HDGE: 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/hdge.
For the month of September, the AdvisorShares Ranger Equity Bear ETF (NYSE Arca: HDGE) gained 3.45% while the S&P500 lost -3.80%.
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.
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.
|Ticker||Security Description||Portfolio Weight %|
|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.