CWS: September 2019 Portfolio Manager Review

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Performance Review

For the month of September 2019, the S&P 500 gained 1.72%. Add in dividends and the index gained 1.87%. Our AdvisorShares Focused Equity ETF (NYSE Arca: CWS) had a decent month. The traded shares gained 0.60%, while the net asset value rose 0.24%.

For the second time this year, the Federal Reserve decided to cut interest rates. The first interest rate cut came in July. The second one came on September 18.

The rate cut this month defined much of the trading for September. What’s interesting is how much of this is a big change in mindset for Wall Street and the Fed. Not that long ago, the Fed had been raising interest rates. In fact, the last hike came in December.

As 2019, wore on the market started to have doubts as to the strength of the U.S. economy. In particular, the manufacturing sector of the economy has appeared weak. The ISM Manufacturing Index recently came in at a 10-year low.

As a result, the bond market soared and yields plunged. Earlier this year, the yield curve actually inverted. This is when short-term rates are higher than long-term rates. A good proxy to watch for Fed policy is the two-year Treasury yield. For much of this year, yields on two-year Treasuries plunged. You could really say that the Fed has been playing catch-up.

Fed Chairman Jay Powell made it clear that these rate cuts are merely “mid-cycle” adjustments and not the start of a long rate-cutting cycle. I’m not so sure he’s right, but for the moment, Wall Street believes him. The futures market shows that Wall Street isn’t expecting a lot more rate cuts this year and next. Perhaps a few, but nothing major.

In this mix, the wild car is trade policy. So far, that’s generated a lot of tweets and headlines but we still haven’t seen much hard data that trade policy is crushing the economy. That may soon change. It’s also a reason why the Fed decided to strike early and not wait for things to start looking bad. There’s a lot of strength in the economy. The September jobs report (released in early October) showed the lowest unemployment rate in 50 years.

Wall Street has also seen a lot less volatility in September. For a brief spot, stocks got jittery during August. We had a few days where stocks fell hard, but for the most part, that volatility faded away in September. Overall, it was a quiet month for trading.

October could be a lot more interesting. That’s when Q3 earnings season starts. Currently, earnings are expected to show a small decline. If that’ right, it would be the first quarterly earnings decline in three years. Since the start of the year, estimates for Q3 earnings have been pared back by about 10%, so the bond market wasn’t just seeing things.

The good news for us that earnings season should be a good time for our portfolio. Now let’s look at what drove our performance in September.

Portfolio Review

Let’s run down some of the stocks that drove our performance during September.

Our big winner was Eagle Bancorp (EGBN) which is interesting for a few reasons. The first is that Eagle didn’t make any news in September. In July, the bank stock got hit hard. The bank’s earnings beat expectations. The problem is that Eagle said the SEC is looking at some third-party transactions involving the bank.

Unfortunately, Eagle is not allowed to say much. It probably involves some local Washington, D.C. political misbehavior. The important fact is that it shouldn’t impact the bank’s operations. While the stock fell hard in July, it saw a nice rebound in September. I think we’ll see even more of this. Eagle was up 9.5% during September. Keep watching Eagle.

Another big winner for us in September was Continental Building Products (CBPX). This is our wallboard stock. CBPX has rallied on hopes that the housing market is improving. That’s a direct outgrowth of bond yields going down. This means mortgage rates are coming down and that’s good for housing stocks like Continental Building.

Continental’s earnings have been quite good, but the stock hasn’t been particularly strong. That’s why it’s good to see a nice bump during September. I think we’ll get another good earnings report from CBPX for Q3. Continental Building rallied 8.5% for us during September.

One of our quieter stocks, Globe Life (GL), also had a very good September. The insurance company recently changed its name from Torchmark. This is probably the most stable stock in our portfolio. It usually doesn’t move much each day. GL gained 7.3% for us last month. This is a good company.

Not all of our stocks were up last month. Our biggest loser in September was FactSet (FDS). For the month, FDS fell 10.7%. The company reported very good earnings for its fiscal Q4. The problem was that their guidance for next year was pretty low.

Let’s start with the good news. FactSet’s quarterly earnings rose 18.6% to $2.61 per share. Wall Street had been expecting $2.47 per share. This was FactSet’s 39th year in a row of revenue growth and 23rd year in a row of EPS growth.

I was particularly glad to see FactSet’s operating margin come in at 33.9%. For the quarter, client count rose by 119 to 5,574. User count rose by 3,871 to 126,833. FactSet’s annual retention rate is running at 89%.

For the whole year, FactSet’s EPS rose to $10.00. Their guidance had been for $9.80 to $9.90 per share. Before that, it was $9.50 to $9.65 per share, so business has been humming along.

On its current guidance, FactSet is being very conservative. The company sees earnings next year (ending in August 2020) ranging between $9.85 and $10.15 per share. Wall Street had expected $10.52 per share.

The stock fell over 9% after the earnings report.  While this is frustrating, there’s no need for concern. FactSet is back where it was a few months ago. Despite the drop, I’m very optimistic for FDS.

Portfolio Attribution

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

Company Symbol 30-Aug-2019 30-Sep-2019 Gain/Loss
Eagle Bancorp EGBN $40.74 $44.62 9.52%
Continental Building Products CBPX $25.14 $27.29 8.55%
Globe Life GL $89.26 $95.76 7.28%
Raytheon RTN $185.32 $196.19 5.87%
JM Smucker SJM $105.16 $110.02 4.62%
Sherwin-Williams SHW $526.75 $549.87 4.39%
AFLAC AFL $50.18 $52.32 4.26%
Ross Stores ROST $106.01 $109.85 3.62%
Hormel Foods HRL $42.61 $43.73 2.63%
Signature Bank SBNY $116.65 $119.22 2.20%
RPM International RPM $67.67 $68.81 1.68%
Check Point Software CHKP $107.70 $109.50 1.67%
Danaher DHR $142.09 $144.43 1.65%
Becton, Dickinson BDX $253.92 $252.96 -0.38%
Cerner CERN $68.91 $68.17 -1.07%
Intercontinental Exchange ICE $93.48 $92.27 -1.29%
Cognizant Technology CTSH $61.39 $60.26 -1.84%
Stryker SYK $220.66 $216.30 -1.98%
Hershey HSY $158.48 $154.99 -2.20%
Fiserv FISV $106.94 $103.59 -3.13%
Broadridge Financial Solutions BR $129.44 $124.43 -3.87%
Moody’s MCO $215.58 $204.83 -4.99%
Disney DIS $137.26 $130.32 -5.06%
Church & Dwight CHD $79.78 $75.24 -5.69%
FactSet FDS $272.09 $242.97 -10.70%

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 September 30, 2019:

Ticker Security Description Portfolio Weight %
MCO MOODY’S CORP 4.80%
HSY HERSHEY CO/THE 4.66%
DHR DANAHER CORP 4.63%
FISV FISERV INC 4.59%
SYK STRYKER CORP 4.58%
SHW SHERWIN-WILLIAMS CO/THE 4.54%
ROST ROSS STORES INC 4.28%
CERN CERNER CORP 4.26%
RTN RAYTHEON COMPANY 4.20%
GL GLOBE LIFE INC 4.19%

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 0.85% during September 2019. After the Fund’s September performance, the CWS fulcrum fee will adjust to 0.85% in October 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.


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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 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.

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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.