CWS: June 2020 Portfolio Manager 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

As we stand at the midpoint of 2020, the stock market this year has been a tale of two markets. From the beginning of the year until March 23, the stock market plunged as the reality of the coronavirus became apparent. It was one of the sharpest drawdowns on record.

Since then, the market has recovered quite impressively as the economy has reopened. Many of the more dire predictions for the virus did not come to pass. Still, we must be vigilant.

For the month of June, the S&P 500 gained 1.84%. Including dividends, the market gained 1.99%. The Net Asset Value of the AdvisorShares Focused Equity ETF (NYSE Arca: CWS) fell by 0.45%. I’ll have more details on our performance in a bit.

The U.S. economy is in an unusual spot. Much of the economy is reopening. There are also reports of a surge in coronavirus cases, especially in areas that had not been hit as hard.

There certainly is a sense that people are restless. They’ve been locked up for several weeks. Apparently, consumers are ready to shop. The last U.S. Retail Sales Report was remarkably strong. The U.S. Census Bureau reported retail sales rose by 17.7%. That beat expectations by 10%.

However, the employment outlook is still weak. The jobs report for June showed a gain of 4.8 million jobs and the unemployment rate fell to 11.1%. We still have a long way to go until the economy gets back to normal.

Overall, the economic figures look pretty bleak, but I think we’ll see a rebound as the year goes on. I suspect that Wall Street has already figured that out and that’s why stocks have rallied over the last three months. In fact, day-trading is popular again. At one point, the Nasdaq Composite closed higher 20 times in 25 days. Don’t be suckered in. I think the day-traders will soon learn a valuable and expensive lesson.

Now let’s look at the some of the stocks that impacted our portfolio in June.

Portfolio Review

Just like May, Middleby’s (MIDD) was another big winner for us in June. In early May, the company said it made $1.46 per share for its Q1 which was ten cents better than expectations.

Middleby makes equipment for the food service industry. Interestingly, the company said that restaurants are seeing week-over-week increases in business. I couldn’t help noticing this nugget in the earnings report: “Sales of certain food items, such as hot dogs and other meat products in our core equipment markets, have experienced recent increased demand.”

At one point, this stock was a 60% loser for us this year. It’s rallied back very nicely. From its March low to its June high, shares of MIDD gained 124%. For June, Middleby gained nearly 16%. This is an interesting stock to watch.

Trex (TREX) was another big winner for us in June. It seems like this stock is near the top of our best-performers list every month. For Q1, the deck-maker earned 73 cents per share. That easily beat Wall Street’s estimates of 63 cents per share.

Quarterly sales rose 12% to $200 million, and gross margin increased by 620 basis points to 44.8%. For last year’s Q1, Trex made 54 cents per share.

Trex said it expects Q2 sales between $180 million and $190 million, although the company withdrew its full-year guidance. They’ve also stopped share repurchases. I completely understand. Trex said it has “no significant sourcing issues,” and that it’s in good shape to ride out the lockdown.

Trex is our #1 performing stock this year. I like this stock a lot. Trex gained more than 8% for us in June.

FactSet (FDS) was our third-best stock in June with a gain of more than 6%. The company reported very good earnings for its fiscal third quarter, which ended on May 31. Quarterly revenues rose 2.6% to $374.1 million, while organic revenues climbed 2.6% to $375.3 million.

FactSet’s adjusted operating margin increased by 1.5% to 35.5%. That’s an important stat to watch. Adjusted diluted earnings rose by 9.2% to $2.86 per share. That beat estimates by 43 cents per share.

Another key stat to watch for FactSet is Annual Subscription Value (or ASV). At the end of May, ASV plus professional services stood at $1.52 billion. This is important because annual ASV retention is over 95%.

At the end of the quarter, FactSet’s client count stood at 5,743. User count rose by 2,199 to 131,095, and employee count now stands at 10,065. That’s up 7.5% in the last year.

During Q3, FactSet bought back 46,689 shares for a total cost of $12.4 million. That’s an average price of $266.09. I’m generally not a fan of buybacks, but given the current FDS share price of $342, that turned out to be a shrewd investment in itself. In March, FactSet’s board added another $220 million to its existing buyback authorization.

