HDGE: 3rd Quarter 2020 Portfolio Manager Review

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Performance

For the month of September, the AdvisorShares Ranger Equity Bear ETF (NYSE Arca: HDGE) gained 3.45% while the S&P500 lost -3.80%.

Markets Review

The Rubber Band of the Market is Stretched Too Far

Market valuations continue at nosebleed levels. The chart below, courtesy of Advisor Perspectives, shows the price / earnings ratio is more than three standard deviations above its mean. This chart reflects data back to the 1800’s and demonstrates that we are in uncharted territory.

Similar to the opportunities available at the lower extremes at the bottom of the 2008 crisis, there is opportunity today, but in the other direction. When investor behavior begins to normalize, it will drive valuations down, probably overshooting to the down-side. While continued Fed liquidity could push the market higher from here, we continue to believe risks are extremely high. Our portfolio is positioned to take advantage of this opportunity.

Other indicators confirm that the “rubber band is stretched too far”. This chart, from Northman Trader, shows the percentage of Nasdaq 100 stocks trading above their respective 200 day moving averages. We see that when that percentage exceeds a mid-80s level, it has often presaged a market decline or, at the very least, a pause in a market rise. The current level stands at a multiyear record of 90!

Lastly, this chart shows the put/call ratio measured in open interest. The low ratio here shows that record numbers of investors are not concerned. In fact, they are acquiring call options disproportionately in order to speculate. 

The combination of stretched valuations (P/E), very high recent purchases (% of stocks trading above their 200DMAs) and speculative investor positioning (low put/call ratios) indicates that equity markets are at high risk of a meaningful decline.

Factor performance confirms that, even during this last market downturn, speculative behavior remains intact. The highest momentum stocks are performing relatively better than those with low momentum. These high momentum stocks tend to be the same as those trading above their 200 day moving averages from the chart above.

Stocks were grouped and ranked by the relevant factor as of the end of the prior month and the returns computed for the month just ended. Stocks chosen were based on Two Rivers Analytics’ universe of stocks. © Copyright 2019. All Rights Reserved Two Rivers Analytics. Further Distribution Prohibited without prior permission.

 

Portfolio Review

For the month of September 2020, the largest realized and unrealized gains were PROS Holdings, Inc. (PRO), Stratasys Ltd. (SSYS), Goodyear Tire & Rubber Company (GT)and Coty Inc. Class A (COTY). PROS Holdings (PRO) stock dropped -18.10% in early September then barely bounced. This artificial intelligence software company provides digital optimization primarily for retail businesses. The company announced a private offering of convertible notes. We exited the position. Stratasys (SSYS) fell -16.08% in September. Stratasys makes additive manufacturing (“3-D printing”) technologies. The company missed sales and earnings estimates last quarter, with both product and consumables revenues declining over 30% year over year. Goodyear Tire (GT) fell sharply, by -20.06%. Sales and earnings had deteriorated from the prior year, although results beat sharply lower estimates. Lower volumes amid the Covid-19 pandemic dragged results down. Hedge funds are reducing exposure to Goodyear. Health and beauty stock, Coty (COTY) eased -24.58%. The company reported dismal Q4 results, which missed estimates dramatically, and showed declines from the prior year. The company continues to try to cut its way to growth by reducing expenses.

The largest realized and unrealized losses for September were PVH Corp. (PVH) , MakeMyTrip Ltd. (MMYT) and Canada Goose Holdings, Inc. (GOOS). PVH Corp. (PVH) rose 6.96%. The clothing retailer announced results that exceeded beaten-down earnings, but earnings were still far worse than the prior year. We exited the position. MakeMyTrip (MMYT) lost -9.00%, net on the month. This US, Asian and Latin American online travel company is facing an overwhelming number of travel cancellations because of the coronavirus pandemic, yet the stock rose on hopes of a recovery. We exited the position. Canada Goose (GOOS) stock rose 31.36%. The premium outerwear manufacturer saw a 63% decline in sales year over year but was able to beat lowered forecasts. The stock rose in anticipation of a recovery. We exited the position.

