VIDEO: Wrapping Up the Quarter With Our Members-Only Call

As we close out the quarter, TheStreet’s Conway Gittens joins Chris Versace to discuss TheStreet Pro Portfolio on our Quarterly Members-Only Call. The conversation spans items that drove the market during the quarter, including AI and Nvidia NVDA, what’s been working for the portfolio, as well as a few positions such as Coty COTY and Lockheed Martin LMT that have yet to pan out.

Chris explains how moves made earlier this year have fueled the portfolio’s meaningful quarter-to-date gains as well as what’s yet to come for the balance of the year. Conway asks Chris about Waste Management WM, United Rentals URI, PepsiCo PEP and many other portfolio holdings before pivoting to the consumer, financials, the larger economy, the Fed, and why earnings growth will determine the market’s next move.

A lot of ground is covered in the hour-long conversation, so sit back and drink it in. When you’re done, visit the Portfolio’s Forum for any follow-up questions as well as our next edition of Office Hours on Thursday between 12 PM – 1 PM ET. 

At the time of publication, TheStreet Pro Portfolio was long NVDA, COTY, LMT, WM, URI and PEP.

Transcript

CONWAY GITTENS: Hello and welcome to the Quarterly Portfolio Call for TheStreet Pro. I'm Conway Gittens and joining me for a lively discussion today is our very own Chris Versace. He's portfolio manager for TheStreet Pro portfolio. We're going to talk Nvidia, AI, interest rates, inflation, the Fed.

What to expect from the stock market in the second half and what would a quarterly call be without a deep dive into the portfolio. So grab a bowl of popcorn, get yourself a cool beverage and let's kick things off.

Chris, let's start first with the big giant in the room, AI and Nvidia. The stock is up 156% in 2024. Looks like the Pro still has a one rating, which means you are buying. Give me a thesis.

CHRIS VERSACE: Well, look, Conway, we love the fact that AI is in the early stages. And when we look at the position that Nvidia has, it's very hard to argue with its leadership status. That was why we took advantage of adding to Nvidia and building the portfolio's position early in the year.

We see this as a multi-year wave, but again, we're only in the early stages when we're starting to see the capabilities come to market. Second wave is going to be more about services and software. That's why we picked up ServiceNow recently and we would like to add to that as we go through the coming quarters as well. But when we look at the spending that we're seeing, whether it's from Amazon, Google, Microsoft or others, including Meta, we continue to see ramping spending on data center. That bodes extremely well, not only for NVIDIA, but also to Conway for the portfolio's position in Marvell.

And I would say that as we move through the year and we start to see the AI on device upgrade cycle happen, it's going to accelerate the virtuous circle that we talk about of data creation, data consumption that's going to bottleneck over time our digital networks. That bodes extremely well for Marvell's non-data center business. So that's another name that we like, you know, for the longer term, call it not one or two quarters, but four, five, six quarters out. And that price target offers as much upside, if not more, than Nvidia.

CONWAY GITTENS: So Chris, you guys, the portfolio did some buying in Nvidia in May and then we had the stock hit a record high. And then right after that it became the world's most valuable company, and then it lost about 10% of his value right after that. What do you think is going on with the stock?

CHRIS VERSACE: Well, I think it's a question of what's your time horizon, right? And what data points are you looking forward to? So, look, we understand that there tends to be a lot of euphoria, or as I like to say, Conway, "hopium," that seeps into the market from time to time. And, you know, this is reminiscent of the dot-com bubble-- I'm not the first to say this-- but there's a lot of enthusiasm about AI.

So in the short term, some of these stocks can get a little overdone. You referenced the year to date move for Nvidia, and we're not even at the halfway mark for the year. So clearly there was a little bit of froth in the price. And what we've seen is it start to come out. But in an alert to members, we kind of shared what are we looking for in terms of a potential pickup price. Because if you look at the technicals, there is a gap right around the $95 level that would be, you know, although lower than where it is today, it would be a considerably great pickup point if we get there.

That's the big if, Conway. And I say that because we are entering soon the June quarter earnings season. We'll get a little preview of that with quarterly results from Micron and what they have to say about data center, AI, the PC market, as well as the smartphone market. But soon we'll be in the middle of that, you know, drink from the fire hose event that is the June quarter earnings season and we'll be paying close attention to capital spending levels by a number of the cloud companies.

So there's a number of potential positive catalysts on the way. But at the same time, Conway, we're hearing about more companies starting to use AI. And when you read that Conagra, frozen foods, is using AI to drive productivity in IT, it just, it's just another confirming factor that we're positioned where we want to be.

CONWAY GITTENS: So I wonder-- here's what I was thinking. Right after the stock hit the record high, you know, we were heading into the end of the quarter. Maybe some people looked at their holdings and said, hey, I'm up 190% over the past 12 months in Nvidia, maybe I take some of the money off the table just for risk purposes and then put the money to work somewhere else. Could that be part of what's happening as well?

CHRIS VERSACE: I would be surprised if it wasn't. And Conway, the thing is, the members know that a few weeks ago, we did that very thing because the run that you referenced within Nvidia, it actually ballooned the position size to almost 5% of the portfolio. So prudent portfolio management dictated that we had to take some of that off the table. You know, but the continued-- excuse me, the continued strength since then, you know, the shares are back over 4%, 4.2%, something like that from the portfolio's position sizing. And I would be surprised if it doesn't march higher between now and the end of the year.

