VIDEO: Reviewing Our Investment Philosophy

In today's Action Alerts PLUS Daily Rundown, Chris discusses the investing philosophy that guides each and every decision the club makes.

Transcript

SARA SILVERSTEIN: 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.

Action Alerts PLUS has no position in the stocks mentioned.