GK: 3rd Quarter 2021 Portfolio Review
Markets during the third quarter were essentially flat but experienced wild bouts of volatility during September when the S&P 500 shed 4.65%. After stocks rose in July and August, investors became alarmed by several issues, including rising inflation, slowing consumer spending and squabbling in Washington, D.C., over the president’s infrastructure proposals.
Against this backdrop, here’s an overview of how our multi-thematic focus in the AdvisorShares Gerber Kawasaki ETF (GK) fared over that period.
TECHNOLOGY / ARTIFICIAL INTELLIGENCE / FINTECH
The growth of FinTech was a bright spot and likely will continue to be one of the dominant investment themes in GK’s future. We added Coinbase (COIN), which became more attractive after tumbling from post-IPO highs, and Silicon Valley Bank (SVB). SVB has a good balance sheet and suffers relatively few loan defaults. It also provides venture capital1, investing heavily in customer businesses, many of which focus on FinTech.
CLIMATE CHANGE / TRANSPORTATION / ENERGY
This theme was uneventful during the quarter. Many of the companies within these sectors were in a holding pattern as U.S. lawmakers haggled over the details of the recently passed infrastructure legislation. Now that the President has signed the infrastructure bill – and with another bill potentially coming before year-end – we expect that to change in future quarters, as EV (electric vehicles) charging firms and other businesses with climate change ramifications could get a boost.
THINGS THAT USED TO BE ILLEGAL
Cannabis companies performed poorly during the 3rd quarter. Much of the momentum surrounding cannabis legalization has begun to die down, souring investment appetite for this market segment. The exception was some cannabis-focused REITs2, such as Innovative Industrial Properties (IIPR), a GK fund holding. Because of the declines in the 3rd quarter, the market prices of several high-profile cannabis firms are now more attractive than they were previously.
We continue to like MGM Resorts International (MGM), whose sports betting app is now available in 11 states, including New Jersey where the betting handle3 exceeded $1 billion in September. That figure, however, could be dwarfed by New York which is slated to authorize mobile betting soon. The BetMGM app is one of the licensed operators in the state. In our opinion, the opportunity is enormous.
Low-interest rates continued to bolster the GK’s real estate-related holdings, including Blackstone (BX), Home Depot (HD) and Lennar (LEN). And while we remain bullish on companies that can disrupt this sector, the Fed will likely get more hawkish in response to rising inflation. Naturally, the need to guard against interest rate risk will impact how we invest in real estate in the quarters to come.
METAVERSE4 (VIDEO GAMES)
We significantly added to our existing Roblox (RBLX) exposure and remain bullish on Electronic Arts (EA) and Take-Two Interactive (TTWO). At the same time, we sold Activision Blizzard (ATVI). We feel the company is plagued by an uninspiring lineup of games and abysmal leadership, which was made clear by recent news reports that disclosed CEO Bobby Kotick had tolerated sexual harassment and other forms of workplace abuse for years. Aside from the fact that the stock has performed poorly, the ethical lapses conflict with Gerber Kawasaki’s internal investing principles.
TOP CONSUMER BRANDS
Consumer spending showed signs of weakness during the late summer, in part due to the COVID Delta variant surging out of control in some parts of the country. This led to a muted third quarter for many retail stocks, including top consumer brands. We believe the outlook going forward is much brighter. Not only has spending rebounded more recently, but the holiday shopping season should give Nike (NKE), Amazon (AMZN), Target (TGT) and others a considerable boost.
STREAMING / SPORTS / ENTERTAINMENT
Netflix (NFLX) continues to spend billions making content. But with a series of new hit shows on the platform, including the juggernaut streaming series “Squid Game,” and its new-found emphasis on games, merchandise and making deals with traditional movie theaters, we think the company is as attractive as it has been in years.
The same, unfortunately, cannot be said about Disney (DIS). Current CEO Bob Chapek was an uninspiring choice to take over for Robert Iger, with the now-departed Kevin Mayer potentially representing a much better choice. Moreover, live entertainment remains a complicated business. While the amusement parks won’t have any trouble attracting visitors, the costs involved with creating a safe environment during a pandemic make them far less profitable.
Meanwhile, despite underperforming during the third quarter, we see Callaway (ELY) having a bright future. Golf experienced a renaissance during the height of the COVID-19 related shutdowns with participation rates in 2020 returning to levels not seen since the height of the Tiger Woods era. As a result, golf club sales soaring. But Callaway does more than make clubs, having completed a merger with Top Golf earlier this year.
People will spend any amount of money to keep their pets happy and healthy. GK’s holdings, Petco (WOOF) and Zoetis (ZTS), are two of the biggest beneficiaries of this phenomenon. We’ve trimmed our Chewy’s (CHWY) position. The company isn’t as well-positioned to deliver medical services as WOOF and ZTS are and, worryingly, is not profitable even after generating $8 billion in sales last year.
HEALTH CARE AND BIOTECH
Moderna (MRNA) was a huge gainer during the quarter (returning over 60% relative to the S&P 500’s -0.30% for the quarter), though its performance was highly volatile, as prone to headline risk as any stock. However, the demand for vaccines is not about to alleviate. It is why we continue to believe in the company through its ups and downs.
It’s a similar story for Fulgent Genetics (FLGT), which drifted lower based on the notion that the demand for testing would decline. But increasingly, to do anything in many big cities across the U.S., you need to be either vaccinated or show proof of a negative test. That should help make Fulgent resilient.
GK aims to provide capital appreciation and outperform the market based on the S&P 500. We came close to doing that during the quarter, as the fund trailed the S&P 500’s performance by a very small margin. So far in the fourth quarter, though, the fund has performed well versus the S&P 500, and we hope to continue the positive momentum into the end of the year.
Performance data quoted represents past performance and is no guarantee of future results. Investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. For the most recent quarter-end and month-end performance, please click here.
1 Venture capital is a type of equity financing that gives entrepreneurial or other small companies the ability to raise funding before they have begun operations or started earning revenues or profits.
2 A real estate investment trust (REIT) is a company that owns, operates, or finances income-generating real estate. REITs pool the capital of numerous investors, making it possible for individual investors to earn dividends from real estate investments—without having to buy, manage, or finance any properties themselves.
3 The handle is the amount of money wagered by bettors.
4 The metaverse is a digital reality that combines aspects of social media, online gaming, augmented reality, virtual reality, and cryptocurrencies to allow users to interact virtually. Augmented reality overlays visual elements, sound, and other sensory input onto real-world settings to enhance the user experience. In contrast, virtual reality is entirely virtual and enhances fictional realities.
|Ticker||Security Description||Portfolio Weight %|
|LIT||GLOBAL X LITHIUM & BATTERY T||4.81%|
|MSOS||ADVISORSHARES PURE US CANN||3.76%|
|IIPR||INNOVATIVE INDUSTRIAL PROPER||3.13%|
|HD||HOME DEPOT INC||2.92%|
|MGM||MGM RESORTS INTERNATIONAL||2.87%|
As of 9.30.2021. Subject to change. Cash is not included.