CONWAY GITTENS: So let's talk a little bit more about this, this ecosystem here. NVIDIA doing well. Broadcom doing well. And carpeting back to the earnings season that we just went through, we saw software get slammed, ServiceNow, Salesforce. So I'm wondering, when you look at the horizon, you're looking at the landscape, is AI eating software's lunch? Is this hardware's day in the sun?

CHRIS VERSACE: So it's a great question. And you know, I will start answering that by saying pain for some is opportunity for others because we did use that sharp pullback in ServiceNow to start a position for the portfolio. But I think where we are, Conway, is, you know, the hardware comes first, the software comes later. You can think about this in other markets, whether it's PCs, smartphones and how they've matriculated over time.

I think that the timing for software in AI is probably going to start to percolate a little bit more later this year, but really in 2025. And one of the reasons that we opted to pick up ServiceNow when we did is because the company shared on its earnings call that it's already starting to see a 30% price lift in its offerings that include AI. And I think we're going to see more of that, particularly as it ripples across more tools, more services, especially at ServiceNow, but also at others.

CONWAY GITTENS: So if software is a 2025 story and you're already adding to ServiceNow, are there other software companies that you're looking to buy on weakness ahead of the upturn that you're expecting in 2025?

CHRIS VERSACE: It's a great question. I mean, you know, when we look at the portfolio and its software exposure, you have to remember that we also have Microsoft, which is, of course, going to benefit from that. So we do want to build up our position in ServiceNow, but we are taking a look at some other names out there.

Obviously, Salesforce is another one. SAP could be one. But I think candidly, we would rather just build up with a strong position in ServiceNow.

CONWAY GITTENS: I'm wondering how you feel about-- I know Intel is not a software, but right around the time when Nvidia did the 10 for 1 stock split, I'm sure The Pro had a little writing about Intel could be vulnerable of getting kicked out of the Dow so that NVIDIA could replace it. I'm wondering what is your thinking on that now that we've had a couple of weeks to mull that idea around about NVIDIA going into the Dow and Intel, you know, basically getting the boot?

CHRIS VERSACE: So it wouldn't be the first time. You know, last year on The Pro Podcast we had a gentleman on, Jay Wood's, NYSE floor member, and he called out some changes that would be coming, including Walgreens getting the boot. And I think the only reason I mention this is because whether it's the S&P 500 or the Dow, you know, the folks who manage these market indices, they want something that's truly representative of what's unfolding in the marketplace space.

So is it possible that we see NVIDIA join? Certainly. Would it be good for us? It would be an incremental positive, no doubt. But I think the bigger question is Intel. And it just, for the last few years, it's had a very difficult time, whether it's on the PC side with AMD challenging it or on the data center business where Marvell, and Nvidia, and AMD have been challenging it. And then just the misstep that we've seen in their foundry business.

And I understand that Intel has gotten, you know, some renewed interest because it stands to be a beneficiary of spending tied to the CHIPS Act. But you know, at some point that company has to turn itself around and begin delivering products that people want on time and taking back market share in some of its end markets. And candidly, right now, I don't see that.

And my bigger concern is that, you know, this entire foundry business model that they're developing, it's really kind of a catch-22 because I'm going to supply you chips, but I'm going to compete with you too? You know, that's a tough one for a lot of folks to wrap their head around. I think, you know, the model that we see at Taiwan semiconductor, you know, arms merchant, chips manufacturer, much cleaner.

CONWAY GITTENS: So what do you think about the three-- I was going to say three man-- but say three person race or three company race at the top of the leaderboard in terms of the world's most valuable company? You have Microsoft, Apple, Nvidia. Tell me how you think that is going to shake out?

CHRIS VERSACE: Well, I mean, I'm not really worried about it, to be candid. I mean, number one, number two, number three, I mean, those are all great spots. The funny thing about that, Conway, is we own all three of them, right? And we own them all for very different reasons. So, you know, for Microsoft, there's obviously what it's winning in on cloud. But when it comes to AI, because you're asking about AI, you know, we see them well positioned inside the enterprise.

When it comes to Apple, and we look at their install base of, you know, iPhone devices, but also other devices as well, they are in a great position when it comes to AI and the consumer. But again, in order to build it all, have it ready, have it work, you need to have the chipsets. That's where NVIDIA comes into play. So, you know, if they jockey around number one, number two, number three, it's not really going to bother me.

CONWAY GITTENS: And so I'm wondering who is more dependent on whom? Is Nvidia more dependent on Microsoft and Apple because they actually make the products that go to consumers and consumers have to adopt their products, which will then further drive demand for the chips, or is Microsoft and Apple more dependent on Nvidia because they have to make the innovation in the chips that can go into the devices and drive the software that will then drive demand?

CHRIS VERSACE: So let me throw a fourth company in there, just in this example, because I think it'll be helpful. So when you talk about Nvidia and Microsoft, Apple, you know, they touch on different things, right? So Nvidia is not really selling chips into devices, right? There are more data center and GPUs that have, you know, some homes in other end markets, including, you know, PCs and gaming PCs, not necessarily the iPhone, which we all know is Apple's bread-and-butter business.

For that, they have their own silicon that is fabbed by Taiwan semiconductor, but they're also using basebands and modem chips that have been and will continue to be supplied by a company known as Qualcomm. So, you know, to get to this, I think that what we need to have is the capabilities to bring AI to market. That's what we're seeing now in this first wave. Then as we talked about, you're going to see this second wave of software, that's going to drive greater use of AI.

