CWS: 3rd Quarter 2024 Portfolio Review

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The third quarter was when it finally happened. That’s when the Federal Reserve (Fed) decided to lower interest rates. Before this, the Fed had not cut interest rate for economic reasons in 15 years.

In the Fed’s eyes, the rate cut wasn’t to rescue a sinking economy. Instead, the Fed saw the move as the central bank walking back its extraordinary rate increases from 2022 and 2023. Those increases were need to combat inflation. Since inflation has greatly receded from its peak, there’s less of a need for sky-high interest rates. With the Fed determined to lower interest rates, this led to a movement away from many growth stocks, especially the famed Magnific Seven, that defined the market during the second quarter of 2024. Lower rates are very good for the stock market, and they’re especially good for our style of investing.

Through the first three quarters of 2024, the S&P 500 is having its best performance in 27 years. This is also the best start to an election year in nearly a century. What’s remarkable is how placid the stock market has been. Despite a flurry of scary headlines, the market keeps quietly chugging along. Except for a quick three-day panic in August, this market has been remarkably calm.

This has also been a tale of two markets. For the first half of the year, growth stocks strongly led value, but in the middle of the year, value started to take the lead. In recent weeks, value’s surge against growth has started to wane, but I’m not ready to say the value cycle is over. As long as the Fed is committed to lowering interest rates, that’s good news for higher-yielding sectors of the market.

What’s helped the market, and our fund, is the decreased inflation combined with a labor market that continues to hold up well. Importantly, workers are also getting raises. The recent gains in average hourly earnings are finally outpacing the rate of inflation.

On October 10, shortly after the end of Q3, the Labor Department said that consumer inflation rose by 0.2% for September. That’s low, but it was 0.1% higher than expected. Over the last 12 months, headline inflation has increased by 2.4%. That’s the lowest 12-month rate since February 2021. Not counting food and energy costs, the core rate increased by 0.3%. That was also 0.1% higher than expected. Over the last year, core inflation is running at 3.3%.

What’s been driving the higher costs? Over the last year, shelter costs are up by 4.9%. This is a very important category. Shelter costs make up more than one third of the overall CPI. During September, the price of butter rose by 7.8%, and egg prices were by up 8.4%. Over the last year, egg prices are up by 39.6%.

Wall Street then got a big shock on October 4 when the Labor Department reported that the U.S. economy created 254,000 net new jobs last month. That was well above expectations for a gain of 150,000 new jobs. The unemployment rate ticked down to 4.1%. The unemployment rate was lower at the end of Q3 than it had been in every single month from February 1970 to November 1999. Many of the details in the report are quite good. For example, the labor force participation rate for prime working-age adults is near a multi-decade high.

The jobs gain data for August were revised higher to 159,000. July’s number was increased by 55,000 to a monthly gain of 144,000. I was very happy to see that average hourly earnings increased by 0.4%. That was 0.1% ahead of expectations. Over the last year, average hourly earnings are up by 4% which is ahead of inflation, but not by much. Still, it’s good to see that workers are finally getting a raise. That means more consumers can go out shopping, and that’s good for our stocks.

I’m pleased to report that the third quarter was an outstanding one for the AdvisorShares Focused Equity ETF (CWS). The Net Asset Value gained 10.53% while the traded shares were up by 10.52% (market). That compares with a 5.89% gain for the S&P 500 (including dividends).

Here’s how the fund performed during Q3:

As of 9.30.2024.

Let’s look at some of the stocks that drove our performance during Q3.

We can start with Moody’s (MCO). For Q2, Moody’s said its quarterly revenues increased 22% to $1.8 billion. The breakdown is that Moody’s Analytics increased by 7% to $802 million, while Moody’s Investors Service increased 36% to $1 billion. For the quarter, Moody’s made $3.28 per share. Wall Street had been expecting $3.02 per share. Moody’s operating margin increased by 590 basis points to 49.6%. Moody’s also raised its full-year guidance to a range of $11 to $11.40 per share. The previous guidance was for $10.40 to $11 per share. The company has already made $6.65 per share this year. Moody’s also increased its share-repurchase guidance from $1 billion to $1.3 billion.

Amphenol (APH) had another strong quarter. Sales were up 18% to $3.61 billion, and earnings were up 22% to 44 cents per share. That was three cents higher than expectations. Amphenol’s operating margin got to 21.3%, which is a company record. During Q2, APH bought 3.1 million shares of stock for $190 million. Amphenol also hiked its quarterly dividend by 50% to 16.5 cents per share. The new dividend will be paid on October 9 to shareholders of record as of September 17. For Q3, Amphenol expects sales of $3.7 billion to $3.8 billion. That’s an increase of 16% to 19% over last year. The company sees earnings between 43 cents and 45 cents per share. That’s growth of 10% to 15%.

