CWS: 2nd Quarter 2024 Portfolio Review
Market Review
The second quarter of 2024 was a tale of two markets.
The first market, the land of growth stocks, was largely concentrated around large-cap technology stocks. These stocks did very well during Q2, especially any company that was tied, no matter how distantly, to artificial intelligence. If there was a king of this sector, it surely had to be Nvidia. Q2 was a golden age for the AI trade.
These stocks were probably best represented by the S&P 500 Growth Index. The rest of the market, the value stocks, sadly, didn’t do much of anything during Q2. The spread between growth and value was enormous during Q2.
What aided this divide was a belief that the Federal Reserve (Fed) was in no hurry to lower interest rates. In general, lower interest rates are good for value stocks. As rates stayed elevated, growth stocks prospered, and value stocks lagged. This hung over the market nearly every day during the second quarter.
During the end of Q2, a consensus gradually emerged that the Fed would finally cut interest rates but not until September 2024. This was a major development. The Fed had left interest rates alone for over a year, and it hadn’t cut rates since the appearance of Covid in 2020.
Performance Review
The AdvisorShares Focused Equity ETF (CWS) had tough quarter but that was largely due to outside factors. The broader market was simply uninterested in higher quality stocks. For the quarter, AdvisorShares Focused Equity ETF lost 2.16% (market) although year-to-date, the fund was up 4.63% (market). In contrast, the S&P 500 Total Return Index gained 4.28% during Q2.
Here’s a look at how CWS did during Q2:
As of 7.1.2024.
Portfolio Review
Let’s take a closer look at some of the stocks that drove our gains during Q2. At the top of the list is FICO (FICO). The credit-scoring people delivered again. After the closing bell on April 25, FICO said it made $6.14 per share for Q1. That was up over 28% from a year ago, and it beat Wall Street’s consensus for $5.81 per share. FICO had quarterly revenues of $433.8 million, which was up from $380.3 million for last year’s Q1. CEO Will Lansin said, “We delivered a strong second quarter, posting double-digit growth across all our guided metrics.” Best of all, FICO increased its guidance. For 2024, FICO had been expecting earnings of $22.45 per share on revenue of $1.675 billion. Now the company sees earnings of $22.80 per share on sales of $1.690 billion. FICO has been a big help to us this year.
Miller Industries (MLR), our smallest stock, gave us another excellent quarter. For Q1, the tow-truck company had revenues of almost $350 million. That’s a new company record, and an increase of 23.9% over last year’s Q1. (I wasn’t even close. I had been expecting revenues of $300 million.) I was also impressed by the improvement in Miller’s profit margins. For Q1, Miller’s earnings increased 81.5% to $1.47 per share. Over the last four quarters, Miller has made $5.73 per share.
“After a record year in 2023, our sustained topline growth demonstrates a promising start to 2024,” said William G. Miller, II, Chief Executive Officer of the Company. “Our revenue this quarter was another quarterly record for the Company, driven by a strong demand environment for all of our products. While our product mix this quarter was a headwind, margins for all of our product lines are up compared to the prior year. As we proceed in 2024, we expect to maintain a more moderate, but healthy year over year growth rate, consistent with the guidance of high single-digit growth for 2024 that we provided last quarter.”
Miller increased its dividend by 5.6% to 19 cents per share; plus, it announced a $25 million share buyback. The shares are still going for about 10 times trailing earnings. I’m puzzled why Miller still says it expects full-year growth in the high single digits, after posting 23.9% revenue growth for Q1. Even if Miller has 0% growth for the final three quarters of this year, thanks to the blow-out Q1, it will still post full-year revenue growth of close to 6%. Putting that aside, I’m pleased to see Miller turn into a big winner for us. At one point during the trading day of the earnings report, Miller was up nearly 9%, and it briefly broke above $60 per share. With stuck with Miller and it’s paying off for us.
Moody’s (MCO) had another very good quarter. I’m amazed at how consistently profitable Moody’s is. For Q1, Moody’s had an operating margin of 50.7%. Q1 earnings rose 13% to $3.37 per share. That was above Wall Street’s forecast of $3.04 per share. Revenue growth was 21%. That was 35% at Moody’s Investors Service, and 8% at Moody’s Analytics. Moody’s expects Analytics to have revenue growth this year in the “high-single-digit” range. Moody’s raised the low end of its guidance by 15 cents per share. The new range is $10.40 to $11 per share. Over the last 10 years, Moody’s is up 435%.