And I think what's going to happen there is that as that bottlenecks these networks that we have, whether it's, you know, digital infrastructure data center, what have you, we're going to see incremental-- excuse me-- spending, which should also benefit Nvidia.

CONWAY GITTENS: And I know you're all in on Nvidia, but I can't help but to put on my backward looking cap. I was here for the dot-com boom and bust, and so were you. Cisco was the most valuable company around that time as well. And of course, now they are not.

Hey man, how concerned are you that history might be repeating itself? Cisco was the largest maker of internet gear. It couldn't sell gear fast enough, and now the world changed and Cisco is in a different position. What do you think about Nvidia and the lead ramp?

CHRIS VERSACE: So I would say that, you know, history is always-- we always have to pay attention to history because there are a lot of lessons to be learned, a lot of signals to look out for. Does it always repeat? Not necessarily. But, you know, more often than not, again, there are some signs that we can-- some signs and learnings that we can use.

So in this case, it is not lost on me, Conway, that we are seeing a tremendous amount of money being funneled into AI startups. That, of course, is going to drive incremental demand inside data center and other end markets that are benefiting-- excuse me-- Nvidia and others. So we need to watch this because if you remember back to the dot-com bubble, there were a lot of would be business models that didn't exactly work.

Some were arguably ahead of their time. But I'm thinking, you know, like eToys, Webvan and all these others. You know, could, if we think about today. Are we likely to see all of these AI startups make it? Probably not, right? That means at some point, there will be some excess capacity in the system.

That's one of the things that we'll be mindful for. But again, we're still in the relatively early innings and I think that this is going to be a little different because the outcome of the dot-com bubble was a sea of dark fiber that was consumed over time. This is a little different. But again, we'll continue to watch the signs. And if we need to make some adjustments, we will.

CONWAY GITTENS: All right, speaking of adjustments, let's dig deeper into the portfolio. The Dow is up 4% year to date. The S&P 500 is up 14% year to date. The NASDAQ is up 17% to 18% year to date. The portfolio is up 13% year to date. So lagging slightly behind the benchmark and definitely behind the NASDAQ. What's going on?

CHRIS VERSACE: So you have to remember that when we take a look at the market, it's really been this handful of big tech stocks that have been driving it. So we are benefiting from that. You know, again, what are we talking about here?

We're talking about Apple. We're talking about Nvidia, Microsoft, Google. We don't have exposure to Facebook. Facebook is in the bullpen and that is a name that we're going to continue to monitor. Maybe we call it up. But, you know, we've laid out the value area where we would be interested in doing that and we are not there yet.

But when we look at the other parts of the market, Conway, you take a look at the equal weighted S&P 500. It shows a very different story. It tells you that the market hasn't really been rewarding other areas of the market. However, when we take a look at some of the returns that we have racked up, whether it's going to be Vulcan Materials or United Rentals, which was one of our stronger performers earlier in the year. We take a look at Costco, for example, or even Morgan Stanley or Bank of America with its 40% return since we added to the portfolio, I think that we're holding our own.

And what I would really call out, Conway, is if you look at the move in the portfolio from the end of the first quarter to where we are now, we have certainly made up a significant amount of ground. That's because a number of the moves that we were making were starting to payoff. And as I look at the second half of the year, which is seasonally stronger for a number of the portfolio's positions, everybody from, you know, Apple and Universal Display to Qualcomm, to PepsiCo, to Coty.

And I look at some of the ramping demand out there in the IPO market as well as the M&A market. I see more upside for Morgan Stanley. I see more upside for Bank of America. I think that the way the portfolio is constructed today, it's probably at, you know, the best we've seen it in some time. And I'm very comfortable with the positions. More importantly, when we look at the second half of the year and the prospects for earnings growth, we see our holdings are very well positioned.

CONWAY GITTENS: So let's stick with the winners. Waste management, you added to that or bought it in May. That's up like 14,000. United Rentals also, you made you added some position in May. That's up about 80,000. What do those two have in common?

CHRIS VERSACE: If we were to connect the dots a little bit, we would say that they're both benefiting from the infrastructure spending that we see. Now, remember, most people tend to think about waste management as what you see coming up and down your street out in front of your apartment, which is residential trash collection, and that is a bread-and-butter business for them. But they are able to benefit from incremental pricing, which they have taken over the last several years. And they initiated some additional pricing moves earlier this year.

But the real key point for us on the residential waste business is the automation that they're putting through. And I've actually seen this in person because, Conway, down my street where I live, there used to be a garbage truck that would come down with three people, the driver, two folks who would get out, toss the cans in, you know, run around and, you know, get back on the truck. Today there is the driver and this mechanical arm comes out, the scoops up the can, lifts it, shakes it, puts it back down. Nobody ever gets out of the truck.

And waste management has been deploying that across all of their routes and they're going to continue to deploy that. So that's a positive there. But again, you asked about what's connecting United Rentals to waste management. Whenever we have construction, whether it's residential construction, non-residential construction, there is waste to be hauled away. That is the other side of waste management's business.

And as we've seen through the monthly construction spending reports, non-residential construction has been ramping. Thank you to the Biden infrastructure bill. The Inflation Reduction Act, and it will continue as the CHIPS Act comes on stream. All of that bodes well, not only for the rental construction equipment fleet that United Rental has and the aggregate business at Vulcan Materials, but also for that waste hauling business at waste management.

CONWAY GITTENS: Do you see waste management and United Rentals as economic defensives as well?