Fiserv (FI) also had a good quarter. For Q2, the company had organic-revenue growth of 18%, and earnings increased 18% to $2.13 per share. Wall Street was expecting $2.10 per share. Fiserv’s operating margin increased 160 basis points to 38.4%. During Q2, Fiserv bought back 10 million shares for $1.5 billion. For this year, Fiserv expects organic-revenue growth of 15% to 17%. The company increased its full-year guidance to $8.65 to $8.80 per share. That represents growth of 15% to 17% over last year.

Otis Worldwide (OTIS) said its organic sales dipped by 1.2% for Q2. That was less than expected. Despite that drop, this was a good quarter for the elevator folks. Net sales were $3.6 billion, and earnings rose 15.2% to $1.06 per share. That was three cents above consensus. For this year, Otis lowered its net sales range to $14.3 billion to $14.5 billion. The company sees 2024 earnings ranging between $3.85 and $3.90 per share. That’s up 9% to 10% over last year, and it’s an increase of two cents to the low end.

Rollins (ROL) had a decent quarter for Q2. Unfortunately, their earnings merely met expectations, and on Wall Street, that’s seen as a negative. I’m not sure why, but that’s Wall Street for you. That said, I don’t see anything to be concerned about. For Q2, the bug people made 27 cents per share. That’s an increase of 17.4% over last year. ROL’s adjusted operating-income margin increased 140 basis points to 20.9%. I always like to see higher operating margins. ROL’s Organic revenues were up 7.7%, and operating cash flow was $145 million.

On July 24, Thermo Fisher Scientific (TMO) reported that its Q2 revenues fell 1% to $10.54 billion. Its earnings rose 4% to $5.37 per share, which was 25 cents better than expected. Thermo raised its 2024 revenue guidance to a range of $42.4 to $43.3 billion, compared with its previous guidance of $42.3 to $43.3 billion. The company also raised its earnings guidance to a range of $21.29 to $22.07, compared with its previous guidance of $21.14 to $22.02.

In July, Abbott Labs (ABT) reported Q2 earnings of $1.14 per share. That topped Wall Street’s consensus by four cents per share. Abbott had a very good quarter. Quarterly sales came in at $10.38 billion, which was a reported increase of 4.0%, but if we look at the underlying base business, then sales grew by 9.3%. This is important because it adjusts for Abbott’s Covid-testing business, which fell to $102 million from $263 million a year ago. For the quarter, Abbott had double-digit growth for its medical devices. CEO Robert Ford said, “We have a lot of positive momentum heading into the second half of the year and are raising our full-year guidance. Abbott raised its full-year earnings guidance to a range of $4.61 to 4.71 per share. The previous range had been for $4.55 to $4.70 per share. Abbott also narrowed its full-year 2024 organic-sales growth guidance to 9.5% to 10%. The previous range had been 8.5% to 10%, and before that it was 8% to 10%. For Q3, Abbott sees earnings ranging between $1.18 and $1.22 per share. Wall Street had been expecting $1.20 per share. Abbott has increased its dividend for the last 52 years in a row.

Stryker (SYK) reported Q2 earnings of $2.81 per share. That beat Wall Street’s consensus by two cents per share. That was a 10.6% increase over last year. Stryker’s organic sales increased by 9.0% and its operating margin expanded by 30 basis points to 24.6%. Looking at Stryker’s divisions, MedSurg and Neurotechnology posted an organic sales increase of 9.7% while Orthopaedics and Spine posted an increase of 8.0%. For guidance, Stryker said it expects full-year organic sales growth of 9% to 10%. That’s an increase of 0.5% to both ends. Stryker also increased its full-year guidance by five cents at both ends to a range of $11.90 to $12.10 per share.

For Q2, AFLAC (AFL) said it earned $1.83 per share. That was 23 cents above expectations. That’s an increase of 15.8% over last year. The dollar/yen exchange rate pinged the bottom line for seven cents per share. CEO Dan Amos said, “We continue to generate strong capital and cash flows while maintaining our commitment to prudent liquidity and capital management.” On June 30, adjusted book value stood at $29.3 billion, or $52.26 per share. During the quarter, AFLAC spent $800 million to buy back 9.3 million shares. It has 59.2 million shares left in its current authorization. This was a rare instance of the market probably being more impressed by AFLAC’s results than I was (and I was). Make no mistake, AFLAC continues to do very well for us.

American Water Works (AWK) said it made $1.42 per share for its Q2. That includes two cents per share of additional interest income. The quarterly results were five cents below estimates. Despite the miss, the water company increased the low end of its earnings guidance by five cents per share. American Water now sees full-year earnings of $5.25 to $5.30 per share. AWK is a dependable value stock in this environment.

