VIDEO: More on Apple Intelligence and Our Plan for Coty

In today’s Daily Rundown video, Chris Versace recaps Apple’s AAPL WWDC keynote debut of Apple Intelligence and why it’s a positive for Apple and three other portfolio holdings.

He also discusses the portfolio’s playbook for Coty COTY shares, and which shopping list stocks are on his radar heading into the conclusion of the Fed’s policy meeting Wednesday afternoon.

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Transcript

CHRIS VERSACE: Hey, folks, Chris Versace here. Tuesday, June 11, better known as the day after Apple's WWDC keynote and the day before the May CPI report and the conclusion of the Fed's latest monetary policy meeting. Now, we take a look at Apple shares. Initially yesterday, not a lot of enthusiasm for what they heard during the keynote. But as we're seeing today, the market has come around to realizing something that we shared with you in our note describing the keynote and what it said about Apple Intelligence.

And it really kind of boils down to this, that if you want to use Apple Intelligence, odds are you are going to have to upgrade your iPhone. That confirms our thinking for the AI on device upgrade cycle that would really benefit Apple. Remember that the iPhone continues to be its largest revenue category. And when we look at the size of the install base and estimates that say there are about 270 million iPhones that haven't been updated in the last four years, there's a lot of reasons to think that we're going to soon embark upon what could be a two, maybe two-year-plus upgrade cycle for the iPhone.

Now, I will concede that while we are bullish on this, I do think that we're going to need to see a number of use cases in the coming months that get people excited and want to upgrade to use Apple Intelligence. But I think that's going to happen, especially once Apple seeds the beta software not only to its developers, but also to individuals. And of course, when Apple introduces the iPhone 16 lineup potentially in September, I expect it's going to make another splash, with Apple Intelligence helping foster the upgrade momentum.

But I would also say two other things. One, Apple is a very large percentage of the S&P 500, and of course, the NASDAQ composite. That helps explain why they're performing a little bit better than the Dow or the Russell 2000 today while we wait for the outcome of the May CPI report, and again, the Fed's meeting updated economic projections and the like. So that's the first thing.

But the second thing is, we always like to connect the dots because we realize that Apple has a profound impact on a number of other areas or, as we like to think about it, other stocks, some of which are in the portfolio. So when we think about the multi-year upgrade cycle, not only for smartphones, including the iPhone, but also when it comes to PCs, we are going to see Qualcomm benefit. That's why we talked about that in our alert this morning.

But we also see that upgrade cycle, particularly for iPhones and smartphones, benefiting the shares of Universal Display. But if we go one step further and connect our dots, if we think about what Apple showed about the demand and use of data as a part of Apple Intelligence, this really confirms our thinking that we're going to see a pickup in the coming quarters for Marvell's non-data center business. So that explains why in our note this morning, we talked very positively about Apple, about Qualcomm, Universal Display, and Marvell.

Now, I also want to talk a little bit about some things that we're also paying attention to ahead of the Fed's meeting, but also in the coming days. And I wrote a note on this yesterday talking about Coty. Look, I know it's very frustrating out there. I'm frustrated. We're not interested in exacerbating losses in any one of our positions. That's why we're going to watch Coty very closely over the next couple of days.

And I say that because last week, management gave a very good presentation. They laid out all the things that they are doing and the benefits they are reaping. But as I shared in a note with you yesterday, the market not really coming around to accepting it, even though the expectations are that we will see significant year-over-year earnings growth in Coty in the second half of the year. Really speaking to the benefits of CEO Sue Nabi's turnaround plan bringing fruit. But we're not interested in fighting an uphill battle.

But what we will do is patiently wait for Thursday's management presentation by Coty. If it's largely a retread and the stock is still below $10, we're going to have some hard thinking to do. But I just want to let you know that we're not going to let one bad position turbo-- or torpedo, I should say, excuse me, torpedo the portfolio. We are going to stick to our market discipline. We're going to stick to our portfolio discipline. And we will be heeding our panic points. And in some cases, if we feel the need to act ahead of those panic points, we will do that for the sake of the larger portfolio.

We also want to keep our eyes on PepsiCo. As we talked about in Friday's roundup, they are in a trading range from the low $160s all the way higher. With them around $164-ish, we are watching very closely. This could be something that we might want to nibble on, depending on what we see coming out of the Fed's policy meeting. And I'll talk about that in a second. But Morgan Stanley approaching their 50-day moving average is another one we want to watch closely and, of course, the shares of Waste Management.

So as it relates to the expectation for the Fed, we know that they're not going to cut rates exiting tomorrow's meeting. And while a lot of folks are focused, understandably so, on what they'll say about the second half of the year, we're taking a little bit longer approach. We're more concerned about the total number of rate cuts potentially between the second half of 2024 and all of 2025.

I say this because if we look between now and September 2025, the CME FedWatch tool shows four, maybe even five rate cuts. But our thinking remains that we'll see one rate cut this year. And then in the March economic projections, the Fed showed the potential for two rate cuts in 2025. That's three rate cuts, not four, not five. So we could see the market have to wrap its head around the notion that over the longer term, there may not be as many rate cuts as soon as the market is thinking.

And why do I think the Fed is likely to stay with two rate cuts in 2025, at least for now? Well, you look at the strength of the economy. OK, get it. Take a look at what we've seen with the inflation data not backing off as soon as possible. Most likely too. Do I think that they're going to call the full year out now and reduce it to one? It's way too soon for that. But at the same time, it's way too early for them to signal that maybe there could be more rate cuts in 2025.

So I think it's going to stick around two for 2025, one likely for this year. That is going to be three. And again, if the market has to rewrap its head around those combined number of rate cuts over the next 18 months, that could give us an opportunity to tap into our shopping list. Again, whether it's going to be for PepsiCo, for Waste Management, Labcorp, or one or two other positions in the portfolio, we'll have to make that call at the time.

But that's our plan, and those are the things that we'll be watching. So I would say, as you know, please be sure to check your alerts, check your emails. We want to make sure you're getting our latest thinking. And more importantly, if we make any moves with the portfolio late this week, we want you to be right there with us. Thanks for watching.

At the time of publication, TheStreet Pro Portfolio was long AAPL and COTY.