CWS: 4th Quarter 2022 Portfolio Review

The fourth quarter of 2022 marked a difficult end to a difficult year. In 2022, the S&P 500 suffered its fourth-worst year in the past 80 years. Some of the poor performance was due to bad timing: the stock market peaked on the first trading day of the year.

The stock market was also plagued by the highest inflation rates in 40 years. Moreover, the Federal Reserve attacked inflation with seven interest-rate hikes during the year. Until the rate increases came, the Fed had kept interest rates near 0%.

Throughout the year, investors were tempted by several bear-market rallies. These upturns fooled investors into thinking the worst was behind them, yet each rally fizzled and stocks dropped to another low. There have been worse years for investors than 2022, but there haven’t been many that were more frustrating.

The drop in stock prices wasn’t felt evenly. The greatest pain was concentrated in the stocks that had done so well during the Covid rally. With the Fed and the government responding so aggressively to Covid, risk was taken off the table for many investment sectors. As a result, high-risk areas of the market soared. Once the Fed started to raise interest rates, the high-risk areas fell dramatically.

The newfound emphasis on quality and conservatism was very good news for the AdvisorShares Focused Equity ETF (CWS). The Net Asset Value of the fund gained 15.65% during the fourth quarter. The traded shares gained 16.12%. This was one of our best quarters in the history of the fund. The S&P 500 had a more difficult go of it. During the fourth quarter, the S&P Total Return Index gained 7.56%.

For the entire year, Net Asset Value of the AdvisorShares Focused Equity ETF fell by 9.54%. The traded shares lost 10.54%. This was far better than the performance of the S&P 500 Total Return Index, which lost 18.11%.

Outstanding Earnings Results

Several of our stocks reported outstanding results. One example is FICO (FICO), which boasted strong performance. For the quarter, the credit-scoring outfit earned $4.40 per share. That easily beat Wall Street’s forecast of $4.12 per share. Quarterly revenues rose 4.2% to $348.7 million.

For the new fiscal year, which ends in October 2023, FICO said it expects revenues of $1.475 billion and earnings of $19.42 per share. That’s revenue growth of just over 7%, and EPS growth of 12.8%. That’s a very bold outlook. Wall Street had been expecting $18.36 per share. Traders loved the report, and FICO gapped up 31% in one day.

Intercontinental Exchange (ICE) posted a nice earnings beat. For Q3, the exchange company earned $1.31 per share. That topped Wall Street’s forecast by four cents per share.

Quarterly revenues edged up 1% to $1.8 billion. The exchanges provided $1 billion in revenue. Fixed income and data services added $534 million, and mortgage technology generated $276 million. (The key for ICE is the data.)

ICE has a wonderful business. For Q3, ICE’s operating margin was 60%. That’s an increase of 176 basis points. The shares got a nice 3% bounce after the earnings report.

Silgan Holdings (SLGN), our favorite container company, had another strong quarter. Q3 earnings rose 25% to $1.27 per share. That beat Wall Street’s consensus by five cents per share. Net sales rose 19.3% to $1.97 billion. (How come more people don’t know about these guys?) The shares popped nearly 4% after the report.

Stepan (SCL), the specialty-chemical company, had a blowout quarter. For Q3, the company earned $2.01 per share. That’s up from $1.57 per share for last year’s Q3, and it easily beat Wall Street’s consensus of $1.60 per share.

For the first three quarters of 2022, Stepan made $6.06 per share. That’s a nice increase from the $5.20 per share it made at the same point last year.

Stepan also raised its quarterly dividend by 9% to 36.5 cents per share. This is Stepan’s 55th consecutive annual dividend increase.

Portfolio Changes for 2023

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 new buys are AmerisourceBergen (ABC), Celanese (CE), Intuit (INTU), Middleby (MIDD) and Polaris (PII).

Here’s the corporate description of the five new buys:

AmerisourceBergen (ABC) fosters a positive impact on the health of people and communities around the world by advancing the development and delivery of pharmaceuticals and healthcare products. As a leading global healthcare company, with a foundation in pharmaceutical distribution and solutions for manufacturers, pharmacies and providers, we create unparalleled access, efficiency and reliability for human and animal health. Our approximately 44,000 global team members power our purpose: we are united in our responsibility to create healthier futures. AmerisourceBergen is ranked #10 on the Fortune 500 with more than $200 billion in annual revenue.

Celanese (CE) is a global chemical leader in the production of differentiated chemistry solutions and specialty materials used in most major industries and consumer applications. Our businesses use the full breadth of Celanese’s global chemistry, technology and commercial expertise to create value for our customers, employees and shareholders, as well as the corporation itself. As we partner with our customers to solve their most critical business needs, we strive to make a positive impact on our communities and the world through The Celanese Foundation. Based in Dallas, Celanese employs approximately 13,000 employees worldwide and had 2021 net sales of $8.5 billion.

Intuit (INTU) is the global financial technology platform that powers prosperity for the people and communities we serve. With more than 100 million customers worldwide using TurboTax, Credit Karma, QuickBooks and Mailchimp, we believe that everyone should have the opportunity to prosper. We never stop working to find new, innovative ways to make that possible.

Middleby (MIDD) is a global leader in the food-service industry. The company develops and manufactures a broad line of solutions used in commercial food service, food processing and residential kitchens. Supporting the company’s pursuit of the most sophisticated innovation, the state-of-the-art Middleby Innovation Kitchens showcases and demonstrates the most advanced Middleby solutions. In 2022 Middleby was named a World’s Best Employer by Forbes and is a proud philanthropic partner to organizations addressing food insecurity.

As the global leader in powersports, Polaris (PII) pioneers product breakthroughs and enriching experiences and services that have invited people to discover the joy of being outdoors since our founding in 1954. Polaris’ high-quality product lineup includes the Polaris RANGER®, RZR® and Polaris GENERAL™ side-by-side off-road vehicles; Sportsman® all-terrain off-road vehicles; military and commercial off-road vehicles; snowmobiles; Indian Motorcycle® mid-size and heavyweight motorcycles; Slingshot® moto-roadsters; Aixam quadricycles; Goupil electric vehicles; and pontoon and deck boats, including industry-leading Bennington pontoons. Polaris enhances the riding experience with a robust portfolio of parts, garments and accessories. Proudly headquartered in Minnesota, Polaris serves more than 100 countries across the globe.

The five sells are Church & Dwight (CHD), Reynolds Consumer Products (REYN), Ross Stores (ROST), Sherwin-Williams (SHW) and Zoetis (ZTS).

As of 09.30.2022.

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 0.85% during December 2022. After the Fund’s December performance, the CWS fulcrum fee will remain at 0.85% in January 2023.

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3rd Quarter 2022 Commentary