2022 was a tough year to navigate for investors. Sky-high inflation in the U.S. and a land war in Europe led to a bear market both domestically and overseas. But in a webinar hosted by FCF Advisors, the investment firm argued that there’s a deeper reason for the current bear market. Namely, it’s marking a structural shift in the global economy and facilitating a paradigm shift in how profit and success is measured.
According to FCF, the companies deemed profitable and worth investing in aren’t necessarily the big tech companies, but the companies demonstrating free cash flow. Free cash flow is the cash a company generates after its cash outflows to pay expenses or support operations.
“Over the last several quarters, market has been demanding profitability, and we’ve been measuring profitability through free cash flow,” said Bob Shea, CIO of FCF Advisors. “Free cash flow has never been more important.”
FCF Advisors specializes in free cash flow investment strategies, primarily through its Free Cash Flow Quality Model (FCFQM), a multi-factor model featuring a combination of quality measures informed by the firm’s research.
“At FCF Advisors we offer unique way to gauge quality investment,” said Vince (Qijun) Chen, director of research and portfolio manager at FCF Advisors. “We measure profitability with free cash flow instead of earnings, which is subject to manager discretion.”
Two exchange traded funds that FCF Advisors offers are the FCF US Quality ETF (TTAC) and the FCF International Quality ETF (TTAI).
TTAC aims to outperform the Russell 3000 through a fundamentals-driven investment process that selects about 150 stocks based on free cash flow strength. Its holdings are then weighted by a modified market-cap log transformation, allowing increased exposure to companies with the strongest proprietary rankings.
TTAI, meanwhile, aims to outperform the MSCI All Country World Index ex the U.S. through an active investment process. A quant model is used to rank stocks based on proprietary measures of free cash flow. Highly leveraged firms that incur debt to buy back shares, or don’t satisfy ESG criteria, are screened out. Roughly 150 of the highest-ranked stocks are selected and then weighted on a modified market-cap basis that factors in free cash flow and log transformation.
Both ETF portfolios will also be rated with an ESG score, excluding companies with low ESG ratings. Firms with an extreme rise in shares count and increase in leverage are excluded.
For more news, information, and analysis, visit the Free Cash Flow Channel.