VIDEO: Why We Rang the Register on Shares of This Holding

As we close out January, Chris Versace discusses our take on Apple’s AAPL December quarter earnings report and the Portfolio’s decision to ring the register on shares of Mastercard MA. 

He also digs into Friday's December PCE Price Index report, explaining why it supports a view that the Fed isn’t likely to deliver a rate cut at either of its next two policy meetings. 

Finally, Chris gives a first-blush reaction to quarterly results from Eaton ETN and previews what we’ll be focused on over the weekend and next week. 

Transcript

CHRIS VERSACE: Hey, everyone, Chris Versace here. Friday, January 31. And we're coming off a couple really busy days for the portfolio. But we've got the end of the week and the end of the month. And so far, it looks like the market's going to close it out on a high note. Helping lead that upswing in the market is one of the highest rated and weighted stocks in the S&P 500 and the NASDAQ.

Yes, I'm talking about the shares of Apple. We've shared with you an alert, our take on the better than feared quarter. We also lifted our price target to reflect confirmation that the iPhone upgrade cycle is unfolding. And we are also seeing continued growth in the high margin services business.

And as we explained in the note, it is understandable that the vast majority of people focus on iPhone. It's Apple's largest product, the flagship. But-- but here's the thing. As we think about Apple's devices, including the iPhone, they kind of have a razor-blade relationship, if you will, with the services business. And we like the services business, as I've explained in the note, because it is a essentially a recurring nature type of business, subscription largely driven, and it really has higher margins.

And as we see that business continue to grow and become a larger piece of Apple's overall revenue stream, that shift towards higher margins helps lift Apple's overall gross margin, its operating margin. But it also brings, or I should say, increases a more stable element when it comes to profit and earnings generation.

So we really do like to see that. In many respects, I would liken it to why we appreciate the membership revenue streams at Costco and the card fee revenue stream at American Express. So I would encourage you to take a look at that note. We do lay out some milestones that we'll be paying attention to as it relates to Apple in the first half of the year, and I think you're going to want to really dissect that note. We also lay out where we'd be interested in potentially either picking up more shares of Apple or revisiting the two rating on the shares. So please be sure to check that note out.

We also have an alert out this morning where we rang the register on the shares of Mastercard. We locked in close to a 30% gain on that slug of the shares, really looking back over the strong-- continued strong, I should say-- performance in Mastercard shares since late July, early August.

Now, there were a couple reasons why we wanted to monetize that gain. Yeah, the size of it and the strong run that Mastercard shares have had. But also, as we looked at it, the shares were overbought. And as you know, we like to kind of be cognizant of the technical setup in the shares when they get overbought. There is the concern that they could give some of those gains back, and we wanted to make sure that we took the chips off at the right time. Call us prudent. But you know that's how we manage the portfolio.

We did, as we pointed out in the alert, manage to keep a relatively good sized position in Mastercard shares. Why? Well, a couple of reasons. One, there is the ongoing share gains across the trillions and trillions of dollars across the globe that are still used-- still using, I should say-- cash and check. I know it's hard to believe, but, as we explained in the note, there are multiples of trillion dollars in these type of transactions. And to us, that just says further share gains are possible for Mastercard.

Other things we'll continue to pay attention to will be job growth, real wage growth, and what they tell us about consumer spending powers. As we go further into 2025, we'll be paying attention, as well, to what might happen on the tax reform front under the Trump administration. But we're also going to be paying close attention to what Mastercard does on the crypto front. It's made some partnerships as it looks to eventually expand the reach of the Mastercard platform to allow people to buy and transact with crypto.

So we'll continue to watch all of that in that alert, just like we did in the Apple one. We kind of laid out price levels where we might be interested in either picking up more shares or revisiting our rating. So again, I would encourage you to read the Mastercard alert, as well.

There is one other item I want to kind of talk to on a higher level today. And that was the December PCE price index report. Remember, the PCE is the Fed's preferred metric when it comes to the topic of inflation. And what we saw in the December data was the core reading came in at 2.8% on a year-over-year basis, as expected, unchanged from November. But we take a look back just a little bit, and it's the third consecutive month at that level, telling us that inflation is sticky.

If we go back a little further, we'll see that the 2.8% average in the fourth quarter is up compared to what we saw in the third quarter. Now, earlier this week, we had the Fed's policy statement, which was really no surprise. And we had Fed Chair Powell really coming out with remarks saying that the Fed is going to need to see more good data on inflation. In other words, it's got to see inflation data start moving back towards the Fed's 2% target on a sustained basis.

So as we think about what we saw in today's data, it tells us that our thought that we shared with you on Wednesday that we're not likely to see a Fed rate cut at either of the Fed's next two policy meetings, well, that is more likely than not. Why? Well, look, the Fed wants to see the return of progress towards its 2% target. Check. We know that. But here's the thing. It wants it, as I said, on a sustained basis, which means multiple months of data moving in the right direction, not one or two.

So I think they're going to be patient. And as long as the strength of the economy holds up, which it appears to be doing, I think they're going to take their time. My suspicion is midyear at the soonest, possibly in the second half of the year, we could see a rate cut if we see inflation get back on track.

But for that, we're going to have to continue to follow the data. And that means paying attention to the next round of clues that we'll get, which will be next week with the start of January economic data. We're going to have a sea of it, everything from manufacturing and service PMIs to multiple looks at job creation and wage gains in the month of January. And as you know, we will be here to break it all down for you, and we will be updating our thinking as we do so.

A couple other things as it relates to today and the weekend. We also had quarterly results from Eaton this morning. First blush is that they, the December quarter and the guidance, appear to be in line, but we will have more after we digest the earnings call. So please remember to check your emails, your alerts.

We also, later today, have our January monthly roundup coming. And that means we will be sharing updates with you on all of the portfolio's portfolios positions. Now, because we want you to really focus in on that monthly update, we are not going to be sharing any Weekend Signals or Sunday Soup. Those will return next weekend.

And finally, as we move into the weekend, I have to share that we will be paying close attention to developments on the tariff front. You probably saw that President Trump indicated that we could very well see tariffs on Mexico and Canada as soon as tomorrow, February 1.

We're also reading and hearing that there could be a last minute deal to prevent that from happening. But ultimately, what unfolds over the weekend will set the tone for how we kick off the first week of February. Needless to say, folks, when we get back here on Monday, we are going to have a lot to discuss. So I will say, enjoy the weekend, and we will see you back here on Monday. Thanks for watching.

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