Now for guidance. FactSet expects full-year revenues to range between $1.485 billion and $1.49 billion. The high ASV numbers help a lot with revenue-forecasting. FactSet also expects full-year earnings to range between $10.40 and $10.60 per share. That’s an increase from the previous range which was $9.85 to $10.15 per share. Their fiscal year ends on August 31.

Now let’s look at some portfolio laggards. The big loser for us in June was Ross Stores (ROST). For June, Ross fell by 12.1%, but I’m still a fan. The company released its earnings on May 21. Or rather, it would have reported earnings if the stores had been open. Instead, the company closed all of its stores, so Ross showed a big operating loss.

For the 13 weeks ending on May 2, Ross Stores lost 87 cents per share. That’s down from a profit of $1.13 per share one year ago. Ross also halted its dividend.

Total Q1 sales were $1.8 billion. That’s down from $3.8 billion for the same quarter one year ago. Q1 also includes a one-time charge of $313 million or 58 cents per share resulting from the extended period of store closures.

Ross’s Q1 guidance had been for $1.16 to $1.21 per share, but on March 19, they withdrew guidance. The company is a well-run outfit, and it’s prepared to ride out the storm.

Honestly, I’m not terribly concerned about Ross’s latest results. No one can make a profit when all their stores are shut. Still, I’m very confident that Ross will do well once the economy reopens. On May 14, Ross began a phased reopening process. As the economy gets better, Ross Stores will thrive.

Portfolio Attribution

Here’s how all 25 positions performed during the month of June.

Company Symbol 4/30/2020
5/31/2020
Gain/Loss
Middleby MIDD $68.10 $78.94 15.92%
Trex TREX $120.12 $130.07 8.28%
FactSet FDS $307.51 $328.47 6.82%
Danaher DHR $166.61 $176.83 6.13%
Broadridge Fin Solutions BR $121.10 $126.19 4.20%
Ansys ANSS $283.00 $291.73 3.08%
Church & Dwight CHD $75.07 $77.30 2.97%
Moody’s MCO $267.41 $274.73 2.74%
Eagle Bancorp EGBN $32.36 $32.75 1.21%
RPM International RPM $74.78 $75.06 0.37%
Stepan SCL $97.16 $97.10 -0.06%
Hormel Foods HRL $48.83 $48.27 -1.15%
AFLAC AFL $36.47 $36.03 -1.21%
Check Point Software CHKP $109.67 $107.43 -2.04%
Sherwin-Williams SHW $593.85 $577.85 -2.69%
Becton, Dickinson BDX $246.93 $239.27 -3.10%
Silgan SLGN $33.44 $32.39 -3.14%
Globe Life GL $77.02 $74.23 -3.62%
Hershey HSY $135.68 $129.62 -4.47%
Disney DIS $117.30 $111.51 -4.94%
Intercontinental Exch ICE $97.25 $91.60 -5.81%
Cerner CERN $72.90 $68.55 -5.97%
Stryker SYK $195.73 $180.19 -7.94%
Fiserv FISV $106.77 $97.62 -8.57%
Ross Stores ROST $96.96 $85.24 -12.09%

Source: Yahoo Finance

Portfolio Changes

The philosophy of the AdvisorShares Focused Equity ETF is to make portfolio changes just once a year. At the end of the year, we add five stocks and delete five. We made our changes in December, so there were no changes to make this month.

Top Holdings

Ticker Security Description Portfolio Weight %
TREX TREX COMPANY INC 5.95%
FDS FACTSET RESEARCH SYSTEMS INC 5.11%
DHR DANAHER CORP 4.84%
MCO MOODY’S CORP 4.80%
ANSS ANSYS INC 4.72%
CHD CHURCH & DWIGHT CO INC 4.59%
HRL HORMEL FOODS CORP 4.45%
SLGN SILGAN HOLDINGS INC 4.35%
BR BROADRIDGE FINANCIAL SOLUTIO 4.30%
SHW SHERWIN-WILLIAMS CO/THE 4.15%

As of 06.30.2020.

Management Fee

In a first for the ETF industry, the portfolio manager of CWS has “skin in the game.” The manager’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 June 2020. After the Fund’s May performance, the CWS fulcrum fee will adjust to 0.65% in July 2020.

 

Respectfully,

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

 

Past Manager Commentary

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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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.

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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.