CHRIS VERSACE: I would say between the two of them, I would say waste management is largely because of that residential business. Good times, bad times, Conway, you need your trash removed.

CONWAY GITTENS: All right, so we talked about the good. Let's talk about the not so good, Coty. You added to that in April. It's down right now in the portfolio about $10,000. What's wrong with Coty?

CHRIS VERSACE: Nothing is wrong with Coty. If anything, Coty is outperforming the rest of the luxury goods market. We've seen comments over the last several weeks from luxury goods companies and we peer through that. Are there spending issues for leather goods, jewelry and other categories? Yes.

What has been the standout category? Fragrance and skincare. And those are the ones that Coty excels at. We are coming off the weaker first half of the year, moving into the second half of the year. Why is that so strong for Coty? Well, it's all the buildup into the holiday shopping season, but they are also releasing more skincare products, particularly on their prestige line. But they're also continuing to bring out new fragrance products as well, really setting the stage for that year-end demand.

But the keys here, too, are that they are leaning more so into prestige, which is a higher margin business. And they continue to address the balance sheet by using free cash flow to delever. So when you look at, Conway, the second half of the year compared to the first half, Coty's earnings expectations are up not, you know, 11%, 12%. They're up significantly higher. So that's kind of what we're waiting for.

You know, members know that when we added Coty to the portfolio, it was in the early stages of its turnaround. But as we know, when turnarounds really start to catch, they whip faster. That's what we're on the cusp with. So we've said to members that we are inclined to be extremely patient with this. CEO Sue Nabi's transition and transformation plan are paying off. And we're inclined to reap the benefits of the full transformation.

CONWAY GITTENS: I like what you did there, Chris. You took a negative and turned it into a positive. But I want to stay with the negative. What did not work? What is not working for the portfolio? What are the losers for the quarter?

CHRIS VERSACE: Well, I mean, geez, so let's think about this. There's been some, I would say, like Lockheed Martin has been a bit of a disappointment, but it's kind of a known disappointment. So when we think about Lockheed Martin and defense contractor, you would say that, geez, given what we're seeing between Israel and Hamas, Ukraine and Russia, and the need for other countries, including the US, to build back its defense capabilities, boy, this should be a home run of a stock and the backlog certainly reflects that.

They continue to rack up multi-million dollar wins and in some cases a few billion dollar wins, giving us far greater visibility. But what we're waiting for, Conway, is for the resumption of F-35 deliveries, and that's expected to start sometime in the third quarter. And I think, you know, folks are just kind of waiting for that to happen. So you can start to revisit what the ramp in those deliveries are, what the impact is towards the end of the year and into 2025, let's say, for revenue and earnings.

So that's another negative into a positive, if you will. But that's the way that we see Lockheed and that's really the catalyst that we're waiting for.

CONWAY GITTENS: And how are you feeling about retail? We talked a little bit about Coty, which is consumer facing. When I look through the top holdings, I only see one retailer in there and that's Costco. How are you feeling about retail and the consumer at large?

CHRIS VERSACE: Great question. So I mean, it's important because the consumer is directly, indirectly 2/3 of the US economy. I think the consumer is probably holding up and in better shape than people think. We are seeing the continued return of real wage growth, but we are also seeing consumers trade down. They are still feeling the pinch of inflation. So, you know, we made a distinct decision earlier this year not to be in a lot of retail names.

Are we continuing to watch retail names? We are. There are some that are probably better positioned. Call them your raw stores, your TJX companies, this kind of schlep to shop or, you know, treasure hunting type of thing. But what we like Costco and the qualities around it is that it's not really your traditional retailer.

Yes, people go in and they come out buying stuff, whether it's, you know, fresh goods, fresh grocery, packaged goods, or all sorts of sundries and other items. But the business model at Costco is what first attracted us to the name, it's what keeps us bullish on the name. Yes, it is a warehouse company, but it is a membership-driven company and it's one that continues to expand its footprint. So as Costco continues to grow its warehouse base, it drives and continues to grow the membership, which in turn drives the very high margin membership fee revenue stream. And Conway, what we're waiting for, and it's not just us, everybody, we are waiting for the next eventual price target increase.

So when we see something like that where we can see a price target increase that's responsible for the part of the business that drives 50, 60% of net income depending on the quarter, that's where we want to be when it comes to retail, not duking it out between Target and whether or not it can hold its own against Amazon or others.

CONWAY GITTENS: Do you think Costco could push through a subscription fee hike at a time when everyone's really complaining about inflation? Although the rate of inflation is coming down, people are still feeling the pinch.

CHRIS VERSACE: Agreed. I think they're still feeling the pinch. But, you know, Conway, you have to remember that a price target increase at Costco is 5, maybe $10. I would challenge you, right, to think of it this way. I might pay a little bit more for that on an annual basis.

Big when spread across Costco's entire array of members. Meaningful to them. But if you're a Costco member, odds are you're not even going to blink at paying $5 or maybe 10 because of the amount that you're saving every time you go. That's the value proposition.

CONWAY GITTENS: So sticking in the retaily space, or consumer space, you have a stockpile rating on Pepsi, stockpile on Mastercard. What are you waiting for, what are you looking for to push the button to go from a stockpile to add?

CHRIS VERSACE: So let's deal with PepsiCo first, right, because the shares have come down to that low 160 level and we missed it. You know, candidly, I'm kind of kicking myself. I wish we had picked up some shares there, but that is one of the ones that we would look to actually upgrade at the right time because we are entering the seasonally strongest time of the year, not for the beverage business. A lot of people have this misconception when it comes to PepsiCo, they think of Pepsi, right?

