CWS: 1st Quarter 2022 Portfolio Review

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Portfolio Review

The first quarter of 2022 marked an important turning point for financial markets, and for the AdvisorShares Focused Equity ETF (CWS).

For the first time in two years, Covid-19 was no longer the foremost concern for investors. However, despite improved case numbers for Covid-19, the world economy still had to grapple with its aftereffects, such as troubling supply-chain issues.

Instead of Covid, investors face new challenges. For example, during Q1, the Federal Reserve raised short-term interest rates for the first time since 2019. The Fed also signaled that it intends to raise interest rates several more times this year, and most probably a few times in 2023 as well. As part of getting back to normal, the yield curve has flattened dramatically.,

When Covid-19 first struck, the Federal Reserve responded quickly and massively. Now, the central bank is facing the consequences of its actions. The Fed has also outlined its plans to reduce its extraordinarily large balance sheet.

During the first quarter of 2022, investors also had to face the highest inflation numbers in four decades. As Lael Brainard (U.S. Federal Reserve board member and confirmed future Fed Vice Chair) recently pointed out, inflation falls particularly hard on lower-income consumers. Historically, inflation has been troublesome for stocks. For example, during the 1970s, the Dow Jones Industrial Average gained a total of 38 points. At the current rate, inflation eats nearly $80,000 of a $1 million portfolio every year.

During Q1, the stock market faced a quick setback. The S&P 500 reached its highest closing in history on the first trading day of the 2022. A little over two months later, the index had shed 13%. While that may sound unpleasant, as far as market corrections go, it’s fairly mild. Still, it was another obstacle for investors.

Unfortunately, investors are also facing the fallout from Russia’s invasion of Ukraine. In particular, the war has upended commodity and foreign-exchange markets. In just a few days, prices at the pump jumped 70 cents per gallon.

Financial authorities across the globe have imposed sanctions against the Russian government and many high-profile Russian citizens. As a financial entity, Russia has nearly been frozen in place.

The Stock Market Has Turned Defensive

Now let’s review our performance during the first quarter. From January through March 2022, the Net Asset Value of the AdvisorShares Focused Equity ETF lost 8.77%, while the traded shares fell 9.80%. That result trailed the S&P 500 Total Return Index, which lost 4.60%, although the AdvisorShares Focused Equity ETF was much less volatile.

Our portfolio has a strong weighting towards high-quality defensive stocks. As the Federal Reserve raises interest rates, that should be a big help for more defensive sectors of the market. By this, I’m referring to businesses who tend to prosper in difficult economies.

A perfect example of this is Hershey (HSY), the chocolatier. When times get tough, consumers generally don’t scale back on their chocolate purchases. Hershey has been one of our best investments this year.

In February, Hershey said that it made $1.69 per share for Q4 2021. That topped the consensus of $1.61 per share. Business is so strong that Hershey has boosted its capacity, yet it still can’t keep up with demand,

Hershey said it expects 2022 earnings of $7.84 to $7.98 per share. That’s a very optimistic outlook. The consensus on Wall Street had been for $7.57 per share. Including dividends, Hershey gained more than 12% for us during the first quarter.

The stock has more than doubled in four years. I expect to see more gains from Hershey in the months ahead.

Another strong investment for us has been FICO (FICO). This is one of our new stocks this year. FICO is returning to our portfolio after several years, and it’s already doing well for us. On January 27, FICO said it made $3.70 per share for its fiscal Q1. That’s up from $2.74 per share for last year’s Q1. Wall Street had been expecting just $3.36 per share.

This was a very good quarter for FICO. Its free-cash flow rose by 65% to $124 million. FICO’s software revenue was mediocre, but that was made up for by strong performance from its scores business. FICO is a good example of a company that has an enviable hold on its market.

For 2022, FICO expects full-year earnings of $14.12 per share. The stock jumped more than 16% on the news. FICO finished the first quarter with a year-to-date total return of 7.5%.

Another investment that’s proving to be highly profitable is Thermo Fisher Scientific (TMO). On February 2, Thermo reported Q4 earnings of $6.54 per share. That easily beat Wall Street’s consensus of $5.27 per share.

Q4 was an outstanding quarter for TMO. For the entire year, Thermo made $25.13 per share. That’s an increase of 28% over 2020. The company’s most recent guidance had been for $23.37 per share. Thermo’s revenue grew by 22% to $39.21 billion.

Thermo raised its revenue guidance for 2022 to $42 billion. That’s an increase of $1 billion. Wall Street had been expecting $40.7 billion. Of that, $1.75 billion is expected to be Covid revenue.

The company also raised its 2022 EPS guidance to $22.43. That’s an increase of $1.07 per share. Wall Street had been expecting $21.87 per share. This continues to be a strong company, and I’m very optimistic for Thermo Fisher.

What to Expect for the Rest of 2022

It’s always difficult to predict what financial markets will do, however, I think we can cautiously lay out some expectations.

I expect to see the Federal Reserve continue to raise interest rates this year. In fact, the Fed said that if it weren’t for Russian’s invasion of Ukraine, it they would have raised rates in March by 0.5%. Considering this, I expect to see the yield curve continue to flatten.

A flattening yield curve is traditionally a warning sign for a coming recession. However, I’ll caution that it’s not an immediate signal. The U.S. economy will probably continue to prosper in 2022, but the outlook for next year is not so bright.

I expect that the market’s internal rotation towards defensive stocks will continue. This is good for sectors such as utilities, consumer staples and healthcare. In my opinion, these trends are especially good for the stocks in our AdvisorShares Focused Equity ETF. Despite the slow start to 2022, I expect to see another profitable year for us.

Top Holdings

Ticker Security Description Portfolio Weight %
HSY HERSHEY CO/THE 4.96%
AFL AFLAC INC 4.81%
SAIC SCIENCE APPLICATIONS INTE 4.76%
SLGN SILGAN HOLDINGS INC 4.73%
HEI HEICO CORP 4.66%
FICO FAIR ISAAC CORP 4.66%
CHD CHURCH & DWIGHT CO INC 4.32%
SYK STRYKER CORP 4.31%
FISV FISERV INC 4.23%
ICE INTERCONTINENTAL EXCHANGE IN 4.22%

As of 3.31.2022.

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 March 2022. After the Fund’s March performance, the CWS fulcrum fee will remain at 0.65% in April 2022.

 

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.


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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.