CWS: 4th Quarter 2020 Portfolio Review

Performance data quoted represents past performance and is no guarantee of future results. Current performance may be lower or higher than the performance data quoted. Investment return and principal value will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than original cost. Returns less than one year are not annualized. For the fund’s most recent standardized and month-end performance, please click www.advisorshares.com/etfs/cws.

Performance Review

The fourth quarter of 2020 was an unusually dramatic time for Wall Street, the economy and the country overall. The United States along with the entire world, is still wrestling with a nasty Covid pandemic.

Ordinary consumers are dealing with difficult lockdown orders. Thousands of small businesses have closed. On top of that, we had a contentious election in the United States. For the first time in 28 years, an incumbent president was defeated at the polls.

In the third quarter of the year, real GDP grew at an annualized rate of more than 33%. That’s certainly impressive but it was merely a rebound from the terrible performance during the second quarter. At that time, the U.S. economy shrank at an annualized rate of more than 31%. The unemployment jumped to nearly 15%. These are numbers we’ve haven’t seen since the Great Depression.

Over the summer, we saw signs that the economy was gradually recovering. However, that trend started to fade as we got closer to the end of the year. In fact, the jobs report for December showed a net loss of more than 140,000.

The Federal Reserve made it clear that it would keep interest rates low for as long as it will take. The central bank is also buying up huge amounts of bonds each month. That has been a big benefit for investors. Inflation may show up at some point, but for now, prices have been stable.

Despite the unfortunate news for the labor market, stock prices did very well towards the end of the year. In fact, the stretch of November and December was one of the best closing two-month runs the S&P 500 has ever had. For November, the S&P 500 gained close to 11% and it added another 3.8% for December.

Now let’s look at our performance. For the fourth quarter of 2020, the traded shares of the AdvisorShares Focused Equity ETF (NYSE Arca: CWS) gained 12.54% while the Net Asset Value rose by 11.80%. The S&P 500 gained 12.15%.

There were many key point during the quarter but I want to focus on one particular day, November 9th. This was an especially dramatic day. Pfizer said that its Covid-19 vaccine appears to be 90% successful. The New York Times reported, “If the results hold up, that level of protection would put it on par with highly effective childhood vaccines for diseases such as measles. No serious safety concerns have been observed, the company said.”

Wall Street went bonkers. Some sectors exploded higher for gains of 10%, 20% or even more. Other areas fell sharply. The S&P 500 opened higher by 2.1%. It eventually ran up to a gain of 3.9% and touched a new all-time intra-day high. By the end of trading, the index had fallen back to close higher on the day by 1.17%.

At one point, the Dow was up over 1,700 points for a gain of 5.7%. It also made a new all-time intra-day high. The index closed off its high for a gain of 834 points, or 2.95%. The Dow did nearly three times better than the S&P 500. The indexes generally track each other pretty closely, but you rarely see divergences quite like this.

Many of the sectors that had been hit hard by the lockdowns soared. For example, Cinemark (CNK), the movie theater chain was up over 45% today. Carnival (CCL), the cruise operator, soared 39%. Even Denny’s (DENN) gained 36%. Malls and airlines were also strong. United Airlines (UAL) was up 19%.

We saw evidence of this in our portfolio as Disney (DIS) jumped nearly 12% and Ross Stores (ROST) gained more than 15% on November 9th. Banks and financials also had an outstanding day. AFLAC (AFL) rose 12% and Eagle Bancorp (EGBN) rallied over 16%.

The tremendous reaction on November 9th defined much of the market’s performance during Q4. Now let’s look at third-quarter earnings season.

Portfolio Review

From mid-October to early November, we had third quarter earnings season. Many of the stocks in the fund had the chance to report how well they did do the third quarter of the year. Most of our results were very impressive.

For example, Sherwin-Williams (SHW) reported earnings of $8.29 per share. That beat Wall Street’s forecast by 54 cents per share. On October 29, Stryker (SYK) reported earnings of $2.14 per share. That was more than 50% higher than Wall Street’s expectations. Disney (DIS) had a difficult quarter. The entertainment giant lost 20 cents per share for the third quarter. Still, the beat expectations by 50 cents per share.

