VIDEO: These Are the Stocks We'd Be Interested in Buying as Earnings Season Unfolds

In today's Daily Rundown video, Chris Versace breaks down the portfolio's decision to trim its position in McDonald's MCD and add more shares of Coty COTY. 

He also shares the portfolio’s plan for earnings season, which positions the portfolio is interested in adding to, and why we're watching RSI levels for the S&P 500 and the Nasdaq Composite. 

Transcript

CHRIS VERSACE: Hey folks, Chris Versace here, Wednesday, April 17. And I want to just review some of the quick moves that we made with the portfolio today, before I turn to some larger thoughts, as we head into the March quarter earnings season. So first, we trimmed and downgraded the shares of McDonald's to a 3.

We also added to the portfolio's position in Coty, following positive comments from luxury goods company LVMH on its perfume and cosmetics business, but also more larger comments about the strength of the US beauty market really pushing back hard on what Ulta said a few weeks back. With McDonald's, and the downgrade, and the trimming, really some several concerns at work here. First, as we shared in our note, there's the concern about some market share losses to competitors, as McDonald's March sales based on some third-party data seemed to soften. There's also the issues that have been talked about with its international business in China and the Middle East, and we kind of have some concerns about the Middle East, especially if Israel's retaliation on Iran is one of escalation or at least extension. That uncertainty could certainly weigh on that market.

But there are other things too. Rising beef costs, the California minimum wage increase, softer guidance from McDonald's French fry partner Lamb Weston, and you kind of put it all together and there could be some concern about McDonald's March quarter results or their outlook for the current quarter. And as we kind of put it together from a risk-reward perspective, there is some risk that the shares could move even lower. They're technically not oversold, close to it, but they could move lower if the guidance disappoints.

But in the best case scenario, when we stack all those things up, the real concern here is that McDonald's shares could be dead money. So for that reason, we did take a slice of the position off today. We are going to eventually work our way out of it. Our thinking here is, at the end of the day, those concerns kind of amplify the fact that McDonald's only expected to have low single-digit EPS growth this year and next year, far slower than the market.

We think we can do better. We have some constituents in the bullpen that offer far better earnings growth rates, better growth aspects to their businesses, and we would rather wade into those waters at the right price. I'll touch on two or three of those in a few minutes. But just in thinking about the these changes that we're making to the portfolio, it really brings me to something that I want to talk about with you today.

Pretty simple, while it would be nice when it comes to investing, the landscape is rarely static, and if it is, it doesn't remain so for very long. Rather, it tends to evolve as new, fresh information becomes available, and we have to do that as well. Now, we're not active in active traders, far from it.

But we are active investors, and that means revisiting our investment rationale for our holdings and contenders, as well as the data, company comments, and pretty much everything that we watch when it comes to our holdings and industries that they are in. We need to revisit this data, refresh our thinking on an ongoing basis. That's why I like to say that we're active, but we are investors because we take a longer-term horizon than, certainly, than traders do.

Typically, our investment horizon is 12 to 18 months. We do up that, update that on a rolling basis as well. And if things start to change like we saw with McDonald's, we're not afraid to take action, because we believe it's the right move to make. As we look to refresh some of our thinking, this of course, means we want to be cognizant of what's unfolding from a top down perspective.

Meaning that we have to think about the economy, we have to think about inflation, interest rates, and especially these days, where Fed policy is as new data becomes available. And of course, the technicals matter as well. As it relates to the landscape so far this year, I think we've done a very good job of paying attention to it. That's allowed us to really shift our thinking about interest rate cuts.

As you know, we were not in the camp earlier this year that was thinking we would see five, maybe six rate cuts. We thought far fewer were on the table. But as the inflation data and the other economic data came out for January, February, March, we've shared with you our thinking that the odds of rate cuts are falling and moving significantly into the back half of the year.

So yesterday, were we caught off guard by Fed Chair Powell's comments that the Fed is going to have to let monetary policy work a little bit longer than it previously expected? Of course we weren't. We were prepared for the notion that rates would be higher for longer. We even called that out in our analysis of Bank of America's quarterly results, where even Bank of America still seemed to say that they see three rate cuts in 2024.