But you have to really understand the business that you're buying when you own PepsiCo shares, right? The key driver for nearly half of their profits is the snack business. And the second half of the year is seasonally strong for that. So that's really what we're watching. We want some confirmation on that. We are incrementally positive on PepsiCo because we are seeing consumers, again, the ones feeling the pinch, are flocking back to eating at home.

We're starting to see grocery sales and the monthly retail sales report pick up. We're starting to see dining out sales in the monthly retail sales report start to trickle lower, not still growing, just not as robust. You know, we were concerned about that. That's candidly why we exited the position in McDonald's when we did. That seemed to be a good move because the shares have moved lower since then.

CONWAY GITTENS: Let's-- Mastercard.

CHRIS VERSACE: Yes. Thank you. So for Mastercard, for us, you know, we are continuing to watch consumer spending trends. And you have to remember that when it comes to Mastercard, you swipe a debit card, you swipe a credit card, you use a mobile payment, it doesn't matter because they are making money every time a transaction is processed over their network. So for us, if we didn't see real wage growth, I think we'd be a little more concerned about Mastercard.

I think that we want to see between now and let's say September is what are we seeing in terms of the back to school shopping season. We also want to get some sense as to the facts and figures that will emanate from Amazon's upcoming Prime Day, which they just announced July 16th and 17th. And I think that could be some of the catalysts in the near term.

But the bigger catalyst, Conway, for Mastercard is what's happening outside the US with its joint venture on China because it is entering that market. That could be a real catalyst for 2025 expectations. But we need to learn more. We need to understand exactly how they're maneuvering and what the real timing for that is. So I think we're going to be a little more patient with Mastercard.

Let me flip it around. If, on the other hand, we saw the economy decelerate in a meaningful way, border on a recession, Mastercard could be one of those names that we have to let go. Or if we see, you know, job creation, which has been healthy, turn meaningfully lower, potentially contract, that could be another indication that it's time for Mastercard to go, in part because consumers, when they see that type of data, they get fearful, understandably so. They pull in their spending. And as spending comes in, that is obviously going to impact the number of transactions going across Mastercard's network.

CONWAY GITTENS: So you're waiting to pounce on Mastercard. Mastercard, of course, is considered a financial, right? Also, you've got B of A in the portfolio, Morgan Stanley. The financials have been a bit of a laggard in the broader market. What's going on with this group? Is it all interest rate jitters, loan delinquency risks, loans going bad? What's your view on the financials?

CHRIS VERSACE: Sure. So, you know, the economy, if we take a look at some of the recent data, whether it was from ISM, or even more recently, the July flash manufacturing from S&P Global, the economy continues to grow above trend. That is a positive. But look, you know, borrowing costs are high. And I think that as the Fed starts to embark upon a rate cutting cycle, something we see starting to happen late this year, but with more likely in 2025, we're going to see interest rates come down.

I think that will be a positive for a number of different things, whether it's auto loans, you know, people are feeling a little more comfortable using their credit cards, taking on loans, home construction, that sort of thing. That's all going to be helping on that borrowing side of the business model. More so for Bank of America.

You have to remember Morgan Stanley, they're really investment banking and asset management. So two different business models. But again, for Bank of America, I think that would be a positive. Both companies, however, have meaningful exposure to investment banking.

And what are we seeing? The IPO market has continued to improve during the first half of the year. The pipeline is rich. And I think that we're going to see more IPOs happen. But there's also the other side of M&A. M&A has been healthy. And I think that as long as the stock market continues to be at levels that are, you know, near and dear to where we are, you're going to see more companies start to use stock as currency because they can.

You know, so I think that we're going to continue to see those things drive Bank of America, drive Morgan Stanley. But there's also something else that's happening, and that'll be later today when we get the results of the bank stress tests. The Fed does this just every year just to, you know, stress and see how these banks are, if they're well capitalized, undercapitalized, or not.

My suspicion is that the results of these bank stress tests will be pretty much uneventful. In other words, positive, if you want to think of it that way. And typically, what we've seen kind of coming on this is banks understanding what their excess capital is now, they can make some adjustments either to their dividend or announce incremental share repurchase program. So I wouldn't be surprised, Conway, if we see that happen. And if we do, depending on the size of the dividend increases, we might have to revisit some of those price targets that you mentioned.

CONWAY GITTENS: Chris, balance sheets for both homes and boardrooms are much cleaner, much better. Should banks be doing better here? And if so, where would you be looking to add? Add to some of the positions you already have or looking at some new banks to add into?

CHRIS VERSACE: Great question. So I think you're right about the balance sheets. In terms of where we would want to add, I mean, our position in Bank of America is up 40%. So it's kind of hard, you know, given where we are today, to see that. If all of a sudden, you know, we start to see accelerate-- inflation accelerate lower in a meaningful manner and we see some pull forward in the number of rate cuts that are expected, that could be something that might get-- that might lead us to increase our price target a little bit. But with our price target around $41, the shares at 39, that's not enough upside to really go on the offensive, if you will, with Bank of America.

With Morgan Stanley, again, we would need to see that price target move higher in order for us to make a move, although we do see further upside ahead to that price target, which is currently 105 and above the street consensus of around 99 to $100 depending on where you're looking. But you bring a good point, Conway. You know, should we be looking at other areas in the finance basket?

