

KATHERINE ROSS: Nice catch there, Chris. Bob, now you.

BOB LANG: Well, I'm very lucky. Chris and I didn't talk about this prior so I was hoping he didn't take my pick. So my pick here is a name that we just recently added, and I just became a customer of the company, too. It's a Clear Secure. This is a stock that just went on a tear right after we bought the name. It went up about to about 30%.

It pulled back a little bit here into the high 20s. They had a super strong earnings report come out. And again, I just became a subscriber to Clear Secure, my wife and I did just a week or so ago. And the seamlessness of using the product in the airports was just amazing. I could just slip through there real quickly. I think Chris told me just recently, he went from airport parking lot to the gate in roughly 7 minutes, is it, something like that?

CHRIS VERSACE: Past airport security, yeah, 7 minutes.

BOB LANG: 7 minutes. I mean, it's unheard of these days to get through that so quickly. So I'm a believer in the product. And I think there's some enormous opportunities outside of the airport for Clear Secure if they choose to venture out, whether it's in other governments, other municipalities, other countries, other areas, sporting events, that sort of stuff. It just seems like a natural for them if they're able to build out their process with customers and so forth. So I'm going to say symbol YOU, Clear Secure, that's my name for 2023.

KATHERINE ROSS: All right. I teased this at the top, so I want to end with it. So let's get into the good stuff. Now, I said that you guys had some changes coming up and I want to discuss those changes, starting with our rating system, which I know that you guys are itching to announce. And Chris, I'm going to first. Give us a walk through of the changes that you've made and how it'll all fit into how you and Bob manage the portfolio.

CHRIS VERSACE: I'm sorry, Katherine. Could you repeat that? I got a lot of static on the line.

KATHERINE ROSS: Yeah, I'm talking about the new rating system, Chris. And I was wondering if you could give us a walk through the changes that you've made and how it'll fit into how you and Bob manage the portfolio.

CHRIS VERSACE: All right. We seem to be having some technical difficulties. So I'm going to speculate here that the question is about the new AAP rating system that we're going to unveil.

And back in, I think it was our October members call, I was asked a question about the rating system. And I had said that we sympathized with members, because it was a rating system that we kind of inherited when we took the portfolio over. It wasn't very clear. It was confusing. And we were hoping to do something a little more transparent to really help members understand what we're trying to do, how we're going to run the portfolio, how we think about the positions.

And that led us to recast the rating system. And it'll be going into greater effect later today. We have a real four-pronged rating system. The first is Buy Now, second Stockpile, third is Holding Pattern, and the fourth is Sell.

As we formally debut this with members, we're going to remap the portfolio. So all the positions will be sorted into these four positions. I'm happy to say that all of them currently will be either one, two, or three re-ranked. We don't have any sales yet, but as Bob alluded, we are not afraid of doing the right thing and taking a position off the board if the fundamentals or the technicals erode.

But just real quickly, what are these new ratings? The first and the new number one will be Buy Now. This is a position that members can buy at any time. It's one that we'll be looking to buy ourselves for the portfolio. Two now becomes what we're going Stockpile. Think of it when you go to the grocery store when things are on sale, you might stockpile some of those goods. So with that in mind, we will be looking to add to these positions on a pullback or weakness, or after they've tested some technical support.

The third is Holding Pattern. We kind of got this from when you're flying around in a plane and you seem to be circling around the airport, you're in a holding pattern, waiting for a clear signal that either you're going to have to land or perhaps unfortunately, you have to move on to another airport.

So with these positions, the risk-reward is more likely to be neutral. There might be some lack of visibility or clarity ahead. And we're looking for our next catalyst to determine what we're going to do next.

So members, you'll be seeing all of this in much greater detail soon after the call. And again, there'll be in-depth descriptions and we'll be mapping the portfolio to these new ratings. And more importantly, we've even anticipated some questions we're likely to get, totally understand if you have them. Feel free to email in. We'll be happy to do some more clarification on that. But stay tuned. You'll be seeing all of this very shortly.

KATHERINE ROSS: Chris, I really appreciate you breaking down the new rating system. And I apologize for the technical difficulties. I did want to tack on, now that you've broken down the rating system, can you explain how this will impact how you and Bob manage your portfolio?

CHRIS VERSACE: So that's actually a great question. I would say the day-to-day, the way we think about the stocks, this is really going to, as I said, reflect how we've been thinking about it now that we're able to really leverage that stockpile rating. I think that's really been one of the missing keys here compared to the prior rating system, that we were really leaning somewhere between a 1 and a 2 at the time.

This one 1.5, I think, is going to give us a lot more flexibility. And I think it's going to make members really have a much clearer understanding of what our intentions are with the portfolio names and the positions and how we're going to go around and not just manage the position, but what we're looking for to either add to the positions that we do have or get ready to exit ones that we're not as excited about, fundamentals eroding, or technicals not really showing what they need to.

KATHERINE ROSS: And Bob, what led to these changes?

BOB LANG: So we get a lot of feedback from our subscribers, and it seems like the rating system that we had before was a little bit confusing. But it also was confusing to Chris and I. Just sometimes when we were looking to add a position, is it still a buy after we initially bought it? Is it something for new subscribers to come in?

There was just a lot of confusion. And we took a look at the middle rating that was there before, which was sort of a buy on pullbacks rating, and we split that up into a stockpile one side, one branch, and then hold or holding pattern for the other branch. I think this is probably going to alleviate a lot of the confusion that was there before with trying to figure out, am I supposed to buy it or am I supposed to hold it? What am I supposed to do with it? And do I buy the pullbacks, and that sort of thing.

So I think that it was really driven by the confusion by our subscribers. And we listened and we paid attention. We got a lot of feedback from them giving us some great suggestions on how to change things. And we incorporated that into our mix in figuring it out. So I think this is going to be something-- I'm very proud of what we did. And I think the subscribers are going to be happy it as well.

KATHERINE ROSS: All right, members. A lot of change coming your way and we appreciate you taking the time to join us this afternoon. Thank you so much and we'll see you next time.