Danaher (DHR) reported Q3 earnings of $1.72 per share. That was up 62% from last year’s Q3. The consensus on Wall Street was for earnings of $1.36 per share. The results are impacted by the addition of Cytiva. That’s the new name for GE’s biopharma business, which Danaher bought last year. For Q4, Danaher expects revenue growth, excluding Cytiva, in the low-single digits. Danaher’s CEO said, “We delivered outstanding third-quarter results, achieving double-digit revenue growth, over 60% adjusted EPS growth, and we more than doubled our free cash flow year-over-year.

Fiserv (FISV) said it had Q3 earnings of $1.20 per share. That’s a 19% increase over last year. Wall Street had been expecting $1.16 per share. For the quarter, free cash flow rose by 12%, and it’s up 13% for the year. Operating margin increased 3.1% to 32.9%. Fiserv expects to see its earnings rise by 11% over last year. This will be their 35th year in a row of double-digit earnings growth. Last year, Fiserv earned $4.00 per share, so an 11% earnings increase translates to full-year earnings of $4.44 per share. For the first nine months of this year, the company made $3.12 per share. That implies Q4 guidance of $1.32 per share.

For Q3, Moody’s (MCO) earned $2.69 per share which creamed estimates by 59 cents per share. Moody’s Analytics, which is a key business for them, saw a revenue increase of 7% to $531 million. Moody’s raised its full-year guidance range from $8.80 to $9.20 per share to $9.95 to $10.15 per share.

Ansys (ANSS) reported Q3 earnings of $1.36 per share. That beat the Street by 10 cents per share. The company said that growth in the Asia-Pacific region was particularly strong. Growth exceeded 10% in South Korea and Japan. CFO Maria Shields said, “We reported a record third-quarter balance of deferred revenue and backlog of $880 million, an increase of 35% over the third quarter of 2019. Additional financial highlights reflecting the resiliency of our business model included ACV growth, which continues to be comprised of a high level of recurring sources at 78% for the quarter and 81% for the first nine months of the year.” Now let’s look at guidance. For Q4, Ansys expects revenues between $542.3 million and $582.3 million and earnings between $2.36 and $2.67 per share. That’s a pretty wide range. For all of 2020, Ansys sees revenues between $1,610.0 million and $1,650.0 million, and earnings between $6.09 and $6.40 per share.

Here’s a summary of the earnings results of our stocks during earnings season. (Four of our stocks don’t report on the regular March/June/September/December reporting schedule.)

Stock Ticker Date Estimate Result
Eagle Bancorp EGBN 21-Oct-2020 $0.81 $1.28
Globe Life GL 21-Oct-2020 $1.75 $1.75
Silgan SLGN 21-Oct-2020 $0.95 $1.04
Stepan SCL 21-Oct-2020 $1.40 $1.56
Check Point Software CHKP 22-Oct-2020 $1.53 $1.64
Danaher DHR 22-Oct-2020 $1.36 $1.72
AFLAC AFL 27-Oct-2020 $1.13 $1.39
Fiserv FISV 27-Oct-2020 $1.16 $1.20
Sherwin-Williams SHW 27-Oct-2020 $7.75 $8.29
Cerner CERN 28-Oct-2020 $0.71 $0.72
Church & Dwight CHD 29-Oct-2020 $0.67 $0.70
Intercontinental Exchange ICE 29-Oct-2020 $0.99 $1.03
Moody’s MCO 29-Oct-2020 $2.10 $2.69
Stryker SYK 29-Oct-2020 $1.40 $2.14
Broadridge Financial Sol BR 30-Oct-2020 $0.63 $0.98
Trex TREX 2-Nov-2020 $0.38 $0.41
Ansys ANSS 4-Nov-2020 $1.26 $1.36
Becton, Dickinson BDX 5-Nov-2020 $2.52 $2.79
Middleby MIDD 5-Nov-2020 $1.04 $1.34
Hershey HSY 6-Nov-2020 $1.71 $1.86
Disney DIS 12-Nov-2020 ($0.71) ($0.20)

