CWS: 4th Quarter 2021 Portfolio Review

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Portfolio Review

During the fourth quarter of 2021, the stock market faced significant challenges from all sides. Let’s start with the most serious. Near the end of the quarter, the Omicron variant of Covid spread rapidly across the country, and around the world.

The U.S. economy experienced its worst bout of inflation in four decades. The country also faced a widespread supply-chain crisis. Prices for items like used cars skyrocketed beyond comprehension.

Amid all this drama, the Federal Reserve decided to adopt a more aggressive stance with its monetary policy. By the end of the fourth quarter the central bank strongly suggested that its first rate hike in four years wasn’t too far off.

Despite these challenges the stock market put on an impressive performance in 2021. The S&P 500 gained more than 28% for the year. The index made 70 new all-time highs. In fact, the market came close to making an all-time high in the number of all-time high. Ultimately, 2021 trailed 1995’s record in the number of new highs. Still, the market proved to be incredibly resilient.

I’m pleased to say that our ETF continues to perform well. We’re now in our sixth year and we made several new highs in Q4. During the fourth quarter, the traded shares of the AdvisorShares Focused Equity ETF (CWS) gained 15.00%, while the Net Asset Value of the shares increased by 13.63%. That was better than the S&P 500 Total Return index, which gained 11.03% for the quarter.

More Strong Earnings from Our Stocks

Several of our stocks reported outstanding results during Q4. One example is Thermo Fisher Scientific (TMO). The company said it made $5.76 per share for Q3. That easily beat Wall Street’s estimate of $4.67 per share.

Q3 revenue increased by 9% to $9.33 billion. Of that, COVID-19 response revenue was $2.05 billion. Thermo’s adjusted operating margin was 29.8%, compared with 32.9% in the third quarter of 2020.

Thermo also increased its full-year revenue guidance by $1.2 billion to $37.1 billion. That’s revenue growth of 15%. The company is also raised its EPS guidance by $1.30 to $23.37. That’s growth of 20% over last year. For the year, shares of TMO gained more than 43% for us.

In October, we got another outstanding earnings report from AFLAC (AFL). In my opinion, this has to be one of the most consistent stocks around. For Q3, the duck stock beat the Street by 21 cents per share. Total revenues fell to $5.2 billion for this quarter, compared with $5.7 billion for last year’s Q3.

Basically, business is flat in Japan, while it’s improving in the U.S., especially for larger businesses. AFLAC’s annualized ROE in the third quarter was 10.6%. The weaker exchange rate pinged earnings for two cents per share.

AFLAC has usually been very good about providing earnings guidance. Understandably, the company has suspended guidance during the pandemic. AFLAC gained over 31% for us in 2021.

Stepan (SCL) also had a solid earnings report. This is a relatively quiet stock of ours, but it’s been a strong company. For Q3, Stepan said it made $1.57 per share. That beat the Street by 15 cents per share.

Like many companies, Stepan said it was impacted by supply-chain disruptions. They also said that foreign-exchange headwinds dinged two cents from their bottom line. Overall, sales were up 30%, but sales volume wasn’t up that much. That means that Stepan has been benefiting from price increases.

CEO F. Quinn Stepan, Jr. said, “The Company had a solid first nine months of 2021 and delivered record year-to-date results. Both reported net income and EPS were up 25%, and both adjusted net income and adjusted EPS were up 22% versus the first nine months of 2020.” Operating income at Stepan’s Polymer division was down 12%, but that was mostly due to compensation from the Chinese government in last year’s Q3.

The best news is that Stepan boosted its dividend by three cents per share, from 30.5 cents to 33.5 cents per share. This is Stepan’s 54th consecutive annual dividend hike. The board also approved $150 million for a share-buyback program.

Portfolio Changes for 2022

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

The five news buys are Carrier Global (CARR), Fair Isaac (FICO), Otis Worldwide (OTIS), Reynolds Consumer Products (REYN) and Science Applications International (SAIC).

Carrier is a major name in the heating, ventilation and air conditioning (HVAC) biz. The company has 56,000 employees. Carrier also has a refrigeration business and a fire-and-security business.

Fair Isaac is the leading name in credit scoring. The company protects 2.6 billion payment cards from fraud.

Otis Worldwide is the world’s leading elevator company. Every day, two billion people catch a ride on Otis’s products.

Reynolds Consumer Products had its IPO in 2020. You can find a Reynolds product in 95% of U.S. households (Reynolds Wrap, Hefty Bags).

Probably the best way to describe Science Applications International is by calling them tech support for the Pentagon. Their reach can be found on the battlefield and in foxholes to outer space and cyber space.

The five sells were Ansys (ANSS), Cerner (CERN), Check Point Software (CHKP), Disney (DIS) and Middleby (MIDD). We’re letting Cerner go because the company got a generous buyout offer from Oracle.

Top Holdings

Ticker Security Description Portfolio Weight %
REYN REYNOLDS CONSUMER PRODUCTS I 4.01%
CHD CHURCH & DWIGHT CO INC 3.99%
MLR MILLER INDUSTRIES INC/TENN 3.97%
HSY HERSHEY CO/THE 3.96%
CARR CARRIER GLOBAL CORP 3.95%
TMO THERMO FISHER SCIENTIFIC INC 3.94%
OTIS OTIS WORLDWIDE CORP 3.94%
SHW SHERWIN-WILLIAMS CO/THE 3.94%
DHR DANAHER CORP 3.94%
TREX TREX COMPANY INC 3.93%

As of 12.31.2021.

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 2021. After the Fund’s December performance, the CWS fulcrum fee will remain at 0.65% in January 2022.

 

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.


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