CWS: 3rd Quarter 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.
After a very nice summer, the bulls on Wall Street finally ran into pushback during September. Actually, that’s not much of a surprise. Historically, September has been the worst month of the year for the stock market over the last 20 years. In fact, it’s also been the worst month over the last 50 and 100 years.
This summer was a golden rally for the market. A small group of growth stocks effortlessly pushed the market higher and higher. This August was the single-best August for the stock market in 36 years.
As soon as we crossed Labor Day, the bears started to growl. One key milestone came when the S&P 500 dipped below its 50-day moving average. This is a key technical indicator that a lot of professional investors like to watch. When the index falls beneath it, that’s often a negative sign, and it was this September. At one point, the S&P 500 was negative for the year.
Let’s look at some numbers. For the month, the S&P 500 lost 3.92%. Including dividends, the index was off by 3.80% for September. I’m happy to report that the AdvisorShares Focused Equity ETF (NYSE Arca: CWS) held up well for us. For the month, the net asset value of the fund fell by 2.38%. It was close but once again, we beat the market.
One important fact is that the stock market has been aided by a very friendly Federal Reserve. The central bank has kept interest rates near 0%.
The Fed has also mentioned its willingness to let inflation drift above 2%. This was the big policy change that it had announced at its Jackson Hole conference. Until then, the Fed had held a target of 2% for inflation. Of course, inflation has been running below that almost consistently.
To be sure, the Fed said that it’s willing to maintain 2% as a long-run goal for inflation. This means, in theory, that the Fed is willing to allow inflation of more than 2%, which can be offset by periods of sub-2% inflation, and it will all somehow add up to 2%.
The Fed’s intentions are perfectly fine, but they’ve consistently misjudged the economy. In trying to fight inflation, they’re fighting an enemy that’s simply not there, and they’ve actually harmed the economy while doing so. I think it’s for the best that they leave interest rates alone for some time.
Let’s take a look at some the stocks that helped power our gains during the month.
Our top-performing stock last month was Stryker (SYK), and that’s not a big surprise. This has been a stellar stock for us.
In July, Stryker reported that it had a tough quarter for Q2, but it still managed to deliver an impressive profit. Quarterly sales fell 24%. Earnings fell 67.7% to 64 cents per share. Wall Street was looking for 55 cents per share.
Here’s the breakdown by Stryker’s three business segments. Orthopaedics had a net sales decline of 29.9%. MedSurg’s net sales dropped 17.3% and Neurotechnology and Spine dropped by 29.6%. It was bad all across the board.
Stryker is in a tough spot since the business environment has been so poor for them. Still, it’s a solid and well-run outfit. Stryker made over 5% for us in September. I expect to see more gains from them in the future.
Danaher (DHR) had another solid month for us. For Q2, Danaher said that quarterly earnings rose 32% to $1.44 per share. That’s a big beat. Wall Street had been expecting $1.09 per share. Revenue increased 19% to $5.3 billion.
For Q3, Danaher sees revenue growth “in the mid- to high-single digit range.” CEO Thomas P. Joyce, Jr., said, “We are very pleased with our second-quarter results—especially in such a challenging environment. Our solid revenue growth, strong cash-flow generation and more than 30% adjusted EPS growth are a testament to our team’s commitment to the Danaher Business System and the outstanding portfolio of businesses that comprise Danaher today.”
Through September, Danaher is a 40% winner for us this year.
Sherwin-Williams (SHW) also did well for us in September. In fact, the paint folks raised their Q3 sales guidance, and their sales and income guidance for the full year. The company now sees Q3 sales rising by 3% to 5% over last year’s Q3. The previous guidance was for sales to be up or down by a “low-single-digit” percentage.
For all of 2020, Sherwin sees sales “flat to up slightly” over last year. The previous guidance was for flat. For full-year earnings, Sherwin sees a range of $20.96 to $21.46 per share. The previous guidance was $19.21 to $20.71 per share. That includes $2.54 per share in an acquisition-related amortization expense. Earnings are due out on October 27.
Not all of our stocks led the market in September. Middleby (MIDD), which was our biggest winner in August, was our biggest loser in September. In August, the company reported earnings of 55 cents per share. That was well above estimates for 41 cents per share. Net sales fell 38%.
I was very impressed by the earnings report. CEO Tim Fitzgerald said, “Our solid financial performance was a result of successfully reducing our cost structure and maintaining strong levels of profitability across all three of our business segments, despite revenue decreases.”
I expect to see more improvement from Middleby. Fitzgerald also said, “As we progressed through the month of July, business activity across all of our foodservice segments demonstrated continual improvement. In particular, we have seen strong demand from quick-serve and pizza restaurants, as well as in the healthcare, convenience stores, and retail categories.”
Middleby pulled back over 8% in September. Don’t worry too much. The stock has still rallied over 110% from its March low.
Here’s how all 25 positions performed during September.
|Church & Dwight||CHD||$95.83||$93.71||-2.21%|
|Broadridge Fin Sol||BR||$137.40||$132.00||-3.93%|
|Check Point Software||CHKP||$126.26||$120.34||-4.69%|
Source: Yahoo Finance
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.
|Ticker||Security Description||Portfolio Weight %|
|TREX||TREX COMPANY INC||6.00%|
|CHD||CHURCH & DWIGHT CO INC||5.10%|
|FDS||FACTSET RESEARCH SYSTEMS INC||4.77%|
|SLGN||SILGAN HOLDINGS INC||4.52%|
|RPM||RPM INTERNATIONAL INC||4.18%|
As of 9.30.2020.
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 0.77% during September 2020. After the Fund’s September performance, the CWS fulcrum fee will adjust to 0.65% in October 2020.