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.

July 2018 Portfolio Manager Review


For the month of July, the AdvisorShares Ranger Equity Bear ETF (NYSE Arca: HDGE) returned -3.08% in market price while the S&P 500 gained 3.72%.

Rising rates bode poorly for the stock market.   Noted market analyst, the late Martin Zweig, analyzed equity market performance during periods of rising interest rates.  Rising rates affect corporate earnings through rising interest expense.  They also affect investor behavior in that margin loan costs increase as well, often leading investors to sell to reduce margin balances.  In past letters, we have highlighted that margin debt is near record highs.  That continues to be true.

Source: dshort.com                 

Rate hikes when investors are this stretched can lead to sudden and sharp margin liquidation.  Martin Zweig coined the phrase “3 Steps and a Stumble”.  He noted that when the Fed raised rates three times, the market tended to drop soon afterwards.  The Fed raised rates in March and June this year. The Fed says it will raise rates twice more in 2018. This chart from NDR shows when the 3 steps and stumble rule was followed by declines in the Dow Jones Industrial Average going all the way back to 1915. The stock market could be overdue for a major downturn.

Source: Ned Davis Research Inc.         

July brought some caution to financial markets.  Some of the most speculative behaviors were toned down somewhat.  While the market remains overvalued and investors are too optimistic, some of the wildest froth has settled.

Investors’ preference tilted sharply away from growth stocks, especially after Facebook’s earnings report where they cut sales and earnings forecasts.  The higher the forecast growth rate, the worse the stock’s performance in July.  This marks a change from prior months when investors paid almost any price for growth.

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.

The returns to stocks of companies showing high returns on equity and invested capital marks another dramatic turnaround.  In low quality rallies, high ROE company stocks tend to get left behind.  This month, they rallied. 

For the month of July 2018, the largest realized and unrealized gains were LogMeIn, Inc. (LOGM), Skechers U.S.A., Inc. Class A (SKX), Prestige Brands Holdings, Inc. (PBH)and Dycom Industries, Inc. (DY).

LogMeIn, Inc. (LOGM) stock plunged -21.50% after reporting quarterly earnings.  The company managed a modest “beat,” but issued guidance for the full year that fell far short of expectations.  They admitted that the integrations with acquired GoToMeeting was going badly and that they were losing customers.  We exited the position after earnings.

Skechers U.S.A., Inc. Class A (SKX) stock plunged -7.63% on earnings.  The company changed its revenue recognition method which, in conjunction with late period sales, increased the risk of a top-line disappointment.  In addition, inventory build-up raised our concerns about underlying demand and resultant margins.  We are still short and have added on the most recent bounce.

Prestige Brands Holdings, Inc. (PBH) stock slid -6.90% during the month.  The company displays weak organic growth coupled with earnings quality issues.  The company’s low inventory reserves call into question the sustainability of its gross margins.  We have elected to maintain this short position.

Dycom Industries, Inc. (DY) stock eased -5.66%.  Three of the company’s main customers show deterioration in receivables quality, calling into question the quality of revenues. Unbilled receivables continue to grow, which also raises concerns about revenue quality.

The largest realized and unrealized losses for July were Knowles Corp. (KN), Align Technology, Inc. (ALGN) and Aerojet Rocketdyne Holdings, Inc. (AJRD).

Knowles Corp. (KN) stock spiked 13.46% on earnings.  The earnings beat forced us to reevaluate our concerns regarding inventory turnover slowdowns, and we covered our position.

Align Technology, Inc. (ALGN) rose 4.24%.  Expectations are high for this company.  We are concerned that the company is pulling forward sales, particularly in the youth business.  We exited the last position at a small loss but intend to put on a new short at the right time.

Aerojet Rocketdyne Holdings, Inc. (AJRD) spiked 14.28% in July.  Absent a change in contract estimates, the company would have missed earnings estimates.  Low quality earnings coupled with flat backlog raise concerns about the ability to meet estimates in coming quarters.  The company had enjoyed a 100% market share.  However there is new competition from Blue Origin, a new company that has better engineering and better rockets.  The weak back log is a red flag.

Respectfully,

Brad Lamensdorf, Co-Portfolio Manager of HDGE

 


June 2018 Commentary

 

Top 10 Holdings

Ticker Company Name Portfolio Weight %
AJRD AEROJET ROCKETDYNE HOLDINGS -4.26%
SNA SNAP-ON INC -4.09%
K KELLOGG CO -3.81%
OSK OSHKOSH CORP -3.75%
XRAY DENTSPLY SIRONA INC -3.54%
GCP GCP APPLIED TECHNOLOGIES -3.35%
BDC BELDEN INC -3.22%
TPX TEMPUR SEALY INTERNATIONAL I -3.22%
OSIS OSI SYSTEMS INC -3.21%
OMCL OMNICELL INC -3.19%
As of 7/31/2018. Holdings subject to change.

 

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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.