CWS: 3rd Quarter 2021 Portfolio Review

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Portfolio Review

The third quarter of 2021 was an unusually calm time for the stock market. During the months of June, July and August, the S&P 500 only had seven days when it closed up or down by more than 1%.

Last year, that happened quite frequently. The market was especially volatile in 2020 as Covid-19 started to break out. Through the end of September 2021, the S&P 500 had made 54 record highs this year. That’s the second-most on record, trailing only 1995.

For the quarter, the AdvisorShares Focused Equity ETF (CWS) had a slight loss of 0.62%. That’s compared with a slight gain of 0.58% for the S&P 500.

While the stock market was calm during much of the quarter, there are a number of concerns facing Wall Street. For one, the Federal Reserve has increasingly hinted that it will soon pare back on the enormous bond purchases that it does each month. While the Fed hasn’t given a precise timeline, it’s becoming clear that the Fed will start to rein in its bond buying sometime around the end of this year.

When this happened eight years ago, the infamous “Temper Tantrum,” the bond market quickly sold off. The Fed doesn’t want to repeat that episode.

While the second-quarter earnings season, from mid-July to early August, was quite positive for Wall Street, and especially for us, there are some recent concerns that U.S. economic growth may be flagging. This is not to say that the economy is anywhere near a recession. Rather, it’s that the rate of growth is slowing down. Not too long ago, Wall Street economists had been expecting the economy to grow in real terms by 7% or more during Q3. Lately, however, expectations have been pared back to around 4%.

Since our portfolio is concentrated on high-quality stocks, it’s not uncommon to see the portfolio lag during buoyant times for the overall market. Still, many of our individual names continue to perform very well. FactSet (FDS), for example, gained more than 17% for us this quarter.

In late September, FactSet reported earnings of $2.88 per share for its fiscal Q4. That exceeded the company’s own guidance for $2.43 to $2.83 per share. This was the 25th year in row that FactSet has increased its earnings per share (EPS). That’s exactly the type of company we like to focus on.

Another company in our portfolio that I want to highlight is Stryker (SYK). In July, the company reported fiscal second-quarter earnings of $2.25 per share. That was a solid profit, and it beat the Street’s consensus of $2.12 per share. Revenue also came in above consensus ($4.29 billion vs. $4.14 billion).

These are especially good numbers to see because Stryker was greatly impacted by last year’s lockdown. As a result, net sales rose 55.4% from last year’s Q2. To give you a better example, we can look at the organic growth rate by each of Stryker’s business units. MedSurg was up 30%. Neurotechnology and Spine was up over 60% and Orthopaedics was up 50%. Good companies may go through rough times, but they often bounce back strongly.

Stryker also raised its guidance for this year. For 2021, Stryker now expects organic sales growth of 9% to 10% and earnings between $9.25 and $9.40 per share. That’s an increase from the previous guidance of 8% to 10% sales growth, and $9.05 to $9.30 for earnings.

Stryker does a lot of business outside the U.S. That means that if the foreign exchange market holds at its current level, it could add five to 10 cents per share for this year.

I also want to mention Moody’s (MCO). I like this company because it dominates its field. For Q2, the credit-ratings agency earned $3.22 per share. That was up 15% from last year. This was a big earnings beat. Expectations were for $2.74 per share.

Total revenue rose 8% to $1.6 billion. Breaking that down, Moody’s Investors Service was up 4% to $980 million, and Moody’s Analytics was up 15% to $573 million. The company’s adjusted operating margin was 55.4%.

Like Stryker, Moody’s also raised its full-year guidance. They now see full-year earnings ranging between $11.55 and $11.85 per share. The old range was $11.00 to $11.30 per share. This is their second increase in guidance this year. The original range was $10.30 to $10.70 per share. For the first half of this year, Moody’s has made $7.28 per share. That’s up 31% over last year.

Looking ahead, I’m particularly concerned about the strength of the U.S. economy. While growth is slowing down, there’s little reason to fear a recession at the moment. I’m also a little concerned about a frothy housing market. High prices have started to cool off robust demand. Overall, this is an ideal environment for our type of investing which is buying and holding high-quality stocks.

Top Holdings

Ticker Security Description Portfolio Weight %
DHR DANAHER CORP 5.10%
MIDD MIDDLEBY CORP 4.87%
MCO MOODY’S CORP 4.55%
TMO THERMO FISHER SCIENTIFIC INC 4.54%
TREX TREX COMPANY INC 4.49%
FDS FACTSET RESEARCH SYSTEMS INC 4.39%
AFL AFLAC INC 4.38%
ZTS ZOETIS INC 4.37%
SHW SHERWIN-WILLIAMS CO/THE 4.27%
HSY HERSHEY CO/THE 4.15%

As of 09.30.2021.

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