We are, but it's too soon to tell. As members know, you know, we like to have our arguments and our thought process kind of laid out. We like to do our homework before we make any additions to the bullpen. And if we were to move closer to the financials or any other sector, that would be a good place to gauge our intention.

CONWAY GITTENS: All right, let's leave the banks for now and circle back to AI. I was looking at one other holding in the portfolio, Universal Display. So I think that's the biggest holding in the portfolio right now. Is that a back-end way of playing the AI story?

CHRIS VERSACE: You know, the former math major in me would say, Conway, you're looking at the third derivative. That's what I would say. So how do I get there? We do see AI on device driving an upgrade cycle, whether it's going to be for iPhones, or Samsung Galaxies, or other devices. We see that happening in the PC market. We see it happening in the tablet market.

So, you know, those types of connected devices, we do see a rebound in volume, but we're also seeing something else happen, which is the continued adoption of organic light-emitting diode displays. If we think about AI and the demands that's going to put on the device, you know, organic light-emitting diode displays are far more battery friendly-- excuse me-- they're emissive, and there are other characters sticks that make them appealing.

So, you know, Universal Display is a company that is kind of a supplier of key materials for organic light-emitting diode displays, whether it's the Samsung display or some of the other big manufacturers. They also have an IP licensing business. So where I'm going with this is that as these volumes in these connected devices ramp and companies like Apple, Samsung, and the score of others increasingly use organic light-emitting diode displays, our shares of Universal Display will benefit.

Now that's one of the drivers. You can ask me about the other driver, if you like, which centers around the march to general illumination.

CONWAY GITTENS: Well, go on and tell us about it.

CHRIS VERSACE: OK. So as members know, we've kind of seen this movie before, right, with light-emitting diodes or LEDs. And if you trace them back, LEDs became very popular first with mobile phones, with backlighting screens, and then color. And then we started seeing them with interior lighting. And then we started seeing them in certain general illumination applications.

And now, lo and behold, you know, you go into Home Depot, all you can find pretty much are LED light bulbs. And that's the same roadmap that we're seeing for organic light-emitting diodes. So we're seeing it in those connected devices that I mentioned. We're seeing it in automotive interiors. We're also starting to see early adoption in some very high-end exterior LEDs-- sorry, exterior automotive lighting applications.

So I do expect over time we will see that same roadmap unfold for organic light-emitting diode displays. And it's something that keeps us long-term bullish on OLED shares.

CONWAY GITTENS: OK, so we've talked AI, we've talked Nvidia, we've talked the portfolio. Let's talk markets. As I mentioned, the S&P 500 is up 14% in so far year to date. A number of Wall Street firms are raising their estimates, their full year estimates for the S&P 500. The top estimate right now, I believe, is 6,000. And so what has to go right here? Is it the P or the E?

CHRIS VERSACE: Well, let's talk about where the PE is first, right? So, you know, I've written to members. And, you know, if you take a look at where we have been the last several weeks, the PE for the S&P 500 is kind of bouncing right up against the level that we saw the market peak out at in 2022 and 2023. So could we get some additional multiple expansion? Maybe a little bit, but I don't think we're going to see anything demonstrative.

So that tells you, Conway, that it's all on the E. And when we take a look at the earnings expectations, both for this year and next year, S&P 500 is expected to be up about 11% year over year, 2024 over 2023, and then accelerate to up 14% or so in 2025. So the questions we have to ponder are, OK, what is going to allow company earnings to accelerate?

Clearly, this is going to be some issues when it comes to the economy. Are we still growing? You know, there's been a lot of concern about hard landing, soft landing, no landing. You know, and those are evolving pictures. And I would say that based on the most recent data that we've seen and tying it together, it appears that we're just going to be somewhere between a no landing and maybe a soft landing. So that would be good.

We're seeing input costs come down. That could be good for margins. That would be helpful for potentially incremental upside in earnings expectations. But I think the other side of it, too, is, you know, what is the Fed going to do? And I'm sure we'll talk about that. But again, my view has been, you know, we'll get one rate cut this year and, you know, probably, you know, somewhere between two or three, maybe four next year. But it's all going to be predicated, as members know, on the data.

CONWAY GITTENS: Yeah, how much of the earnings forecast, and thus the forecast for the S&P 500, is dependent on the Federal Reserve lowering interest rates in order to pump up that E?

CHRIS VERSACE: It's an interesting question because, you know, what have we seen so far this year through the first half? As we've gone through the December quarter earnings season and the March quarter earnings season, and we get ready for the June one, you know, earnings expectations have kind of, you know, melted higher, both for 2024 and 2025. Yet the expectation for rate cuts this year when we started the year was five or six.

And now I think the market has kind of settled down to, you know, one. And I think, you know, if you look at the CME Fedwatch tool, there's some signs that, you know, maybe it could be two. But I would argue that we're going to need to see more of that, quote, "good data" that the Fed wants to see when we get the, you know, June, July and August CPI, PPI, PCE data. Sorry for the alphabet soup there, Conway.

But, you know, so I don't think it's as predicated on that. But I think in order to see further upside for 2024 earnings, but really 2025 earnings, we're going to have to get greater confidence that the Fed is indeed embarking on that rate cutting cycle. And then, of course, the question becomes, what's the health of the economy, how is the consumer doing, are they opening their wallets, and the like. So, you know, there's a lot of moving pieces, but this is why we follow, you know, all the data, as I like to say, Conway.

