CWS: 2nd Quarter 2021 Portfolio Review

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Portfolio Review

The second quarter of 2021 was a very good period for the stock market. The U.S. economy continued to recover from the pandemic. Across much of the country, stores and businesses reopened. Importantly, cases rates continued to drop. Many localities rolled back or even ended their Covid restrictions. This helped consumer spending and, in turn, corporate profits.

The stock market was also helped by the Federal Reserve’s commitment to keep interest rates low and help the economy. The Fed has also continued its policy of buying billions of bonds each month. There has been some concern that rising inflation presents a threat to the recovery.

Indeed, consumer prices have been rising sharply. During the second quarter, we experienced some of the highest inflation rates in decades. The Federal Reserve has maintained that these inflation pressures are transitory, and that they mostly affect sectors of the economy related to “re-opening.” Used car prices, for example, are up markedly.

The market and economy have also been helped by unpresented spending by the Federal government. So far, long-term interest rates have remained low. In fact, longer-term rates declined towards the end of the quarter. This generally helps equity valuations.

In large part, the recovery from the pandemic has been better than expected. Wall Street analysts have revised their earnings estimates for the second quarter much higher. At the start of the year, the analyst community had been expecting fairly tepid profit growth for Q2. That’s not so anymore. Analysts now forecast robust profit growth for Q2.

Overall, this has been a good period for the AdvisorShares Focused Equity ETF (CWS). During the second quarter, the traded shares gained 4.43% (market) while the net asset value (NAV) increased by 4.76%.

I want to highlight a few names that drove our performance during the second quarter. One stock in particular, Abbott Labs (ABT), had an unusually dramatic quarter for us. The stock dropped in June after the company lowered its guidance. Ironically, the lower guidance was actually due to good news. The drop in Covid cases led to fewer testing machines. It’s not that Abbott’s normal business was falling off. Instead, the company had received extra business during Covid, and that benefit has receded. In January, Abbott said it expected full-year 2021 earnings of $5 per share. That’s growth of 35% over 2020. Abbott said it now sees 2021 earnings ranging between $4.30 and $4.50 per share. That’s growth of 18 to 23%, which is hardly bad. Still, shares of Abbott dropped 9% following the announcement. However, since then, ABT has worked its way back. This is a good example of the ETF’s buy-and-hold strategy paying off for us. I should point out that once again, the ETF made zero portfolio changes during the entire quarter. Before the end of June, Abbott made back everything it had lost.

Danaher (DHR) is having a good year. Danaher is a low-profile outfit run by brothers Steven and Mitchell Rales. Their strategy has been to buy overlooked niche companies with strong cash flow. In April, the company gave us an outstanding earnings report. Danaher topped Wall Street’s consensus by 44%. For fiscal Q1, Danaher earned $2.52 per share. Wall Street had been expecting $1.75 per share. Danaher’s earnings per share increased by 140% over last year’s Q1, and core-revenue growth was 30%. Danaher sees Q2 core-revenue growth “in the mid-20 percent range,” and full-year core-revenue growth “in the high-teens percent range.” Shares of DHR got a nice bump on June 17 when the company said it’s buying Aldevron for $9.6 billion. Aldevron is a private firm that’s a supplier to Covid-19 vaccine makers. The company has been working with Moderna for several years. Aldevron makes biological components for messenger-RNA-based vaccines. Danaher said the deal will be all in cash.

Last year, Danaher bought GE’s biopharma business. Moderna recently said that Aldevron will supply it with plasmid DNA. From the market low in March 2020 to the end of the second quarter, Danaher has gained more than 120%.

With Abbott and Danaher, I’m glad to see that our investments are not only profitable, but they’ve been important players in the battle against Covid-19.

What to expect for the rest of the year? I continue to be optimistic, especially if the inflation pressures fade. We’re in a period of strong profit growth and low interest rates. This is especially good for the high-quality stocks we hold in the AdvisorShares Focused Equity ETF.

Top Holdings

Ticker Security Description Portfolio Weight %
MIDD MIDDLEBY CORP 4.92%
MCO MOODY’S CORP 4.62%
AFL AFLAC INC 4.48%
TREX TREX COMPANY INC 4.47%
DHR DANAHER CORP 4.47%
HSY HERSHEY CO/THE 4.24%
ZTS ZOETIS INC 4.16%
SHW SHERWIN-WILLIAMS CO/THE 4.14%
SLGN SILGAN HOLDINGS INC 4.12%
TMO THERMO FISHER SCIENTIFIC INC 3.98%

As of 06.30.2021.

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 June 2021. After the Fund’s June performance, the CWS fulcrum fee will remain at 0.65% in July 2021.

 

Respectfully,

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

 

Past 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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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.