CWS: 1st Quarter 2023 Portfolio 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.

The stock market began 2023 on a strong footing. The S&P 500  performed well in January, and by early February, the index was up nearly 9% for the year. I’m pleased to report that the AdvisorShares Focused Equity ETF (CWS) also performed well. However, the market got a little weaker as the quarter wore on.

By the of end of the first quarter, the S&P 500 Total Return Index gained 7.50%. For AdvisorShares Focused Equity ETF, the traded shares were up by 7.05% and the Net Asset Value gained 6.98%.

While CWS trailed the market by a small amount, that was mostly due to a rebound in growth stocks and lower-quality stocks. Last year, many low-quality stocks did very poorly, and that helped CWS beat the overall market soundly in 2022. The first quarter of this year was, to some extent, a reaction to last year’s market, and CWS held up very well.

One example of our success is little Miller Industries (MLR), which is a holding in our fund. Despite being almost completely ignored by Wall Street, Miller was our strongest performer during Q1. The company makes tow trucks. Including dividends, Miller gained more than 33% for us during Q1. What I love about this stock is that currently, no Wall Street investment houses follow Miller. I hope this company gets more attention from Wall Street.

Another big winner for us was FICO (FICO), the credit-scoring firm. The stock gained more than 17% for us for Q1.

I was especially pleased to see CWS perform well considering that the Federal Reserve continued to raise the Federal funds rate. The FOMC increased interest rates twice during the first quarter. The first time, in early February, the Fed increased interest rates by 0.25%. The Fed raised rates again in late March by 0.25%. 

These two rate hikes were notable because they represented a slowdown from the Fed’s previous policy. The Fed had increased interest rates by 0.75% at four consecutive meetings. Then, in December of 2022, the central bank scaled back and went with a 0.50% increase.

The Fed has been increasing interest rates to curtail inflation. Last year, we witnessed the highest inflation in four decades. Initially, the Fed assured investors that inflation was merely transitory. When that turned out not to be the case, the Fed stepped up and started aggressively raising interest rates.

The labor market was very strong during Q1. The unemployment rate dropped to multi-decade lows. On top of that, many employers are desperately looking for new workers. There are nearly two job openings for every unemployed worker, One big concern is that wages have so far failed to keep up with inflation.

The overall market has seen its earnings growth ebb recently. In fact, earnings for the S&P 500 declined during Q4, and look to fall again during Q1.

Now let’s look at the some of the stocks that drove our returns during Q1.

Strong Earnings Helped CWS During Q1

We had several good earnings reports during the Q4 earnings season, which ran from the middle of January until early February. Moody’s (MCO), for example, reported very good earnings for Q4. The credit-ratings agency earned $1.60 per share. That was 16 cents more than expectations. The company had been expecting $1.24 to $1.54 per share.

As I’ve said before, Moody’s is really two companies: Moody’s Analytics and Moody’s Investors’ Service. Unfortunately, the businesses have been moving in opposite directions lately. Last year, MA saw its revenues rise by 15%, while MIS saw its revenues drop by 29%. That’s largely due to a big drop in deal-making on Wall Street.

The data biz is the real key to Moody’s. The other side of the business is very good, but as we can see, it moves with the unpredictable tides of Wall Street.

Still, Moody’s is doing well. For 2022, Moody’s made $8.57 per share. Previously, the company cut its full-year 2022 estimate from a range of $9.20 to $9.70 per share, to $8.20 to $8.50 per share.

For 2023, Moody’s expects earnings between $9.00 and $9.50 per share. That’s pretty good. Wall Street had been expecting $9.28 per share. The company sees revenues rising “in the mid-to-high-single-digit percent range.” That’s roughly in line with consensus. Moody’s also sees operating margin running between 44% and 45%.

Polaris (PII), one of our new stocks this year, gave us a great earnings report and impressive guidance. For Q4, the company earned $3.46 per share. That beat the Street by 19 cents per share. Sales rose 21% to $2.4 billion. The company said that a strong contribution from “volume, price and mix” more than offset forex headwinds.

Polaris divides its business into three segments: Off Road, On Road and Marine. Last year, Off Road delivered a sales increase of 15%. On Road was up 13%, and Marine was up 30%. For the year, Polaris earned $10.40 per share, and sales rose 15% to $8.6 billion.

Polaris expects a flattish 2023. Given the state of the economy, that’s probably the smart thing to do. The company projects earnings to be between $10.10 and $10.70 per share and sales to be between $8.6 and $9.1 billion. Despite the conservative guidance, the guidance is still above Wall Street’s forecast of $9.97 per share.

If PII’s guidance is right, that means the stock is going for about 11 times forward earnings. That’s not bad. I expect to see more strong results from Polaris.

For Q4, Stryker (SYK) reported Q4 earnings of $3.00 per share. That beat the analyst community by 16 cents per share. Stryker’s earnings were up 10.7% over Q4 2021. Organic net sales rose by 13.2%.

Stryker has two units: MedSurg and Neurotechnology, and Orthopaedics and Spine. M&N had Q4 organic-sales growth of 16.9%. O&S had organic-sales growth of 8.4%.

“We delivered outstanding organic-sales growth in the fourth quarter, driven by strong commercial execution and improved supply,” said Kevin Lobo, Chair & CEO. “We expect continued positive sales momentum in 2023 and for adjusted earnings to gradually improve over the course of the year.”

For the year, Stryker made $9.34 per share, and organic net sales were up by 9.7%. For 2023, Stryker expects organic-net-sales growth of 7.0% to 8.5%, and EPS between $9.85 and $10.15. Stryker continues to be a wonderful stock for us.

What to Expect for the Rest of 2023

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

The Federal Reserve may be nearing the end of its rate cycle. The Fed has tried to sound very hawkish, but that may soon bump up against the reality of a slowing economy.  The central bank has made it clear that it’s willing to fight inflation until inflation is no longer a problem.

To be fair to the Fed, it has made significant gains against inflation. The 12-month inflation rate is much lower than it was at its peak in June 2022.

The problem is that the economy is beginning to show cracks. For example, the housing market is very weak. Home prices have been falling for several months. That’s not all. Recently, we’ve also seen sluggish reports on jobs and retail sales. In fact, the Fed’s own staff said it’s likely that the economy will slide into a recession before the end of this year. I agree, but it will likely be a shallow recession.

Overall, I expect the market to favor high-quality stocks such as we own in CWS. A weaker economy can work to CWS’s advantage, as our stocks tend to be much stronger than the overall market. I also don’t expect to see a long and painful recession. This continues to be a very good environment for the AdvisorShares Focused Equity ETF.

Ticker	Security Description	Portfolio Weight %
CARR	MILLER INDUSTRIES INC/TENN	5.01%
SYK	STRYKER CORP	4.40%
TREX	TREX COMPANY INC	4.32%
FICO	FAIR ISAAC CORP	4.28%
INTU	INTUIT INC	4.24%
FISV	FISERV INC	4.23%
HEI	HEICO CORP	4.18%
HSY	HERSHEY CO/THE	4.12%
CARR	CARRIER GLOBAL CORP	4.12%
MCO	MOODY’S CORP	4.12%

As of 03.31.2023.

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% during March 2023. After the Fund’s March performance, the CWS fulcrum fee will remain at 0.85% in April 2023.

​​