CONWAY GITTENS: And we'll drill down further on the data and the Fed in just a second. But I want to stick with the market for a minute here. I was reading one analyst who was saying that there's so much money in money market funds, and if that money moves out of those funds and moves into the stock market, that alone could boost, you know, the S&P 500 and some of the indices and the averages to these new higher levels that Wall Street is expecting.

CHRIS VERSACE: Certainly, certainly a factor, Conway. But I think you have to remember, too, that a lot of that money is probably parked in these high yield savings accounts that are currently paying, what, 4 and 1/4 to 4.4%. Remember, I can open up my iPhone and move money into an Apple savings account with 4.4%, easy peasy, right? No risk, no nothing. So I do think that it's fair to say that as the Fed gets further along in cutting its rates, that that money could come off the sidelines because it's less advantaged to hold it in those savings accounts because those rates will come down as well.

CONWAY GITTENS: And I'm wondering, as we were talking about the price to earnings ratio and the earnings driving stocks higher. How much of that is the heavy lifting being done by the Magnificent 7? I mean, because it's easy to say, well, analysts are predicting our earnings to be up, you know, this amount over the year ago. But how much of that is just really concentrated in those seven companies, in terms of the earnings forecast?

CHRIS VERSACE: That is a fair point, Conway, because, you know, again, when you take a look at the Mag Seven or, you know, even some derivative of that, you know, and you look at their weightings in the S&P 500, it's significant. So, yes, it is an important factor. This is why I always try to take a look at what's happening, not only in the market cap weighted S&P 500, but its equal weighted cousin, ticker symbol SPEW.

But the other thing I would point out, Conway, is this, when we look at the market, we have to pay attention to it, we use it as a barometer of things, but we don't buy the market, right? We have to be mindful of it, but we always look for companies that are poised to outperform over the coming, you know, landscape of quarters. Call it, you know, two, to four, to six quarters, depending on the rationale for owning a position.

So, you know, when we look at that, we want to zero in on companies whose earnings prospects are superior to that of the S&P 500. And the reason for that is very simple. Companies that tend to deliver greater earnings tend to get better valuation multiples. So that's our thinking. And, you know, not to hammer it home, but when we take a look at, you know, the big tech company positions that are in the portfolio, yes, they are expected to deliver significant, significantly better earnings in the back half of the year. But even some of the companies that we just talked about, whether it's Coty or, you know, Trade Desk, or some of the others, you know, strong earnings growth in the second half of the year, either compared to the first half of the year or on a year over year basis. And that is our hurdle for bringing companies into the portfolio.

CONWAY GITTENS: And so how important is tech leadership to the bull-- keeping the bull market intact for the second half of the year? And the reason why I asked that is because lately so goes Nvidia, so goes the rest of the market. And so if we see Nvidia stumble the second half of the year, does that mean that all of these rosy projections for the S&P 500 are going to be-- going to be mute?

CHRIS VERSACE: I don't think so. I mean, you know, when you think about it and just going just going back to the conversation we had with Nvidia earlier, right, where there is a period of, you know, some people like to say digestion, right? And I think that's really what we saw with Nvidia. You know, all expectations are when you ramp out the spending on data center, not just this year, but the next several years, it's going to continue to ramp.

So if you're an Nvidia bull, the outlook is favorable. Could that change? It could change. But, you know, all indications are right now that we'll probably go through this period of digestion. When we go through the earnings season, those companies will reaffirm their spending. We'll get some positive comments more likely than not from Micron.

And then we put all those pieces together for the second half of the year, which, by the way, tends to be seasonally strong for tech anyway. So I just think that no matter how you slice it, I see Nvidia shares going higher. I don't think, even though their first, second, or third of the S&P 500 and the NASDAQ, at this time, I'm not as concerned about where Nvidia is going to go.

CONWAY GITTENS: All right, Chris, time to take out your little crystal ball.

CHRIS VERSACE: OK.

CONWAY GITTENS: Let's talk about the economy as we wrap up, talk about the economy and the Fed. What are you expecting from the US economy in the second half of the year?

CHRIS VERSACE: I think it's going to be kind of pretty much the same, right? What do I mean by that? It's grown above trend. All indications are that we're going to see that continue. You know, I think that the indications will have to watch, though, will be job creation, consumer spending, obviously. But so far, the tea leaves seem to point to, you know, further above trend growth, if we could call it that.

And I think as long as we get inflation coming down, which again, recent data points to, I think it will allow the Fed to start to loosen those purse strings. And I think that will help keep the economy, some would say, on a glide path. Others are a little more optimistic that no landing scenario. And I think we're going to wind up being somewhere between those two.

CONWAY GITTENS: And what do you think about the labor market? We talked a lot about the earnings potential of companies. Do you think the earnings potential is going to be strong enough to continue to support hiring or are we going to see a continued deceleration, not necessarily going to all out layoffs, but deceleration in hiring, which could rattle the nerves there?

CHRIS VERSACE: Well, I mean, it's a good question, Conway. I mean, again, as we sit here today, you know, there is some headlines about how many tech workers have been laid off. But when we take a look at, you know, the job numbers, and I understand that there's, you know, some concerns over the reporting in those data in that data set, but it is the data that we get. You know, it has continued and indications, again, towards the end of the quarter for the month of June seem to be very favorable as well.

Orders seem to be perking up. That tells us the economy would continue. It also tells us that folks might be able to hire more. I think the one wrinkle that we have to pay attention to in all of this is going to be wage growth because it has remained elevated. We can see this in the ADP reports that we get every month, both for job stayers and job changers. Job changers, you know, actually those wages have picked up in recent months.

