There are many companies out there that could be considered “quality.” With that in mind, plenty of good, stable, and profitable large-cap companies within the technology sector fit the definition. But that doesn’t necessarily mean they are quality investments.
Some quality tech companies are currently trading at prices many could consider to be too high, limiting their growth potential. Even if it’s a profitable company, its appeal as a good investment depends on the balance between its merits and its valuation.
Michael Mack, Associate Portfolio Manager for VictoryShares and Solutions, set cautions against overpaying in sectors where prices may currently be inflated.
“Everyone’s looking for quality,” he said. “But there’s a difference between a quality company and a quality investment.” The pivotal distinction, he noted, lies in “the price you’re paying.”
According to Mack, it’s important to find quality companies trading at attractive prices. That’s what the VictoryShares Free Cash Flow ETF (VFLO) has been designed to capture.
Seeking High-Quality, Profitable Companies With Superior FCF Yields
VFLO seeks to track the performance of the Victory U.S. Large Cap Free Cash Flow Index. The Index aims to select high-quality companies by applying profitability screens to its starting universe. The Index uses historical and forward-looking metrics to pick firms with superior free cash flow (FCF) yields and promising growth prospects.
This Index calculates FCF yield by dividing the expected FCF by enterprise value. It derives expected free cash flow as the average of the trailing 12-month FCF and the next 12-month forward FCF. Enterprise value, a measure of a company’s total value, arguably serves as a more comprehensive alternative to equity market capitalization.
VFLO’s growth filter selects the 50 stocks with the highest expected growth score, influenced by sales, EBIDTA, and long-term earnings.
Integrating forward-looking FCF yields with VFLO’s growth filter “seeks to improve upon traditional approaches to free cash flow yield,” Mack added.
For more news, information, and analysis, visit the Free Cash Flow Channel.
VettaFi LLC (“VettaFi”) is the index provider for VFLO, for which it receives an index licensing fee. However, VFLO is not issued, sponsored, endorsed, or sold by VettaFi, and VettaFi has no obligation or liability in connection with the issuance, administration, marketing, or trading of VFLO.
Free cash flow (FCF) is the cash remaining after a company has paid its expenses, taxes, interest, and long-term investments.
EBITDA, or earnings before interest, taxes, depreciation, and amortization, is an alternate measure of profitability to net income.
 The VettaFi 1000 Index, which consists of market cap-weighted U.S. large-cap stocks.
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Derivatives may not work as intended and may result in losses. Large shareholders, including other funds advised by the Adviser, may own a substantial amount of the Fund’s shares. The actions of large shareholders, including large inflows or outflows, may adversely affect other shareholders, including potentially increasing capital gains. Investments in mid-cap companies typically exhibit higher volatility. The value of your investment is also subject to geopolitical risks such as wars, terrorism, environmental disasters, and public health crises; the risk of technology malfunctions or disruptions; and the responses to such events by governments and/or individual companies.
The information in this article is based on data obtained from recognized services and sources and is believed to be reliable. The securities highlighted, if any, were not intended as individual investment advice.
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