Top Holdings

Ticker Security Description Portfolio Weight %
FCFS FIRSTCASH INC -3.67%
T AT&T INC -3.55%
ALX ALEXANDER’S INC -3.49%
SC SANTANDER CONSUMER USA HOLDI -2.91%
SBGI SINCLAIR BROADCAST GROUP -A -2.26%
IBM INTL BUSINESS MACHINES CORP -2.17%
HSBC HSBC HOLDINGS PLC-SPONS ADR -2.09%
COF CAPITAL ONE FINANCIAL CORP -2.05%
WYNN WYNN RESORTS LTD -1.92%
PSO PEARSON PLC-SPONSORED ADR -1.90%

As of 9.30.2020. Cash not included.

Respectfully,

Brad Lamensdorf
Ranger Alternative Management
AdvisorShares Ranger Equity Bear ETF (HDGE) Portfolio Manager

 

Past Manager Commentary

Definitions:

The S&P 500 Index is a free-float capitalization-weighted index based on the common stock prices of 500 American companies. It is one of the most commonly followed equity indices and many consider it the best representation of the market and a bellwether for the U.S. economy.

A Bear Market (Bearish) is a market condition in which the prices of securities are falling, and widespread pessimism causes the negative sentiment to be self-sustaining. As investors anticipate losses in a bear market and selling continues, pessimism only grows. Although figures can vary, for many, a downturn of 20% or more in multiple broad market indexes, such as the Dow Jones Industrial Average (DJIA) or Standard & Poor’s 500 Index (S&P 500), over at least a two-month period, is considered an entry into a bear market.

A Bull Market (Bullish) is a financial market of a group of securities in which prices are rising or are expected to rise. The term “bull market” is most often used to refer to the stock market, but can be applied to anything that is traded, such as bonds, currencies and commodities.

A short position is the sale of a borrowed investment with the expectation that it will decline in value.

Volatility is a statistical measure of the dispersion of returns for a given security or market index. Volatility can either be measured by using the standard deviation or variance between returns from that same security or market index. Commonly, the higher the volatility, the riskier the security.

Implied Volatility is the estimated volatility of a security’s price. In general, implied volatility increases when the market is bearish and decreases when the market is bullish. This is due to the common belief that bearish markets are more risky than bullish markets.

The Volatility Index (VIX) is the ticker symbol for the Chicago Board Options Exchange (CBOE) Volatility Index, which shows the market’s expectation of 30-day volatility. It is constructed using the implied volatilities of a wide range of S&P 500 index options. This volatility is meant
to be forward looking and is calculated from both calls and puts. The VIX is a widely used measure of market risk and is often referred to as the “investor fear gauge”. The VIX is a contrarian sentiment indicator that helps to determine when there is too much optimism or fear in the market.


Before investing you should carefully consider the Fund’s investment objectives, risks, charges and expenses. This and other information is in the prospectus, a copy of which may be obtained by visiting www.advisorshares.com. Please read the prospectus carefully before you invest. Foreside Fund Services, LLC, distributor.

There is no guarantee that the Fund will achieve its investment objective. An investment in the Fund is subject to risk, including the possible loss of principal amount invested. The Fund may invest in (or short) ETFs, ETNs and ETPs. In addition to the risks associated with such vehicles, investments, or reference assets in the case of ETNs, lack of liquidity can result in its value being more volatile than the underlying portfolio investment. Other Fund risks include market risk, equity risk, short sales and leverage risk, large cap risk, early closing risk, liquidity risk and trading risk. Short sales involve leverage because the Fund borrows securities and then sells them, effectively leveraging its assets. The use of leverage may magnify gains or losses for the Fund. See prospectus for specific risks and details.

Shares are bought and sold at market price (closing price) not NAV and are not individually redeemed from the Fund. Market price returns are based on the midpoint of the bid/ask spread at 4:00 pm Eastern Time (when NAV is normally determined), and do not represent the return you would receive if you traded at other times. 

Holdings and allocations are subject to risks and change.

The views in this commentary are those of the portfolio manager and many not reflect his views on the date this material is distributed or any time thereafter. These views are intended to assist shareholders in understanding their investments and do not constitute investment advice.