We do not. We see two, maybe one, really, really late in the year. But again, we're going to get a lot more data and we'll continue to update our thinking as that data is had. Now, because we are constantly checking our data and updating our thinking, we've also been able to be in tune with the shifting market narrative.

Again, one based on the need for multiple rate cuts, to the current one that is far more centered on the strength of the economy and its ability to deliver EPS growth. In fact, this morning in our opening comments, we shared with you a chart that shows a growing percentage of institutional investors now think that there's no need for a soft landing. We probably won't get a hard landing. In fact, they don't see a landing at all.

That's because of the surprisingly resilient economy. And we talked about this yesterday following the rash of economic data so far this week, that the Atlanta Fed GDP now forecast for the March quarter is 2.9%. That's up from low 2's earlier this month.

So the economy continues to surprise to the upside. And again, we've talked about some of this, but it bears repeating. While the economy is strong, the expectations for earnings growth to re-accelerate in the current quarter and strengthen throughout the year give way to double-digit earnings growth for 2024 in full. Now, guidance is going to be key.

And look, if the market wants to see that re-acceleration, we would like to see that re-acceleration, but we have to be on guard should it not emerge. So as we move through the upcoming earnings season, and we hear from our companies, we hear from their competitors, their customers, their suppliers, we are going to parse their quarters. We're going to break down their guidance and we're going to update our thoughts, not only for our companies and our positions, both in the portfolio and the bullpen, but we're also going to think about what they could lead the companies that we own to say when they do report their quarters and the guidance that they might give.

What does this mean? It means that we might have to revisit some price targets. We might get some opportunities to put our shopping list to work a little bit. We might be able to call some companies up from the bullpen as well.

But let's remember, earnings season can be volatile. And once again, I think that's likely to be the case, especially if earnings expectations in aggregate are reset lower, because that would likely pressure the market. Odds are, we will once again be in a period where the market trades based on what it herds last. This means we could see it chop, flip-flop, call it what you will, from day-to-day. But eventually, a clearer picture will emerge, and that's the picture that we will be looking for.

And based on what it is, we will maneuver the portfolio accordingly. Now, whenever we go into earnings season, I do like to take the temperature of the market mood. In this case, it has shifted very recently from one based on greed to fear. We can see that in the CNN Fear and Greed Index, but we can also see it in the Volatility Index, which has climbed to its highest level since November.

I think there are a couple of reasons for that. Obviously, the geopolitical tensions that have increased over the last few weeks, the realization that rates will indeed be higher for longer, and of course, questions over earnings prospects following some of the reports that we got earlier this week. And while that has taken back some of the market's gains, as well as some for the portfolio, it's also made our inverse ETFs and our GLD shares some of the best performing ones in the portfolio quarter-to-date.

And, yes, while the market has traded off, our cash levels have acted as a nice buffer. We will want to watch those geopolitical developments closely. And really, the same goes for the market technicals, specifically the RSI levels for the S&P 500 and the NASDAQ Composite. For now, our inverse ETFs are working for us, but as we've discussed before, at some point, we will want to take the inverse ETF shares that are SH and SPQ off the table.

As we think about that, we're going to continue to watch those RSI levels. Next week, as the earnings season heats up and we get a sense of what earnings expectations are likely to do, be they revised higher, stay the same, or an aggregate be revised lower, as we get that picture, we will start to plot our next move with those inverse ETFs. But that also means that we will watch our shopping list, which I mentioned a moment ago.

What's on our shopping list? We have room for more shares of Universal Display. We would love to pick up some shares of Applied Materials. Ahead of the expected AI on device upgrade cycle, we would be interested in picking up more shares of Apple.

We've been talking this week and last about cybersecurity. We would love to pick up more shares of cyber, closer to 50, if we get that opportunity. We would also love to pick up more shares of Nvidia.

And when we look at the bullpen, we are watching closely positions potentially in Trade Desk, Labcorp, and a few others. And with that, I would say members and subscribers, please be sure to check your emails, your inboxes, and other alerts. Things are going to get busy in the coming days and we don't want you to miss our latest thoughts and observations, as well as any moves that we make with the portfolio. Thanks for watching.

At the time of publication, TheStreet Pro Portfolio is long MCD and COTY.