CWS: 4th Quarter 2024 Portfolio Review

The stock market ended 2024 on a very strong note. This was the second year in a row that the S&P 500 gained over 20% for the year. Since October 2022, the market has been on an impressive run.

The stock market’s gains are particularly impressive in that they came during a contentious election year. The U.S. economy remains strong. Unemployment is low, but the weak spot continues to be inflation. The good news is that inflation is down sharply from its peak. Unfortunately, the Fed is having a difficult time trying to get it back to its 2% target.

During the fourth quarter of 2024, the traded shares of the AdvisorShares Focused Equity ETF (CWS) lost 5.13% (market). The Net Asset Value lost 5.17%. That compared with a gain of 2.41% for the S&P 500 Index.

While the underperformance is unfortunate, it reflects the safety-first nature of CWS. What happened during Q4 is that Wall Street expected the Federal Reserve to lower interest rates. However, more economic data came out that rate cuts may not be so necessary.

The promise of higher rates for a longer time proved to be a big lift for growth stocks and many aggressive sectors of the market. Bitcoin, for example, also did well.

I should point out that CWS tends to be much more conservative than the rest of the market. For example, the “beta” of the ETF is 0.87. Beta is a measure of systemic risk. Any number below 1.0 indicates a conservative and less-volatile strategy.

For the entire year, the AdvisorShares Focused Equity ETF saw its traded shares gain 9.70%, while the Net Asset Value increased by 10.17%. That compares with a gain of 25.02% for the S&P 500.

Here’s a look at how the ETF has fared since it started trading more than eight years ago:

As of 12.31.2024. Source: StockCharts.com

Strong Earnings Helped Power Big Gains

Let’s look at some of the earnings reports that helped the ETF during Q4.

In October, Fiserv (FI) said it made $2.30 per share for its Q3. That’s a very good result. It’s up 17% over last year’s Q3, and it topped Wall Street’s consensus by four cents per share.

The details were quite good. Fiserv’s organic revenue increased by 15%. That was led by 24% growth in Merchant Solutions and 6% growth in Financial Solutions. Fiserv’s adjusted operating margin increased 170 basis points to 40.2%.

For the first nine months of this year, Fiserv’s free-cash flow increased by 23% to $3.34 billion. During Q3, Fiserv bought back 7.6 million shares for $1.3 billion.

Now let’s look at guidance. Fiserv raised its outlook for organic-revenue growth to 16% to 17%. The previous range was 15% to 17%. The company also sees full-year earnings of $8.73 to $8.80 per share. That represents growth of 16% to 17% for this year. The prior range was $8.65 to $8.80 per share. Fiserv is on track for its 39th year in a row of double-digit EPS growth.

Moody’s (MCO) had another outstanding earnings report. For its fiscal Q4, Moody’s made $3.21 per share, which easily beat Wall Street’s forecast of $2.86 per share. Quarterly revenue was up 23%. Moody’s Investor Service transactional revenue grew 70%. That outpaced issuance growth of 51% and drove a 29% increase in operating-cash flow.

Moody’s Analytics had recurring-revenue growth of 9%. Companywide, Moody’s operating margin increased 320 basis points to 47.8%.

Moody’s also raised its full-year guidance to a range of $11.90 to $12.10 per share. The previous range was $11 to $11.40 per share. Before that, it was $10.40 to $11 per share.

Since Moody’s has already made $9.85 per share so far this year, the new guidance implies Q4 earnings of $2.05 to $2.25 per share. Wall Street had been expecting $2.18 per share.

Amphenol (APH) continues to benefit from the AI boom. For Q3, APH made 50 cents per share. That’s up 28% over last year, and it beat Wall Street’s consensus by five cents per share. The company had a record adjusted operating margin of 21.9%.

During the quarter, Amphenol bought back 2.7 million shares for $176 million. Chief Executive Officer R. Adam Norwitt said, “We are very proud of the company’s outstanding performance during the quarter.”

For Q4, Amphenol expects sales between $3.95 billion and $4.05 billion. That’s an increase of 19% to 22%. The company sees Q4 earnings ranging between 48 and 50 cents per share. That’s growth of 17% to 22%.

For the full year, APH expects sales of $14.85 billion to $14.95 billion. That’s up 18% to 19%. Earnings are expected to be between $1.82 and $1.84 per share.

Past performance does not guarantee future results. As of 12.31.2024. Source: StockCharts.com

Rollins (ROL), the bug people, said their Q3 organic revenues grew 7.7%. The company’s operating income was up 8.3% to $192 million. ROL’s adjusted operating margin dropped 90 basis points to 21.4%.

Rollins’s earnings increased 3.6% to 29 cents per share. Although that was a one-penny miss, I’m not too concerned about Rollins. Its operating-cash flow increased 15.4% to $147 million.

Rollins also raised its quarterly dividend by 10% to 16.5 cents per share. The company had a record of raising its dividend for 18 straight years, but Covid put an end to that.

