After the sudden collapse of Silicon Valley Bank and now Signature Bank, things are looking a little bit rough for the banking sector. Despite regulators stepping in to take control of the failed banks and the Fed launching a new Bank Term Funding Program to provide additional funding to help banks meet depositors’ needs, banks like Charles Schwab, Citigroup, and First Republic Bank saw notable declines in their stock prices on Monday. First Republic in particular got hit hard, with its stock price falling nearly 62% over the course of trading.
As the banking sector faces turmoil, investors may want to consider companies that demonstrate strong free cash flow. Free cash flow is the cash generated by a company through its operations after accounting for capital expenditure on fixed assets.
Bob Shea, CIO of FCF Advisors, told VettaFi that his firm believes that “GAAP earnings have significant disadvantages,” and “accounting practices allow a lot of leeway and discretion to management.” Meanwhile, “the ability to manipulate and distort free cash flow is a lot more difficult than with earnings.”
FCF’s position is that free cash flow is less vulnerable to management manipulation than GAAP earnings and has been a better predictor of medium- to long-term outperformance. FCF Advisors has been focused on free cash flow investment strategies since 2011 and specializes in multi-factor fundamental analysis grounded in decades of research.
Its flagship exchange traded fund, the FCF US Quality ETF (TTAC), identifies companies with strong and sustainable profitability that provide core equity exposure with lower downside capture. TTAC aims to outperform the Russell 3000 through a fundamentals-driven investment process that selects an average of 144 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 free cash flow rankings. All the companies selected for inclusion in the actively managed ETF were chosen via FCF Advisors’ Free Cash Flow Quality Model (FCFQM), a multi-factor model featuring a combination of quality measures informed by the firm’s research. FCFQM relies on free cash flow rather than earnings.
“We believe a quantitative active solution is a go-to place in search of all-weather alpha that minimizes your market timing risks,” said Vince (Qijun) Chen, portfolio manager and director of research at FCF Advisors.
TTAC’s portfolio will also be rated with an ESG score, excluding companies with low ESG ratings. Firms with an extreme rise in share count and increase in leverage are excluded.
For more news, information, and analysis, visit the Free Cash Flow Channel.