Our favorite container stock, Silgan Holdings (SLGN), seems to be on the mend. For Q1, Silgan said it made 69 cents per share. That topped estimates of 65 cents per share. CEO Adam Greenlee said, “We have made significant progress towards our $50 million cost-reduction program and are confident in our ability to deliver $20 million of cost savings in 2024. Importantly, we are on track to deliver our 2024 objectives and are encouraged with the opportunities that remain in 2024 and beyond.” Silgan reiterated its full-year earnings forecast for $3.55 to $3.75 per share. That’s up from $3.40 per share last year. For Q2, Silgan estimates earnings of 82 to 92 cents per share.
On April 23, Fiserv (FI) reported Q1 earnings of $1.88 per share. That was nine cents higher than estimates. It was also an increase of 19% over last year’s Q1. Fiserv grew its organic revenues by 20%, and that includes 36% growth in its Merchant Solutions segment. What impressed me was that Fiserv was able to expand its operating margin by 180 basis points to 35.8%. Also, Fortune named Fiserv one of America’s most innovative companies for the second year in a row. Fiserv reiterated its full-year earnings guidance for growth of 15% to 17%. I think they can top that. Fiserv also increased its full-year guidance by a nickel at each end. The company now sees 2024 earnings of $8.60 to $8.75 per share. That represents growth of 14% to 16%. Fiserv’s initial guidance had been for $8.44 to $8.80 per share.
Top Holdings
| Ticker | Security Description | Portfolio Weight % |
| APH | AMPHENOL CORP-CL A | 5.11% |
| MLR | MILLER INDUSTRIES INC/TENN | 4.88% |
| FICO | FAIR ISAAC CORP | 4.82% |
| HEI | HEICO CORP | 4.73% |
| SYK | STRYKER CORP | 4.30% |
| FI | FISERV INC | 4.26% |
| ROL | ROLLINS INC | 4.23% |
| COR | CENCORA INC | 4.19% |
| AFL | AFLAC INC | 4.19% |
| MCO | MOODY’S CORP | 4.08% |
As of 6.30.2024.
Outlook
Thanks to more favorable inflation reports, the Federal Reserve seems willing to cut interest rates later this year. In fact, the Fed may cut three times before the end of the year.
The U.S. economy continues to expand but at a slow rate. We’re also seeing some weaknesses in the labor market, but it’s not a major problem yet.
Investors are paying attention to the presidential election, which takes place in November. It could be a close contest, and it’s possible we may not know the winner for a few days. An indecisive election could weigh on the market and increase volatility.
Overall, I’m very optimistic for the stocks in the AdvisorShares Focused Equity ETF. These stocks tend to be high-quality stocks that prosper in many environments.
Respectfully,
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.
After the Fund’s June performance, the CWS fulcrum fee will be 0.65% in July 2024.
Past Commentary
Definitions:
A basis point is one hundredth of a percentage point (0.01%).
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.
Before investing you should carefully consider the Fund’s investment objectives, risks, charges and expenses. This and other information is in the prospectus or summary prospectus, a copy of which may be obtained by visiting www.advisorshares.com. Please read the prospectus carefully before you invest. Foreside Fund Services, LLC, distributor.
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.
Shares are bought and sold at market price (closing price) not NAV and are not individually redeemed from the Fund. Market price returns are based on the midpoint of the bid/ask spread at 4:00 pm Eastern Time (when NAV is normally determined), and do not represent the return you would receive if you traded at other times.
Holdings and allocations are subject to risks and to change.
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.
The Morningstar Rating™ for funds, or “star rating,” is calculated for managed products (including mutual funds, variable annuity and variable life subaccounts, exchange-traded funds, closed-end funds, and separate accounts) with at least a three-year history. Exchange-traded funds and open-ended mutual funds are considered a single population for comparative purposes. It is calculated based on a Morningstar Risk-Adjusted Return measure that accounts for variation in a managed product’s monthly excess performance, placing more emphasis on downward variations and rewarding consistent performance. The top 10% of products in each product category receive 5 stars, the next 22.5% receive 4 stars, the next 35% receive 3 stars, the next 22.5% receive 2 stars, and the bottom 10% receive 1 star. The Overall Morningstar Rating for a managed product is derived from a weighted average of the performance figures associated with its three-, five-, and 10-year (if applicable) Morningstar Rating metrics. The weights are: 100% three-year rating for 36-59 months of total returns, 60% five-year rating/40% three-year rating for 60-119 months of total returns, and 50% 10-year rating/30% five-year rating/20% three-year rating for 120 or more months of total returns. While the 10-year overall star rating formula seems to give the most weight to the 10-year period, the most recent three-year period actually has the greatest impact because it is included in all three rating periods. Past performance is no guarantee of future results.
©2024 Morningstar, Inc. All Rights Reserved. Morningstar and/or its content providers are the proprietors of this information; do not permit its unauthorized copying or distribution; do not warrant it to be accurate, complete or timely; and are not responsible for damages or losses arising from its use. Past performance is no guarantee of future results.