CWS: 4th Quarter 2023 Portfolio Review

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Market Review

Earlier on in the fourth quarter of 2023, it looked like 2023 was going to go down as a mediocre year for stocks. However, in October, that suddenly changed as the S&P 500 raced higher. By the end of Q4, Wall Street was looking back on a solid year for stocks.

What caused this change in market sentiment? I believe the answer is that Wall Street had finally seen enough evidence that the battle against inflation had turned a corner. After a long series of rate hikes, inflation was clearly fading away. Mind you, prices are still going up, but the rate of that increase has certainly slowed down.

The victory against inflation is noteworthy because not too long ago, it was assumed that the Federal Reserve (Fed) would have to sacrifice the labor market to keep inflation at bay. That appears not to be the case. The Fed embarked on one of its most aggressive interest-rate politics in decades, yet the labor market remained relatively sound. The housing market certainly got pinned back but labor did not.

With inflation fading away, investors saw that as a prerequisite for the Fed actually lowering interest rates. If we look at the futures market where traders can make bets on Fed policy, the latest prices show that investors expect the Fed to start cutting interest rates in 2024. This helped spur the market forward during the last several weeks of the year.

Performance Review

I’m happy to say that this benefitted the AdvisorShares Focused Equity ETF (CWS) and our strategy did very well during the fourth quarter. CWS gained 14.18% (market) in Q4 while the net asset value increased by 13.96%. The S&P 500 Total Return Index gained 11.69% during Q4.

For the year, CWS gained 25.38% (market) and the net asset value increased by 25.27%. The S&P 500 Total Return Index increased by 26.29%.

Portfolio Review

Solid Earnings Results

During Q4, we had the Q3 earnings season. Several of the portfolio’s stocks reported outstanding results. For example, on October 18, Abbott Labs (ABT) said it made $1.14 per share for its fiscal third quarter. That was four cents more than Wall Street’s consensus. This issue with Abbott’s earnings is that the slowdown in its Covid business gives the impression that the entire business is slowing down, but that’s not the case.

Looking past Covid, Abbott is doing very well. For Q3, Abbott’s total revenue fell by 2.6%, but excluding Covid, its sales were up 13.8%. The core business is doing just fine. Abbott’s sales of its medical devices increased 17% to $4.25 billion. That beat estimates of $4.16 billion. The company said that full-year revenue growth, excluding Covid, should be in the low double digits. Abbott also narrowed its full-year guidance to a range of $4.42 to $4.46 per share. The previous guidance was for $4.30 to $4.50 per share, so that’s an increase to its midpoint. Abbott is as blue chippy as they get. In December, the company increased its dividend for the 52nd year in a row.

On October 26, Hershey (HSY) said it made $2.60 per share for its third quarter. That was a 20% increase over last year. Wall Street had been expecting $2.45 per share. Net sales increased 11.1% to $3.03 billion, and organic sales rose 10.7%. CEO Michele Buck said, “we remain on track to deliver our full-year sales and earnings commitments.” Hershey expects full-year net sales to rise by 8%, and EPS to increase by 11% to 12%, which is $9.46 per share to $9.54 per share. That was a reiteration of its previous guidance. It’s hard to go wrong with chocolate.

In early November, AFLAC (AFL) reported Q3 earnings of $1.84 per share. This was an increase of 28% over last year’s Q3. Total revenues increased by $300 million to $5.0 billion. The duck stock rattled off several very good quarters, and this report was the latest. Wall Street had been expecting earnings of only $1.46 per share. The company also increased its dividend by 19% to 50 cents per share. This is AFLAC’s 41st annual dividend increase in a row.

Little Miller Industries (MLR) gave us another outstanding earnings report for Q3. I still can’t believe no one on Wall Street follows Miller. Miller’s Q3 sales rose 33.6% to $274.6 million. (My guess had been $280 million.) To put this into some context, Miller has already registered more sales this year, in just three quarters, than in all four quarters of last year. Miller has said that its goal is to reach $1 billion in sales for this year. I thought that was a bold call when Miller first made it. Now I think Miller should be able to clear $1.1 billion in sales.

Miller is also doing a better job of turning those sales into profits. For Q3, Miller earned $1.52 per share. That more than tripled last year’s Q3. Over the last four quarters, Miller has made $4.43 per share. CEO William Miller said, “We continue to see strong demand for all of our products, across all of our geographies. Despite our significant sales growth, we still have a healthy backlog that is substantially more than our historical levels.”

 Portfolio Changes for 2024

The fourth quarter is also the time of year when we make our portfolio changes for the new year. Normally, five new stocks go into the portfolio and five stocks go out. This year we had an extra stock leaving due to Danaher’s spinoff of Veralto.

The five new buys are American Water Works (AWK), Amphenol (APH), Federal Agricultural Mortgage (AGN), McGrath RentCorp (MGRC) and Rollins (ROL). The six sells are Carrier Global (CARR), Danaher (DHR), Middleby (MIDD), Stepan (SCL), Veralto (VLTO) and Trex (TREX).

I’ll briefly go over the new buys. Let’s start with McGrath. The company rents relocatable modular buildings, portable storage containers, electronic test equipment and liquid-containment tanks. This means things like modular classrooms. Or imagine a construction site in the middle of nowhere. McGrath can rent the foremen an instant office. These things are more common than you might expect. But McGrath does more than that. It also rents test equipment and storage tanks. The company has raised its dividend for 32 years in a row.

The Federal Agricultural Mortgage Corporation is better known as Farmer Mac. The company was chartered by Congress in 1988, and five of the 15 members of the Board of Directors are appointed by the President. The idea of Farmer Mac was to create a secondary market for agricultural loans such as mortgages in rural areas. While Farmer Mac’s debts are not guaranteed by the federal government, much of the farm sector is protected by the government. In fact, farming may be one of the most state-protected industries in America. Thanks to its close relationship to the government, Farmer Mac is able to have far lower interest-rate risk than many major banks. AGM has a market value of about $2 billion. The stock is going for about 11 times 2024 estimated earnings.

American Water Works is a public utility that provides water to millions of Americans. Water is a good business to be in. No town wants to be another Flint, Michigan. AWK provides “safe, clean, reliable and affordable drinking-water and wastewater services to more than 14 million people with regulated operations in 14 states.” AWK also has a 50-year contract to provide water and wastewater utility services at 18 military installations.

Amphenol is a former Buy List stock. The company makes electronic and fiber-optic connectors. I stupidly kicked APH off the Buy List in 2010.

Rollins is in the pest-control biz. It’s amazing how few people know about this stock. Rollins is the parent of Orkin. Years ago, Rollins was a diversified company with lots of holdings. It eventually spun off its oil and gas units into another company. What was left was the pest-control business, which is a very nice business to own.

Top Holdings

Ticker Security Description Portfolio Weight %

As of 12.31.2023.

Eddy ElfenbeinRespectfully,

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


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 0.85%, 0.73%, and 0.75% during October, November, and December 2023, respectively. After the Fund’s December performance, the CWS fulcrum fee will remain at 0.71% in January 2024.


Past Commentary


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