Value investing is an important part of a diversified portfolio. However, value’s underperformance has made it quite difficult to own. The traditional metric that value mangers use, Price/Book, has not worked in recent years. Free cash flow yield may be a more appropriate way to evaluate value stocks, and could be key in identifying overlooked companies.
In the upcoming webcast, Are Value Managers Measuring the Wrong Thing?, Sean O’Hara, President, Pacer ETFs Distributors, will explain how targeted investment strategies centered around free cash flow yield can help solidify your portfolio in today’s strenuous investing landscape.
Investors interested in the free-cash-flow metric now have several options to choose from. For instance, the Pacer Global Cash Cows Dividend ETF (NYSEArca: GCOW), Pacer US Cash Cows 100 ETF (NYSEArca: COWZ), Pacer US Small Cap Cash Cows 100 ETF (BATS: CALF), Pacer Developed Markets International Cash Cows 100 ETF (BATS: ICOW), Pacer Emerging Markets Cash Cows 100 ETF (NasdaqGM: ECOW), Pacer US Cash Cows Growth ETF (BUL), and Pacer Cash Cows Fund of Funds ETF (HERD) all implement free-cash-flow yield screens to narrow their investing universes.
Focusing on companies with steady free cash flow can be a better approach to security selection. Free cash flow is the cash left over after a company has paid expenses, interest, taxes, and long-term investments. It is used to buy back stocks, pay dividends, or participate in mergers and acquisitions. The ability to generate a high free cash flow yield indicates that a company is producing more cash than it needs to run the business, which can then be invested in growth opportunities.
Free cash flow companies generally have three defining characteristics – they are productive, reliable, and self-sufficient. The companies generate more cash flow then they spend, which allows them to grow without external financing. The free cash flow is a sturdier measure of profitability, which are, unlike earnings, not subject to manipulation and accounting assumptions. Lastly, as the companies are less reliant on capital markets for financing, they don’t dilute their issued company stocks.
Financial advisors who are interested in learning more about free cash flow yield strategies can register for the Tuesday, March 2 webcast here.