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Deep Value Stocks Outpace Markets Last Week, Buoyed by Strong Earnings Expectations

  • Last week, the ALPS Sector Dividend Dogs ETF (SDOG), a deep value portfolio of high-yielding large-cap stocks, rallied nearly 1.0% while the S&P 500 fell over 1.5%, with all ten sectors in SDOG outperforming on a palpable rotation to value stocks. SDOG’s earnings growth, in aggregate, is expected to fare better than the S&P 500 due to its overweight to cyclical sectors that are benefitting from the current inflationary backdrop, as well as stronger expected earnings from its deep value holdings within more defensive sectors.

  • SDOG’s Consumer Staples sector led performance last week, with drug store operator, Walgreens Boots Alliance Inc. (WBA, 2.04% weight*), rising nearly 9% on the back of a 3Q earnings beat that saw the company’s investment into primary medical care centers across its US locations pay dividends. Consumer foods distributor, Kraft Heinz Co. (KHC, 2.18% weight*), also gained 8.17% last week after a positive Goldman Sachs note that highlighted the company’s strong pricing power and cheap valuation.

  • Playing off the positive week for defensives, SDOG Healthcare name, Amgen Inc. (AMGN, 2.25% weight*), surged nearly 10% last week after receiving positive commentary from a number of analysts on its experimental weight loss drug, which is expected to achieve a similar result to Eli Lilly’s (LLY, not in SDOG) blockbuster obesity drug, Tirzepatide. Adding to drug maker outperformance last week, Abbvie Inc. (ABBV, 2.24% weight*), gained over 4% following a positive use extension from the European Medicine Agency (EMA) for its drug that treats acute bacterial skin infections in pediatric patients.

  • SDOG cyclical sector gains were also a highlight last week with Industrials name, 3M Co. (MMM, 2.05% weight*), trading nearly 6% higher after winning permission for an expedited appeal in court to reverse over 230,000 lawsuits accusing the company of deficient earplugs that led to hearing loss. International Paper Co. (IP, 1.70% weight*), in SDOG’s Materials sector, also gained over 3% last week after a positive SeekingAlpha article that touted the company’s strong expected operating margin and high dividend yield. Lastly, the Interpublic Group of Companies Inc. (IPG, 2.14% weight*), returned nearly 4% in SDOG’s Communication Services sector last week on expectations of rising organic growth into 2023 based on the company’s large exposure to health care advertising, which tends to be resilient during a recession.

“The gap in valuation between the most and least expensive stocks in the S&P 500 remains extraordinarily wide. This magnitude of valuation dispersion has historically preceded Value outperformance over the medium term. In the short term, further upward pressure on interest rates should also support Value outperformance.”

– David Kostin, Goldman Sachs Chief Equity Strategist, October 14, 2022

SDOG’s Deep Value Holdings Undergoing a Classic Mean Reversion Story
  • Year-to-date, we have witnessed a massive shift in performance and flows favoring value and cyclical stocks over growth and quality stocks. Deep value, cyclical companies generally perform well prior to an official recession as the earning’s factors that drive those companies tend to also be the macro factors that lead to an eventual economic slowdown (i.e. elevated commodity prices that drive broad-based inflation and, subsequently, higher interest rates). Per Goldman Sachs, “As we saw following last Thursday’s CPI print, further upward pressure on interest rates should support Value outperformance. In addition, Value has historically outperformed around the start of recessions, during the months following CPI peaks, and following the final Fed hike.”

  • According to Bloomberg Intelligence, Energy sector earnings in the S&P 500 are expected to grow 123.3% year-over-year, far outpacing Information Technology’s expected earnings loss of (-6.7%) and affirming the volatility across growth-tilted sectors. Of note, SDOG’s Energy sector names, Exxon Mobil (XOM, 2.28% weight*) and Valero Energy (VLO, 2.24% weight*), are two of the top three largest contributors to positive earnings revisions within the S&P 500, contributing a combined +10.8% to the S&P 500’s overall positive earnings revisions, while growth dependent FAANG names have detracted -19.2%*. SDOG’s 10.6% weight to the Energy sector is more than double the S&P 500’s weight*.

