CWS

AdvisorShares Focused Equity ETF

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/fund/cws.

October 2018 Portfolio Manager Review


Ouch! October was not a happy month for Wall Street. This was the worst month for the stock market in seven years. During October, the S&P 500 fell 6.94% (based on price returns).

What happened? Perhaps the biggest event came on October 3, when Fed Chairman Jay Powell suggested that there are more rate hikes to come. Shortly after that, we learned that mortgage rates had hit a seven-year high. A few days after that, we got a lousy report on home sales.

That’s the chain: higher rates from the Fed translated into higher mortgage rates for home buyers. That pushed a lot of first-time buyers out of the market. As a result, home sales faltered. We also have to bear in mind how important housing is to the economy. It’s not just home builders. It’s construction, flooring, electronics, paints, and much more. During October, nearly every stock involved in construction felt some pain.

Let’s look at some numbers. For October, the S&P 500 lost 6.94% (based on price returns). Including dividends, the index lost 6.84%. Our ETF, the AdvisorShares Focused Equity ETF (NYSE Arca: CWS), saw its share price fall 7.2% in October.

Let me walk you through some of our holdings last month to show you what was driving our portfolio. Let’s start with Continental Building Products (CBPX), which was our worst performer for the month. During October, CBPX shed more than a quarter of its value. As a wallboard company, CBPX found itself at the heart of the building-related bear market in October. Interestingly, CBPX really didn’t make any news during October. The third-quarter earnings report was scheduled for early November.

In August, CBPX had a blow-out earnings report for Q2. The wallboard outfit made 59 cents per share, which was 14 cents more than estimates. The details of the report were quite good. Net sales were up 15.5%, while EBITDA rose more than 21%. Gross margins improved to 29.4% from 25.5%. It wasn’t just about price increases; wallboard sales volume rose from 647 million square feet last year to 722 million square feet this year.

At one point, CBPX was our top-performing stock this year. By late August, we were sitting on a YTD gain of nearly 40%. Despite the setback during October, I still like Continental Building Products, and I’m looking for a strong year-end finish.

Our top-performing stock during October was Hormel Foods (HRL). Much like Continental, Hormel owes its strong monthly performance not to its business execution, but due to the type of business it’s in. Hormel is a consumer staples stock. That means that its fortune isn’t so strictly tied to the economic cycle. Or in particular, the housing cycle. After all, when things go bad, folks cut back on luxuries, not Spam. As a result, Hormel Foods thrived during October. The company also didn’t report earnings last month.

In late August, Hormel reported fiscal Q3 earnings of 39 cents per share. That was up 15% from a year ago. The results matched Wall Street’s expectations. I was pleased to see the Spam folks reaffirm their full-year guidance of $1.81 to $1.95 per share. One point of concern is that the company said that tariffs could ping them as much as six cents per share in earnings.

I also wanted to mention Wabtec (WAB), which had a rough month in October. The shares lost just over 20% for the month. At the end of the month, the company said they made 95 cents per share for Q2. That matched Wall Street’s estimate. I should add that this is a crucial time for the company. The big merger with GE Transportation is coming.

Wabtec said they now expect full-year 2018 earnings of $3.85 per share, which excludes merger costs. The company is aiming for a 13% operating margin and $200 million in cash flow. I’m so not worried about Wabtec. The CEO said he expects a strong fourth quarter. The merger with GE Transportation is expected to happen in early 2019. There will be a special shareholder meeting to vote on the deal on November 14.

On October 18, Danaher (DHR) had a good earnings report. The diversified manufacturer reported Q3 earnings of $1.10 per share. That’s a 10% increase over last year. Core revenues rose 6.5%. The company had told us to expect Q3 earnings to range between $1.05 and $1.08 per share.

For Q4, Danaher expects earnings between $1.25 and $1.28 per share. The company also increased its full-year guidance. The old range was $4.43 to $4.50 per share. The new range is $4.49 to $4.52 per share. I was particularly pleased to see Danaher’s operating margins expand to 17.1% from 16.8% a year ago. DHR has been one of our most dependable stocks. 

