VIDEO: These Stocks Are Getting Hit. Here's Our Plan for Them.

In today’s Daily Rundown video, Chris Versace discusses why the portfolio’s positions in Applied Materials AMAT and Elevance Health ELV are down a lot Wednesday and what our strategy is for both. 

Chris also quickly recaps our price target increases announced today for Morgan Stanley MS and Bank of America BAC. 

Transcript

CHRIS VERSACE: Hey, folks. Chris Versace. Wednesday, July 17. Stocks are largely lower today, but there are some bright spots in the portfolio. This morning, we talked about in our opening comments some nice love that the shares of Axon received with some price targets between 380, 385, right near our own price target with also some positive comments about the company's position in public safety.

Remember on Monday, following the attempted presidential assassination, we called out Axon as a likely beneficiary of renewed concerns over public safety. And obviously, the shares have been performing well. But it is always nice to see others on Wall Street join us in our thinking this time around with Axon shares.

But also, too, Morgan Stanley, Bank of America shares are moving higher. And if you missed it, we did boost our price targets for them early this morning following yesterday's vibrant June quarter results but also prospects for that to continue, particularly given robust investment banking backlogs, particularly for M&A.

But also with regard to Bank of America just continuing to squeeze cost out of the business while it picks up incremental share across the commercial bank. So we continue to both of those. Again, please check the alerts for more details on Axon, Morgan Stanley, and Bank of America.

But what I really wanted to do today in today's video was to spend a little bit of time on two positions that are getting hit. I understand that there's probably going to be some concern out there from the members. And I just want to address this head on. So let's talk about Applied Materials and Elevance. First, Applied Materials

Now, yes, the shares are getting hit. Not anything specific regarding Applied Materials. More along the lines of some news for its competitor, or one of its competitors, in the semi-cap space, ASML, which is a lithography company. Not necessarily a direct competitor for Applied Materials. So there's really two things going on.

ASML reported better than expected quarterly results for its second quarter. Net bookings for the second quarter rose 54% quarter over quarter. They are up 24% year over year. Now, that's pretty strong. Revenue for the quarter was up 9.5% year over year to about EUR 6.24 billion. China accounted about 49% of its total system sales during the quarter up over the last several quarters.

Here's the theme, that really strong bookings led the company to say that even though we continue to see 2024 being flat from a sales perspective, 2025 should be a good return to growth. Now, this kind of meshes with our thinking that rising chip shipments would kind of tighten industry capacity.

Remember, we're seeing vibrant demand from AI data center chips. We're also seeing the rebound unfold for PCs and smartphones. So our thinking has been that that would lead to tighter manufacturing capacity, spurring incremental demand. But also, too, remember that when it comes to 2025, we're going to start to see the benefits of the CHIPS Act really starting to flow through to the semi-cap equipment companies throughout the year.

So that's a positive commentary not only on ASML's 2025 outlook, but it's also positive for our shares of Applied Materials. One other point that I want to share that ASML made is-- and this really speaks to what I was just saying, is that they see strong developments in AI driving most of the industry recovery ahead of other market segments.

So if we want to read through to this, it's another positive indicator that the capital spending we've been hearing about for AI chips from Meta, Microsoft, Amazon, Alphabet, and others is flowing through, driving incremental semi-cap equipment demand. Again, another positive data point for our shares of Applied Material.

And you're probably thinking, this all sounds great. So why are the shares getting clobbered today? Well, two things. First of all, ASML guided its third-quarter revenue to EUR 6.7 to EUR 7.3 billion. That's a little low relative to what the market was looking for-- EUR 7.5 billion. But again, it's up nicely sequentially. So just a little bit of a disappointment, I would say.

The other gets to 49% of ASML's revenue coming from China. There are reports out this morning that the US government may impose another round of export controls hitting semiconductor-capital equipment companies. Now, look, ASML shares, just like AMAT shares, had a huge run over the last several months. So it's not surprising to see some folks cut and run on this news. Hence the pressure on the shares from ASML, but also Applied Materials, Lam Research, and others in the semi-cap space.

