TTAC Underweight Big Tech as it Follows the Free Cash Flow | ETF Trends

Big tech had a rough 2022. While the S&P 500 ended the year down 20%, the tech-heavy Nasdaq Composite dropped 34%, while tech giants like Microsoft, Google parent Alphabet, and Amazon saw their stock prices fall 28%, 39%, and 51% for the year, respectively.

In a webinar hosted by FCF Advisors, the investment manager called into question how sustainably profitable these FAANG stocks were and suggested that these giant tech stocks peaked in 2022.

“Mega-cap technology companies had a really, really tough year,” said Bob Shea, CIO of FCF Advisors. “There was a significant rotation away from them.”

Shea added that this was one of the reasons why FCF was “significantly underweight FAANG stocks.”

“We’re a quant company; we go where the data takes us,” he said, adding that the firm also goes “where the free cash flow takes us.”

Free cash flow is the cash a company generates after its cash outflows to pay expenses or support operations. 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.

The company’s flagship strategy, the FCF US Quality ETF (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 free cash flow rankings.

Because it focuses on companies’ free cash flow rather than earnings, TTAC was overweight to information technology, energy, and healthcare versus the Russell 3000 at the end of December 31 (by 6.55%, 4.48%, and 2.95, respectively), while underweight financials, industrials, and communication services (-3.09%, -3.64%, and -5.13%, respectively).

Meanwhile, FCF Advisors recently revealed that TTAC was overweight companies like O’Reilly Automotive (by 0.93%), Lockheed Martin, and Autozone (both by 0.83%), while underweight stocks like Alphabet (-1.18%), Amazon (-1.84%), and Microsoft (-1.94%).

“Over the last several quarters, the market has been demanding profitability, and we’ve been measuring profitability through free cash flow,” Shea added.

TTAC’s portfolio 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.