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CWS: May 2019 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/cws.

Performance Review

May was a tough month for the stock market, and it’s not hard to find the culprit. Investors were alarmed by the increasingly harsh rhetoric regarding a trade war between the United States and China.

Trade drives the global economy. As a result, any threat to open trade can upset financial markets. The S&P 500 reached its highest close ever on April 30, but the selling increased after a pair of President Trump’s tweets were posted on May 5th.

In the tweets, President Trump threatened to escalate the brewing trade war with China. I need to stress that markets aren’t particularly worried about the tariffs the U.S. imposes. Rather, they’re concerned about retaliatory tariffs from China, or other countries, on U.S-made goods. Worst of all, this kerfuffle could spark an all-out trade war in which tariffs are constantly hiked by two sides that refuse to back down.

This is particularly frustrating because it comes amid positive economic news. On Friday, May 3rd, the government reported that the unemployment rate fell to 3.6%. That’s the lowest level since December 1969. If we look at the peacetime rate, then it’s the lowest in 70 years. For women, we now have the lowest jobless rate since 1953. The brief slowdown we saw earlier this year has clearly passed.

The jobs report said the U.S. economy created 263,000 net new jobs in April. If you recall, we had a pretty lousy jobs report in March. The government said the economy created just 20,000 net new jobs in February. That report shocked a lot of people, and some even thought it might be the beginning of a recession. As it turns out, the February slowdown was a minor blip in the economy. The jobs gain for February has now been revised upward to a gain of 56,000 jobs.

For the month of May 2019, the S&P 500 lost 6.58%. Once you include dividends, then the index was down 6.35%. Our AdvisorShares Focused Equity ETF (NYSE Arca: CWS) did much better. For the month, CWS shares lost 1.76% while the net asset value fell 3.06%.

Why did we perform so much better than the rest of the market? The reason comes down to style. We focus on high-quality stocks, and we don’t worry about timing the market. As investors have become more nervous about the market and global trade, they have found safety in more conservative stocks. We’re focused on conservative stocks, so the recent rotation has helped our relative performance.

Portfolio Review

There are a number of stocks that helped power our performance during May. At the top of the list is Broadridge Financial Solutions (BR). On May 15th, the company reported fiscal Q3 earnings of $1.59 per share. That was nine cents better than expectations.

Broadridge had mixed news on its guidance. The company lowered its full-year revenue growth forecast from 3% to 5% down to about 1%. BR reiterated its full-year EPS growth of 9% to 13%. Last year, the company made $4.19 per share, so the current outlook works out to $4.57 to $4.73 per share. Through the first three quarters, Broadridge had earned $2.94 per share.

The CEO said, “After a solid third quarter, Broadridge is very well-positioned to deliver strong full-year results.” I have to agree. For the month of May, Broadridge gained 5.7% for us.  

Hershey (HSY) was another winner for us. The chocolate-maker rebounded well after the earnings disappointment from Q4. For Q1, the chocolatier had adjusted earnings of $1.59 per share. That’s an increase of 12.8% over last year. It also beat Wall Street’s consensus by 13 cents per share.

I was pleased to see Hershey reiterate its full-year guidance of $5.63 to $5.74 per share. The shares jumped after the earnings report, and HSY recently broke out to a new 52-week high. Notice how good companies always bounce back. During May, Hershey gained 5.69% for us.

We had a couple of poor performers in May, but I want to take a close look at Continental Building Products (CBPX). The wallboard company reported Q1 earnings of 42 cents per share. Expectations were for 34 cents per share. Net sales rose 4.5% to $122 million, and wallboard volume increased by 5.5% to 649 million square feet.

These are pretty good numbers. We want to see that the company isn’t merely profiting from higher product prices, but that they’re selling more units as well.

Continental’s profits were up 16.7% from a year ago. Operating income was up 11.3%. Earlier this year, the company had a malfunction at its Buchanan plant, which went off line for several weeks. That’s now been resolved.

These results are good news for a stock that hasn’t done well this year. In fact, the last two earnings reports have been pretty good, but it hasn’t had much impact on the stock price. I’m not worried about Continental’s 11% slide during May. I think the shares will perform well later this year.

Portfolio Attribution

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

Company

Symbol

30-Apr

31-May

Gain/Loss

Broadridge Financial

BR

$118.13

$124.87

5.71%

Hershey

HSY

$124.85

$131.96

5.69%

Cerner

CERN

$66.45

$69.97

5.30%

AFLAC

AFL

$50.38

$51.30

1.83%

Intercont Exchange

ICE

$81.35

$82.21

1.06%

FactSet Research Sys

FDS

$275.87

$278.20

0.84%

Danaher

DHR

$132.44

$132.01

-0.32%

Church & Dwight

CHD

$74.95

$74.41

-0.72%

JM Smucker

SJM

$122.63

$121.56

-0.87%

Hormel Foods

HRL

$39.94

$39.49

-1.13%

Fiserv

FISV

$87.24

$85.86

-1.58%

Raytheon

RTN

$177.59

$174.50

-1.74%

Torchmark

TMK

$87.66

$85.51

-2.45%

Stryker

SYK

$188.91

$183.24

-3.00%

Becton, Dickinson

BDX

$240.74

$233.44

-3.03%

Disney

DIS

$136.97

$132.04

-3.60%

Eagle Bancorp

EGBN

$55.26

$53.08

-3.94%

Ross Stores

ROST

$97.66

$92.99

-4.78%

Moody’s

MCO

$196.62

$182.88

-6.99%

Sherwin-Williams

SHW

$454.83

$419.45

-7.78%

Check Point Software

CHKP

$120.76

$110.28

-8.68%

Continent Building Pr

CBPX

$25.65

$22.82

-11.03%

RPM International

RPM

$60.65

$53.52

-11.76%

Signature Bank

SBNY

$132.07

$114.55

-13.27%

Cognizant Technology

CTSH

$72.96

$61.93

-15.12%

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 2018, so there were no changes to make this month.

Top Holdings

Here are the ETF’s top ten holdings as of May 31, 2019:

Ticker Security Description Portfolio Weight %
FDS FACTSET RESEARCH SYSTEMS INC 4.81%
CERN CERNER CORP 4.69%
MCO MOODY’S CORP 4.60%
DHR DANAHER CORP 4.54%
BR BROADRIDGE FINANCIAL SOLUTIO 4.47%
SJM JM SMUCKER CO/THE 4.36%
DIS WALT DISNEY CO/THE 4.28%
HSY HERSHEY CO/THE 4.26%
SYK STRYKER CORP 4.16%
FISV FISERV INC 4.08%

 

Management Fee

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 May 2019. After the Fund’s May performance, the CWS fulcrum fee will adjust to 0.85% in June 2019.

 

Respectfully,

Eddy Elfenbein
Crossing Wall Street
AdvisorShares Focused Equity ETF (CWS) Portfolio Manager

 

Past Manager Commentary

Definitions:

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.


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. These views are intended to assist shareholders in understanding their investments and do not constitute investment advice.