Cencora (COR) is having a very good year for us. For fiscal Q3, COR’s earnings rose 14.4% to $3.34 per share. That was above the Street’s expectation of $3.22 per share. Quarterly revenues increased 10.9% to $74.2 billion. Cencora raised its 2024 EPS guidance range from $13.35 to $13.55, to $13.55 to $13.65. The company now expects revenue growth of 12%. The previous forecast was for 10% to 12% growth. Since Cencora has already made $10.42 per share so far this year, the new guidance implies fiscal Q4 earnings of $2.93 to $3.13 per share. This continues to be a very sound investment for us.

FICO (FICO) said its fiscal Q3 earnings rose 10.4% to $6.25 per share which was seven cents below Wall Street’s estimate. Quarterly revenues rose 12.3% to $447.8 million. This was a minor earnings miss. The company is doing very well. FICO’s business is divided into two units, Scores and Software. Last quarter, Scores’ revenue was up 20% while Software was up 5%. The credit-scoring company increased its full-year revenue guidance by $10 million to $1.7 billion. The company also increased its EPS guidance by 36 cents to $23.16. That implies Q4 earnings of $5.96 per share. FICO’s board approved a stock repurchase program to buy up to $1 billion of the company’s stock.

Silgan Holdings (SLGN) could be the hottest stock in our portfolio. The packaging company reported adjusted Q2 earnings of 88 cents per share for a two-cent beat. The company said it had been expecting earnings to range between 82 and 92 cents per share. We’ve been waiting for a turnaround in Silgan’s business and that appears to be happening. Adam Greenlee, the president and CEO said, “The Silgan team delivered solid second quarter results that were above the midpoint of our guidance range, as our business continues to show strength and improving year-over-year trends.” 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 Q3, Silgan expects earnings between $1.20 and $1.30 per share.

Celanese (CE) had a tough second quarter, but the company is still very sound. The chemical company made $2.38 per share while Wall Street was expecting $2.17 per share. Sales rose 2% to $2.7 billion. Pricing fell 2% while volume increased by 4%. Celanese conceded that it faced “significant external headwinds.” This included “a series of outages and curtailments from multiple suppliers that led to the Company’s declaration of force majeure for acetic acid and VAM sold in the Western Hemisphere.” For Q3, Celanese sees earnings ranging between $2.75 and $3.00 per share. For all of 2024, the company expects earnings between $10.25 and $10.75.

On August 1, Intercontinental Exchange (ICE) said it made $1.52 per share for its Q2. That was a three-cent beat. Revenues increased 23% to $2.3 billion. About half of its revenue is recurring. This is such a strong company. Companywide, ICE had an adjusted operating margin of 59%, and its Exchanges unit had an operating margin of 75%. That’s outstanding. Through Q2, ICE’s operating cash flow was $2.2 billion and adjusted free cash flow was $1.8 billion. ICE’s unrestricted cash was $885 million and outstanding debt was $21.8 billion. Through Q2 ICE paid $519 million in dividends. ICE offers guidance for several metrics except for sales and earnings. Still, ICE looks to be in a very good place.

Ticker	Security Description	Portfolio Weight %
FICO	FAIR ISAAC CORP	5.70%
HEI	HEICO CORP	5.00%
MLR	MILLER INDUSTRIES INC/TENN	4.90%
AFL	AFLAC INC	4.74%
FI	FISERV INC	4.64%
APH	AMPHENOL CORP-CL A	4.48%
ICE	INTERCONTINENTAL EXCHANGE IN	4.31%
MCO	MOODY’S CORP	4.16%
SYK	STRYKER CORP	4.13%
TMO	THERMO FISHER SCIENTIFIC INC	3.98%

As of 9.30.2024.

Not too long ago, many of the “experts” on Wall Street assumed that the economy would be in recession by 2024. That hasn’t happened. If anything, the economy appears to be gaining strength. For the rest of the year, the Federal Reserve appears determined to lower interest rates. In fact, rates could fall another 1% in 2025. The inflation news is getting better, but we still have a way to go to get to the Fed’s target of 2% inflation. The labor market is holding up well. We still want to see workers get higher wages. That’s good for them and for our stocks. I continue to see a conservative and bullish environment for the rest of this year, and into 2025. There will be weak areas. The housing market is a good example. Housing costs are too high, and I’d like to see them come down so new homes are more affordable.

I also expect to see a favorable earnings environment for Q4 and 2025. Of course, there are risks to the market (domestic, weather, geopolitical). If any damage comes to the stock market, conservative stocks will fare much better. This is good news for the AdvisorShares Focused Equity ETF (CWS). I remain very optimistic for the stocks in our fund and our overall strategy. We beat the market during Q3, and I foresee these trends lasting for the rest of 2024 and into next year.

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 September performance, the CWS fulcrum fee will be 0.65% in October 2024.

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