Thermo Fisher Scientific (TMO) said that it made $5.28 per share for Q3. That’s down from $5.69 per share one year ago, but it was four cents higher than expectations.

Quarterly revenue came in at $10.60 billion, which was up slightly over last year. Adjusted operating margin fell 190 basis points to 22.3%.

Thermo raised its guidance to a new range of $21.35 to $22.07, versus its previous guidance of $21.29 to $22.07. That implies Q4 earnings of $5.59 to $6.31 per share. Revenue guidance continues to be in the range of $42.4 to $43.3 billion.

The earnings report from McGrath RentCorp (MGRC) needs some explanation. Last quarter, the company made $6.08 per share, but that figure includes the $180 million termination fee it got when the merger deal went under.

Excluding that, McGrath made $1.87 per share last quarter. That’s more realistic. For Q3, revenues from continuing operations rose by 10% to $266.8 million. Adjusted EBITDA increased by 13% to $104 million. McGrath also offered some guidance. For 2024, it expects total revenue between $910 to $920 million and EBITDA between $180 and $190 million.

I’m glad the merger mess is behind them. This company has the potential to do very well.

As of 12.31.2024. Holdings subject to change.

New Year, New Stocks

The end of the fourth quarter is the time of year when we make our portfolio changes for the new year. Five new stocks go into the portfolio, and five stocks go out.

The five new buys are Adobe (ADBE), Allison Transmission (ALSN), Henry Schein (HSIC), IES Holdings (IESC) and Mueller Industries (MLI).

The five sells are AFLAC (AFL), Celanese (CE), Farmer Mac (AGM), Hershey (HSY) and Polaris (PII).

Here are the corporate descriptions from Dun & Bradstreet of our five new stocks:

Adobe is one of the largest and most diversified software companies in the world. It has been known for brands such as Acrobat, Photoshop, and Adobe Document Cloud. Adobe serves customers such as content creators and web-application developers with its digital-media products, and marketers, advertisers, publishers and others with its digital-marketing business. Its creative cloud offering is a cloud-based subscription offering that enables creative professionals and enthusiasts alike to express themselves with apps and services for video, design, photography and the web that connect across devices, platforms and geographies. The Americas account for about 60% of revenue. The company was founded in 1982.

Allison Transmission is the world’s largest manufacturer of fully automatic transmissions for medium- and heavy-duty commercial vehicles and medium and heavy tactical US defense vehicles and a leader in electrified propulsion systems. Its products are used in vehicles such as on-highway trucks, transit buses, motorhomes, off-highway vehicles and equipment and defense vehicles. In addition propulsion solutions, it also sells branded replacement parts, support equipment and aluminum die-cast components, among others. The company also makes electric drives for transit buses and shuttles and its ReTran remanufactured transmissions for aftermarket customers. The US accounts for most of the company’s revenue, but Allison also serves customers in the Americas, EMEA and APAC regions. The company traces its historical roots back to 1915.

Henry Schein is the world’s largest provider of healthcare products and services, primarily to office-based dental and medical practitioners, as well as alternate sites of care. It provides everything from infection-control products, handpieces, preventatives, impression materials, composites, anesthetics and dental implants to vaccines, surgical products, diagnostic tests, infection-control products and X-ray products. Other offerings include practice management, business analytics, patient-engagement and patient-demand software, repair services and financial services. The company stocks a comprehensive selection of more than 300,000 branded products and Henry Schein corporate brand products through its main distribution centers. The US accounts for about 70% of its revenue. Founded in 1932 by Henry and Esther Schein as a storefront pharmacy, Henry Schein became a public company in 1995.

IES designs and installs integrated electrical and technology systems and provides infrastructure products and services to a variety of end markets, including data centers, residential housing and commercial and industrial facilities. Its more than 9,000 employees serve clients in the United States.

Mueller Industries is a leading manufacturer of copper, brass, aluminum and plastic products. The range of products it manufactures is broad: copper tube and fittings, line sets, steel nipples, brass rod, bar, and shapes, aluminum and brass forgings, compressed gas valves, refrigeration valves and fittings and insulated flexible duct systems, to name a few. It also resells a myriad of products, including brass and plastic plumbing valves, plastic fittings, malleable iron fittings, faucets and plumbing specialty products. Its operations are divided among three segments: Piping Systems, Industrial Metals and Climate. The company’s products are used in a wide range of applications, including transportation, automotive and industrial applications, among others. With operations in North America, Europe, Asia, and the Middle East, Muller Industries generates most of its revenue in the US.

In a first for the ETF industry, the portfolio strategist of CWS has “skin in the game.” The strategist’s compensation is directly tied to portfolio’s performance. Using the trailing 12-month returns of CWS vs. its S&P 500 Index benchmark, stronger outperformance is rewarded with a larger management fee while weaker underperformance is penalized with a smaller management fee.

After the Fund’s December performance, the CWS fulcrum fee will be 0.65% in January 2025.

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3Q 2024 Commentary