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HDGE: November 2018 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/fund/hdge.

Portfolio Review

For the month of Novemer, the AdvisorShares Ranger Equity Bear ETF (NYSE Arca: HDGE) lost 3.63% in market price while the S&P 500 gained 2.04%.

The Federal Reserve’s balance sheet has begun to show the effects of the Quantitative Easing unwind. To date, approximately $375 billion has been removed from Federal Reserve Bank assets. It should be noted that this reduction is a small fraction of the liquidity that was pumped into the financial system since the global financial crisis. 

The removal of Fed liquidity is one key reason the credit and equity markets have become unsettled over the past two months. The ongoing liquidation of the Fed’s balance sheet will continue to pressure equities.

After the decline in October and the volatility in November, investor sentiment turned more bullish hoping for a market bounce based on positive hopes of a China trade deal (news that was called into question later in the week and again more recently). Investors became more optimistic. Optimistic investor sentiment is historically a contrarian signal that the markets are headed lower. The Investors Intelligence Bulls/Bears poll of market newsletter writers came in at 48% bullish, a 10-point rise in bullishness, while the bears came in at 21%. The number of newsletter writers indicating that a correction was coming also jumped to 40% (see the purple line in the chart below). Meanwhile the NDR crowd sentiment indicator bounced to 59 from 51 the previous week.

Looking closer into investor behavior, we can see that growth stocks have suffered the most this month. While growth and momentum stocks have been sold down, growth has seen the worst of it. This chart shows stocks ranked by the next twelve months’ expected sales growth rates. It clearly shows the fastest forecast growers dropped more than the market and more than expected slow growers.

Momentum stocks also lost ground, but the highest momentum (those gaining the most over the past twelve months, excluding the most recent month) lost a bit less.

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 November 2018, the largest realized and unrealized gains were Spectrum Brands Holdings, Inc.(SPB), Dycom Industries, Inc. (DY), Coty Inc. Class A (COTY) and Realogy Holdings Corp. (RLGY). Spectrum Brands (SPB) stock plunged -23.97% in mid-November on disappointing earnings. The company’s earnings quality had deteriorated substantially since 2017, which raised the risk of both revenue and earnings shortfalls, as we subsequently saw. Also, earnings quality metrics performance called into question the sustainability of reported results. Dycom Industries (DY) stock was down -2.39% on the month. We had multiple earnings quality concerns about the company’s financial position. We questioned the quality of accounts receivables and noticed a negative trend in unbilled receivables. The trend raised concern about the timing of revenue recognition.  Lastly, backlog started to weaken early in 2018 and cash flow performance deteriorated as well. Coty Inc. (COTY) stock dropped -20.95%. Elevated inventory levels created serious concerns about demand. Top-line growth was already deteriorating before the stock started its slide. Gross margins have been under pressure and cash flow performance has been weak.

The largest realized and unrealized losses for November were Oshkosh Corp (OSK), Allegiant Travel Company(ALGT), Cooper Tire & Rubber Company (CTB) and OSI Systems (OSIS). Oshkosh Corp (OSK) stock was up 27.06% in November on strong earnings. We had been concerned about increases in days sales outstanding, which created red flags for us regarding the timing of revenue recognition. The decline in customer advances poses a risk to 2019 results. Allegiant Travel (ALGT) stock rose 17.76% late in November. The budget airline and travel company has made forays into unrelated business ventures such as condo developments, resort development, hotel management, golf, and even local game and family entertainment centers. They also have earnings quality issues. Cooper Tire & Rubber (CTB) 10.72%.  We have been concerned about how trends in working capital portend weaker demand. The company had reversed reserves, providing a significant boost to earnings. In addition, trends in inventory and receivables raised red flags about sustainability of reported results. OSI Systems. (OSIS) stock rose 4.68% in November. Earnings quality metrics have trended poorly in recent periods. Coupled with DOJ investigations, we have been concerned about the quality of reported results.

Top 10 Holdings

Ticker

Company Name

Portfolio Weight

ALGT

ALLEGIANT TRAVEL CO

-3.43%

AJRD

AEROJET ROCKETDYNE HOLDINGS

-3.41%

BABA

ALIBABA GROUP HOLDING-SP ADR

-2.30%

AN

AUTONATION INC

-2.13%

ADS

ALLIANCE DATA SYSTEMS CORP

-2.02%

BGS

B&G FOODS INC

-1.29%

ACLS

AXCELIS TECHNOLOGIES INC

-1.23%

AAL

AMERICAN AIRLINES GROUP INC

-1.12%

AMWD

AMERICAN WOODMARK CORP

-1.04%

BBBY

BED BATH & BEYOND INC

-0.93%

As of 11/30/2018. Holdings subject to change.

 

Respectfully,

Brad Lamensdorf
Ranger Alternative Management
AdvisorShares Ranger Equity Bear ETF (HDGE) Portfolio Manager

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.

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.

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.

short position is the sale of a borrowed investment with the expectation that it will decline in value.


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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.