But here's the thing. If we look at the ramp in ASML's revenues, including that from China specifically, those past curbs really didn't do a lot of damage. Didn't put a dent, if you will, in that revenue stream. And as we've just discussed, the medium- to longer-term outlook over the next four to six quarters looks extremely bright. That's true for ASML. That's especially true for our shares of Applied Materials.

So while our AMAT shares are off, say, 7% or so as I'm coming to you right now, we will want to wait and see what these new export curbs are. Is there a more bark than actual bite? We're also going to want to see and hear from Taiwan Semiconductor, Intel, and others about their capital spending plans for the second half of the year.

Are they moving higher than what they previously thought they would be because that chip demand is so great and industry capacity is tightening? If we do hear that, that will be another positive confirmation point for Applied Materials, as well as some others in the space. But we're also going to want to hear what Lam Research thinks about all of this when it reports on July 31.

So between now and then, we will continue to watch key levels of support for Applied Materials because we like the long-term story. These key support levels come in at around 227 and then again at 215. I can say that this is a position that it's been particularly strong, again, over the last several months.

And again, we've talked about wanting to add more shares of Applied Materials with a robust outlook. If we see the risk-reward trade-off in the shares being favorable relative to our price target, or perhaps, as we might have to do in the next couple of weeks, even boost that price target just a little bit, that could make for a nice pickup point for the portfolio and potentially for newer members.

So the message I want to leave you with is we're going to continue to follow the shares of Applied Materials-- Materials, excuse me, very carefully. And we'll make some decisions about price targets and next steps in the coming days. So hang tight with that.

The second one that's getting under some pressure today is the shares of Elevance Health. The company reported quarterly results this morning, topping expectations for both revenue and EPS for the June quarter. But one thing kind of stood out to us. This is kind of an issue a little bit with Elevance Health because they are a rather conservative company. There was a little rewording in their 2024 EPS guidance.

Now, they're saying at least $37.20 instead of previously saying more than $37.20. Probably splitting hairs. Again, they're a very conservative company. But the wind-up is that based on the market's mood, at least $37.20 would probably be read as, oh, a little less, missing the $37.28 market consensus forecast.

But here's the thing. You do the math, that is a sub-1% difference. It's like 0.2% difference. It's teeny tiny. So based on that, we could potentially say that the reaction that we're seeing in the shares is a little overdone. But before we make that call, we do want to double check the company's earnings call transcript, particularly for what it has to say about medical costs.

Now, over the last couple of quarters, some of its competitors, UnitedHealth, they saw some pressure with rising medical costs. So we want to go back and just double check what Elevance is saying about that as it looks towards its back half of 2024. In the past, Elevance has done a very good job of managing its costs, but we want to make sure that there's nothing changing.

And if we do see that something is changing, perhaps we might have to revise our expectations, potentially even our price target. However, I will say that our 550 price target is one of the lower ones on the street. If it turns out that we are able to keep our 550 target, but others have to bring their price targets down, that could bring some incremental pressure on Elev-- Elevance, excuse me, shares.

So we'll continue to watch support levels there as well, particularly at 495. That could be a good interesting pickup point. But first, we'll want to see if support around the 523 level holds. So with that, members, we're going to have some more news on both of these names coming to you, Elevance sooner than Applied Materials.

But it's a great reminder of two things. First, our view has been that the outlook for earnings in the second half of the year would be very important, clearly for the S&P 500, given the stretch valuation, but also for shares in the portfolio, particularly those that have had vibrant runs of late. Sometimes, they miss by a couple of pennies. We could see a severe overreaction. But as long as the story, the thesis, is intact, that could bring some opportunity, depending on the position.

So our second point would be, please be sure to check your emails, check your alerts. There's a lot going to unfold in the next couple of days as the earnings season heats up. We want to make sure that you're getting our latest thoughts and make sure you're aware of any moves that we might have to make with the portfolio. So with that, check your emails, check your alerts. And as always, thanks for watching.

At the time of publication, TheStreet Pro Portfolio was long AMAT, ELV, MS and BAC.