20221017-chart

  • Per Credit Suisse, third quarter earnings revisions for the S&P 500 have been slashed by -7.0% in aggregate since the end of the second quarter, with Energy sector earnings being the only sector with positive revisions (+6.9%).

  • SDOG’s cyclical and defensive (non-cyclical) exposures to deep value names are seeing a classic mean reversion story as these stocks come back in favor for their cheaper valuations and “less bad” investor sentiment.

* Weight in SDOG as of 10/14/2022

Performance Summary
  1 Week YTD 1 Y 3 Y
ALPS Sector Dividend Dogs ETF (SDOG) 0.89% -10.92% -8.92% 21.08%
S-Network Sector Dividend Dogs Index - TR 0.90% -10.73% -8.64% 22.41%
S&P 500 Index - TR -1.55% -23.88% -18.03% 26.82%


Source: Bloomberg L.P., as of 10/14/2022

Performance data quoted represents past performance. Past performance is no guarantee of future results so that shares, when redeemed, may be worth more or less than their original cost. The investment return and principal value will fluctuate. Current performance may be higher or lower than the performance quoted. For current month-end performance call 1-866-759-5679 or visit www.alpsfunds.com. Performance includes reinvested distributions and capital gains.

For standardized performance please click here.

Top 10 Holdings
Exxon Mobil Corp 2.28%   Bristol-Myers Squibb Co 2.24%
Amgen Inc 2.25%   Cummins Inc 2.23%
Gilead Sciences Inc 2.25%   Conagra Brands Inc 2.22%
AbbVie Inc 2.24%   Altria Group Inc 2.20%
Valero Energy Corp 2.24%   Kraft Heinz Co/The 2.18%


As of 10/14/2022, subject to change

Important Disclosures & Definitions

An investor should consider the investment objectives, risks, charges and expenses carefully before investing. To obtain a prospectus containing this and other information, call 1-866-759-5679 or visit www.alpsfunds.com. Read the prospectus carefully before investing.

Shares are not individually redeemable. Investors buy and sell shares on a secondary market. Only market makers or “authorized participants” may trade directly with the Fund, typically in blocks of 5,000, 25,000 or 50,000 shares.

Performance data quoted represents past performance. Past performance is no guarantee of future results; current performance may be higher or lower than performance quoted.

All investments are subject to risks, including the loss of money and the possible loss of the entire principal amount invested. Additional information regarding the risks of this investment is available in the prospectus.

The Fund is subject to the additional risks associated with concentrating its investments in companies in the market sector.

Diversification does not eliminate the risk of experiencing investment losses.

The Fund employs a “passive management” - or indexing - investment approach and seeks investment results that correspond (before fees and expenses) generally to the performance of its underlying index. Unlike many investment companies, the Fund is not “actively” managed. Therefore, it would not necessarily sell or buy a security unless that security is removed from or added to the underlying index, respectively.

FAANG: refers to Facebook, Amazon, Apple, Netflix and Google.

Consumer Price Index (CPI): a measure of the average change over time in the prices paid by urban consumers for a representative basket of consumer goods and services.

S&P 500 Index: widely regarded as the best single gauge of large-cap US equities. The index includes 500 leading companies and covers approximately 80% of available market capitalization.

S-Network Sector Dividend Dogs Index (SDOGX): a rules-based index intended to give investors a means of tracking the overall performance of the highest dividend paying stocks in the S&P 500 on a sector-by-sector basis.

One may not invest directly in an index.

ALPS Advisors, Inc. is affiliated with ALPS Portfolio Solutions Distributor, Inc.

ALPS Portfolio Solutions Distributor, Inc. is the distributor for the Fund.

Not FDIC Insured • No Bank Guarantee • May Lose Value

DOG001244 01/16/2023

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