We've heard other indications that some are slowing, they're slowing their hiring because of wages. They're not replacing people. They're being more selective. So it is possible, Conway, that we see a slowing in job creation. But if you're the Fed, that's not exactly the worst thing either.

CONWAY GITTENS: But if you're a consumer, that might not be a great thing.

CHRIS VERSACE: Well, no, no. That's-- That is a fair point, Conway. And this is kind of what we always have to look at, right? There's no-- as we say, there's no one silver bullet. We kind of have to assess the evolving landscape, right? So consider my comment earlier, right? If we saw a softening in the labor market in a meaningful one, that would tell us that consumers are likely to pull back, they're going to be fearful. So I agree with you on that. But that's also why I said, it's something we're watching for Mastercard, because if we do see that, that could be a warning sign.

CONWAY GITTENS: But could the silver lining be if consumers pull back, then that takes some demand out of the system, which then gives inflation the potential to fall even further, which then gives the Federal Reserve the room to finally lower interest rates?

CHRIS VERSACE: I think that would fall into that category of not-- let me get this right, Conway. That would not be in the category of no landing. Probably not in the category of soft landing, more likely hard landing. And if that were the case, then I think that, you know, we would probably see the economy slow more than was expected. And then I think you're right. The Fed, who kind of wants to keep the economy on a glide path, that could potentially lead them to return monetary policy to a more neutral stance faster than the market currently expects.

CONWAY GITTENS: So in this dialogue, this tug of war, which one are you going to be paying attention to more, the labor market or the consumer?

CHRIS VERSACE: There is no or in that, Conway. The only answer is both.

CONWAY GITTENS: So both the retail sales numbers, the PCE numbers. And also taking a look-- It's everything.

CHRIS VERSACE: It's all of it, right? And you know, so members know that I am what we refer to as a data hound, OK? So I am turning all the data over. Probably some members wish I would be a little quiet about some of the data, but I can't because it is so important to the framework of the economy, and the market, and the Fed.

So, you know, we will continue to turn over all the data. That includes Friday's PCE price index, but even next week, Conway, we're going to get another round of very important data, despite it being the 4th of July holiday. You know, we're going to get construction spending. So we'll be paying attention to that for United Rentals, for Vulcan Materials, and as we discussed, waste management.

We're going to get the ISM manufacturing and PMI data, right? We'll also get it from S&P Global. So in there, we'll get, you know, looks at the manufacturing economy, the services economy, the latest unemployment. We'll get new orders that'll tell us how we're going to start off the third quarter and we'll get some insight on inflation as well. So, you know, I don't mean to be flippant, Conway, but if you're in this, you've got to pay attention to the data. There's no other answer.

CONWAY GITTENS: And so as someone who's looking at the portfolio, and looking at the members of the portfolio, and looking at the businesses in the portfolio, there's a debate about whether the Federal Reserve should already be cutting interest rates. When you look at the businesses, when you look at the revenue flow, when you look at the margins, what does that tell you? How does that inform your thinking on that debate, should the Fed already be cutting interest rates, and should we see more than one rate cut this year?

CHRIS VERSACE: OK, Conway, here it comes. The answer to that is no. Why can I say this, right? You know, remember the Fed's mandate, right? Dual mandate, Fed Chair Powell points this out, stable prices and it has to keep-- it keeps the labor market kind of humming in the economy as well. So when we look at, you know, recent CPI data, you know, whether it's on a year over year basis, month over month basis, we have seen some progress. There's no question about that.

But we have not seen outright deflation. The rate of increase is only slowed. So that's the first thing. The second thing is when we look at the year over year metrics, there's still quite a distance away from the Fed's 2% target. When we look on a month over month basis, they are better, right? I believe, I'm going from memory here, that the core CPI for the month of May was, like, 0.2% or 0.3%. You know, so much closer than it had been.

But remember, the Fed also does not want to get head faked. And I walk members through this, but, you know, we saw the core CPI around the May levels in the back half of last year. That's when the market was getting excited about six rate cuts, right, in 2024. And then all of a sudden, the data started to tick higher, and higher, and higher. So the Fed simply could not cut rates at that point. And I think what they're gun shy on, and it's understandable, is they don't want to jump the gun. They don't want to be head faked.

So from my perspective, I totally understand why they're saying that they need to see more good data. But I also think that the Fed at some point wants to cut rates, right? So where I'm coming around with all of this is, we'll watch the data. The data is improving. We're going to need to see more. But my position has been, and members know this, most likely one rate cut at the end of the year. I don't see one happening before the election.

The sidebar on that, Conway, is it is going to be a heated election. And I can't imagine the Fed wants to get involved with that. Unless the economy totally falls off a cliff, but again, the recent data doesn't point to that happening. So I'd say the odds of that are extremely low. That means November, December. You know, if inflation falls, you know, considerably faster than we're thinking-- and I said it before, but I'll say it again-- June, July, August, and September, then all of a sudden maybe we could start to see two rate cuts on a realistic basis. But for now, I'm still thinking it's one, but a couple more in 2025.

CONWAY GITTENS: OK, Chris. Well, the Fed will be watching the data. You'll be watching the data. I will be watching the data. And we'll have to do this all over again. We'll end it right there.

We did it all. Inflation, economy, earnings, stock market second half, AI, Nvidia. We'll continue to keep our eyes on the portfolio. So look out for our next quarterly call. In the meantime, we have lots of exciting videos and alerts planned for you. Thank you so much for watching. And we look forward to seeing you again.