Here’s a look at the unemployment rate during 2020:

Here’s how the S&P 500 performed during the fourth quarter:

Portfolio Changes

Each year, we add five news stocks, and we sell five current positions. The portfolio always stays at 25 stocks (unless there’s a buyout). For 2021, the five new stocks are Abbott Laboratories (ABT)HEICO (HEI)Miller Industries (MLR)Thermo Fisher Scientific (TMO) and Zoetis (ZTS).

​Abbott Labs is a diversified healthcare giant. HEICO makes replacement airplane parts. Miller has a great niche business. They make and sell towing and recovery equipment. If a car or truck needs to be hauled out of something and then hauled away somewhere, odds are Miller’s got a vehicle that can do it. Thermo Fisher makes all the stuff researchers need for lab work. Zoetis is a major player in animal health.

The five sells are Becton, Dickinson (BDX), Eagle Bancorp (EGBN), Globe Life (GL), Hormel Foods (HRL) and RPM International (RPM).

Top Holdings

Ticker Security Description Portfolio Weight %
SYK STRYKER CORP 4.00%
SHW SHERWIN-WILLIAMS CO/THE 4.00%
ICE INTERCONTINENTAL EXCHANGE IN 4.00%
SCL STEPAN CO 3.99%
AFL AFLAC INC 3.98%
HSY HERSHEY CO/THE 3.98%
ZTS ZOETIS INC 3.97%
DHR DANAHER CORP 3.97%
ABT ABBOTT LABORATORIES 3.97%
MCO MOODY’S CORP 3.97%

As of 12.31.2020.

Management Fee

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. The CWS fulcrum fee was 0.65% during December 2020. After the Fund’s December performance, the CWS fulcrum fee will adjust to 0.67% in January 2021.

 

Respectfully,

Eddy Elfenbein
Crossing Wall Street
AdvisorShares Focused Equity ETF (CWS) Portfolio Strategist

 

Definitions:

The S&P 500 Index is a broad-based, unmanaged measurement of changes in stock market conditions based on the average of 500 widely held common stocks. One cannot invest directly in an index.

The ISM Manufacturing Index, which used to be called Purchasing Manager’s Index (PMI), measures manufacturing activity based on a monthly survey, conducted by Institute for Supply Management (ISM), of purchasing managers at more than 300 manufacturing firms.


Before investing you should carefully consider the Fund’s investment objectives, risks, charges and expenses. This and other information is in the prospectus, a copy of which may be obtained by visiting www.advisorshares.com. Please read the prospectus carefully before you invest. Foreside Fund Services, LLC, distributor.

There is no guarantee that the Fund will achieve its investment objective. An investment in the Fund is subject to risk, including the possible loss of principal amount invested. The prices of equity securities rise and fall daily. These price movements may result from factors affecting individual issuers, industries or the stock market as a whole. Shares of the Fund may trade above or below their net asset value (“NAV”). The trading price of the Fund’s shares may deviate significantly from their NAV during periods of market volatility. There can be no assurance that an active trading market for the Fund’s shares will develop or be maintained. In addition, equity markets tend to move in cycles which may cause stock prices to fall over short or extended periods of time. Other Fund risks include market risk, liquidity risk, large cap, mid cap, and small cap risk. Please see prospectus for details regarding risk.

Shares are bought and sold at market price (closing price) not NAV and are not individually redeemed from the Fund. Market price returns are based on the midpoint of the bid/ask spread at 4:00 pm Eastern Time (when NAV is normally determined), and do not represent the return you would receive if you traded at other times.

Holdings and allocations are subject to risks and to change.

The views in this commentary are those of the portfolio manager and may not reflect his views on the date this material is distributed or anytime thereafter. These views are intended to assist shareholders in understanding their investments and do not constitute investment advice.