HDGE

AdvisorShares Ranger Equity Bear 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 month end performance, please click www.advisorshares.com/fund/hdge.

August 2018 Portfolio Manager Review


For the month of August, the AdvisorShares Ranger Equity Bear ETF (NYSE Arca: HDGE) returned -2.65% in market price while the S&P 500 gained 3.26%.

The market remains overvalued and stretched despite the recent pullback. 

This indicator, designed by Goldman Sachs to signal bear market risk, is at its highest levels from the last 50 years.  It is based on measures of equity valuation, growth momentum, unemployment rates, inflation and the yield curve.  It attained peaks towards the end of the internet bubble and near the end of the housing bubble.  The gauge often precedes a bear market but is sometimes indicative of a prolonged period of low index returns. 

Source: Goldman Sachs                 

Another metric on investor behavior is the Haver Analytics/Citi Research Panic/Euphoria model.  The model relies on their Market Sentiment Composite.  It is intended to track the mood of the investor base and is used as a contrary signal.  Note below that forward returns based on euphoric readings, are low, meaning that the market tends to fall or tread water after the indicator breaches the upper threshold.

Source: Haver Analytics, Pinnacle Data, and Citi Research         

Investors have returned to favoring growth stocks.  July appears to have been an aberration in that growth characteristics lagged.  Through August and into the first week of September, companies with high forecast growths are leading the market again.

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.

This chart shows similar returns to momentum stocks.  Two Rivers defines momentum as the price change for a stock from one year ago to one month ago (to avoid measuring near term mean reversion trends).  Stocks ranked on that basis gained the most last month, outperforming the broader market significantly. 

When growth and momentum perform this strongly, it often translates into “value” stocks underperforming.  This is the case here.  We can see that companies with the highest EV/Sales ratios, the most expensive stocks, are leading the market.  Expensive stocks became more expensive.  Value stocks lagged badly.

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 August 2018, the largest realized and unrealized gains were Dentsply Sirona (XRAY), GCP Applied Technologies (GCP) and Standard Microsystems (SMCI). Dentsply Sirona develops and markets a variety of dental products and equipment.  They bought and merged Sirona into their company in 2016. In our opinion this was a terrible acquisition.  Dentsply overpaid, and the deal was based on generating large synergies which failed to materialize.  The stock fell hard in August due to a poor earnings report, and we exited the position at a profit.  Specialty construction chemicals and building materials manufacturer, GCP Applied Technologies, has been using aggressive revenue recognition in their accounting.  Inventory has risen to quite high levels, which poses a threat to future margins.  EPS has benefited from an unsustainable boost in operating profit.  We remain short this stock.  Standard Microsystems has numerous working capital issues.  Moreover, their delay in filing regulatory SEC documents is a dangerous sign and could result in violations of the NASDAQ listing rules.

The largest realized and unrealized losses for August 2018 were West Pharmaceuticals (WST), Credit Acceptance Corporation (CACC) and Omni Cell (OMCL).  West Pharmaceuticals had elevated receivables, and they adopted a new revenue recognition policy.  These factors raised concerns about future revenue sustainability.  However, their quarterly earnings report was solid, and we exited the position at a loss. Credit Acceptance Corporation finances subprime auto purchases.  They trade at 5x book value, whereas the company’s peers trade at an average of 1x book value.  We believe a bubble has formed in the subprime auto finance sector, and Credit Acceptance Corporation is completely exposed to this market.  Omni Cell has persistent working capital issues, which is our primary concern.  Elevated receivables and a deterioration in deferred revenue present a risk to future revenues.  Elevated inventories could also reduce future profit margins, causing a shortfall in earnings.

Respectfully,

Brad Lamensdorf, Co-Portfolio Manager of HDGE

 


 

 

Top 10 Holdings

Ticker Company Name Portfolio Weight %
CAT CATERPILLAR INC -4.53%
AJRD AEROJET ROCKETDYNE HOLDINGS -4.44%
SNA SNAP-ON INC -4.27%
SXT SENSIENT TECHNOLOGIES CORP -3.81%
BDC BELDEN INC -3.62%
MTZ MASTEC INC -3.36%
ELLI ELLIE MAE INC -3.21%
OSIS OSI SYSTEMS INC -3.14%
PBH PRESTIGE CONSUMER HEALTHCARE -3.10%
EPC EDGEWELL PERSONAL CARE CO -3.03%
As of 8/31/2018. Holdings subject to change.

 

Before investing you should carefully consider the Fund’s investment objectives, risks, charges and expenses. This and other information is in the prospectus and summary prospectus which can be obtained by visiting www.advisorshares.com. Please read the prospectus and summary 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 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. These views are intended to assist shareholders in understanding their investments and do not constitute investment advice.

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.