June 2018 Portfolio Manager Review
For the month of June, the AdvisorShares Ranger Equity Bear ETF (NYSE Arca: HDGE) returned -4.27% (NAV) while the S&P 500 returned 0.62%.
One of Ned Davis Research’s (NDR) most-watched models, its “Big Mo Multi-Cap Tape Composite Model” (shown below) is indicating trouble for the market’s direction. The model was created to give a composite reading on the technical health of the broad equity market. The indicator, plotted in the lower clip of the chart, aggregates the signals of over 100 component indicators. The chart’s top clip plots the S&P 500’s weekly closes. The model uses trend and momentum indicators based on a broad array of our NDR Multi-Cap cap-weighted sub-industry group price indices.
The current reading below the threshold of 53% has been a warning sign associated with negative returns in the market. During the period charted, when the indicator has ranged below the threshold, the market has fallen, on average, 18% over the subsequent year.
Within the broad market, investors have focused on certain categories of companies and stocks. Some of these preferences point to continued investor speculative fervor. One such chart demonstrates that investors have bid up the stocks of unprofitable companies since December. The performance of unprofitable companies, relative to the broader market (here, Two Rivers Analytics’ stock universe) shows this effect.
A similar chart shows the outperformance of momentum stocks since at least mid-2017, with very few pauses. June’s momentum performance was more muted. It could be that this period of relative gains for momentum is ending.
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 2018. All Rights Reserved Two Rivers Analytics. Further Distribution Prohibited without prior permission.
For the month of June 2018, the largest realized and unrealized gains were Yirendai Ltd. Sponsored ADR (YRD), GCP Applied Technologies, Inc. (GCP), Owens-Illinois, Inc. (OI) and Triumph Group, Inc. (TGI).
Yirendai stock fell -9.55% last month. Yirendai is the lending club of China. Seventy-five percent (75%) of their business is in deep subprime. We expect that their write-offs on their lending book will rise sharply and higher than anticipated.
GCP Applied Technologies stock fell sharply over the month, finishing down -8.53%. GCP’s inventory remains elevated relative to sales expectations. In addition, the company has generated significant EBIT growth through the reduction in expenses. We view the level of expense reductions to be unsustainable in future quarters.
Owens-Illinois sank -9.62% in June. Owens-Illinoi’s DSOs remain elevated, which increases the risk of aggressive revenue recognition. Cash flow performance has been weak and below expectations. Profit margins remain under pressure.
Triumph Group shares fell -7.55%. Recent corporate guidance fell well below expectations. We have had long-term concerns over their liquidity and cash flow generation abilities. These concerns persist, and earnings quality has continued to be low.
The largest realized and unrealized losses for June were Actuant Corporation Class A (ATU), Omnicell, Inc. (OMCL) and B&G Foods, Inc. (BGS)
Actuant Corporation stock spiked 25.70% in June. We were concerned about free cash flow growth and elevated receivables. However, the company recently reported a positive quarterly report, boosting the stock and leading us to scale back the position.
Omnicel stock rose 12.67%. Their deferred revenue trends have weakened while DSO remains elevated. Put together, it leads us to question their forward sales expectations. In addition, inventory levels remain elevated and pose significant risks to margins in the coming quarters.
B&G Foods stock rose 6.22% in June. Weak organic sales growth and possible extension of payment terms increases the risk of revenue shortfalls in coming quarters. Finished goods inventory has increased year-over-year as well.
Co-Portfolio Manager of HDGE
Top 10 Holdings
|Ticker||Company Name||Portfolio Weight %|
|AJRD||AEROJET ROCKETDYNE HOLDINGS||-3.64%|
|SKT||TANGER FACTORY OUTLET CENTER||-3.52%|
|NTCT||NETSCOUT SYSTEMS INC||-3.37%|
|GCP||GCP APPLIED TECHNOLOGIES||-3.25%|
|SXT||SENSIENT TECHNOLOGIES CORP||-3.21%|
|XRAY||DENTSPLY SIRONA INC||-3.15%|