JM Smucker (SJM) was another surprise winner for October. The jam stock gained more than 5% while so many other stocks were languishing. Again, consumers don’t cut back on their peanut butter purchases during a housing recession. The only important news from Smucker recently was that it completed the divestiture of its Pillsbury baking division. That brought in $375 million for Smucker.

In August, SJM reported fiscal-Q1 earnings of $1.78 per share. That was two cents better than estimates. The company stood by its full-year guidance of $8.40 to $8.65 per share. That means the shares are going for a very good valuation. I expect more good news from Smucker.

Portfolio Attribution

Here’s how all 25 positions performed during the month of October:

Company

Symbol

28-Sep

31-Oct

Gain/Loss

Hormel Foods

HRL

$39.40

$43.64

10.76%

JM Smucker

SJM

$102.61

$108.32

5.56%

Intercont Exchange

ICE

$74.89

$77.04

2.87%

FactSet Research Sys

FDS

$223.71

$223.76

0.02%

Church & Dwight

CHD

$59.37

$59.37

0.00%

Ross Stores

ROST

$99.10

$99.00

-0.10%

Torchmark

TMK

$86.69

$84.66

-2.34%

Ingredion

INGR

$104.96

$101.18

-3.60%

Fiserv

FISV

$82.38

$79.30

-3.74%

Signature Bank

SBNY

$114.84

$109.90

-4.30%

Check Point Software

CHKP

$117.67

$111.00

-5.67%

RPM International

RPM

$64.94

$61.17

-5.81%

AFLAC

AFL

$47.07

$43.07

-8.50%

Danaher

DHR

$108.66

$99.40

-8.52%

Stryker

SYK

$177.68

$162.22

-8.70%

Cognizant Technology

CTSH

$77.15

$69.03

-10.52%

Cerner

CERN

$64.41

$57.28

-11.07%

Carriage Services

CSV

$21.55

$19.06

-11.55%

Becton, Dickinson

BDX

$261.00

$230.50

-11.69%

Alliance Data Systems

ADS

$236.16

$206.18

-12.69%

Moody's

MCO

$167.20

$145.48

-12.99%

Sherwin-Williams

SHW

$455.21

$393.47

-13.56%

Snap-on

SNA

$183.60

$153.94

-16.15%

Wabtec

WAB

$104.88

$82.02

-21.80%

Continent Building Pr

CBPX

$37.55

$27.81

-25.94%

Source: Yahoo Finance

Portfolio Changes

The philosophy of the AdvisorShares Focused Equity ETF is to make portfolio changes just once a year. At the end of the year, we add five stocks and delete five. We made our changes in December, so there were no changes to make in October.

Top Ten Holdings

Here are the ETF’s top ten holdings as of October 31, 2018:

Company

Symbol

Weighting

Ross Stores

ROST

4.84%

Fiserv

FISV

4.82%

Hormel Foods

HRL

4.77%

Church & Dwight

CHD

4.75%

FactSet Research

FDS

4.58%

RPM International

RPM

4.57%

Intercontinental Ex

ICE

4.37%

Danaher

DHR

4.25%

Check Point Software

CHKP

4.23%

Becton, Dickinson

BDX

4.21%

 

Respectfully,

Eddy Elfenbein
AdvisorShares Focused Equity ETF Portfolio Manager


 

In a first for the ETF industry, the portfolio manager of CWS has “skin in the game.” The manager’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 0.73% during October 2018. After the Fund’s October performance, the CWS fulcrum fee will adjust to 0.67% in November 2018.
 

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 prices of equity securities rise and fall daily. These price movements may result from factors affecting individual issuers, industries or the stock market as a whole. Shares of the Fund may trade above or below their net asset value (“NAV”). The trading price of the Fund’s shares may deviate significantly from their NAV during periods of market volatility. There can be no assurance that an active trading market for the Fund’s shares will develop or be maintained. In addition, equity markets tend to move in cycles which may cause stock prices to fall over short or extended periods of time. Other Fund risks include market risk, liquidity risk, large cap, mid cap, and small cap risk. Please see prospectus for details regarding risk.

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 to change. 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.

The views in this material were 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.

Definition:

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.

EBITDA stands for earnings before interest, taxes, depreciation and amortization. EBITDA is often used as an indicator of a company's financial performance and as a proxy for the earning potential of a business.