Distillate Capital Q1 2024 Letter To Investors

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Distillate Capital Partners LLC was formed in 2017 and is based in Chicago, IL. The firm is 100% employee-owned, and DCP’s partners each have invested significantly in the firm’s investment strategies...

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The firm is 100% employee-owned, and DCP’s partners each have invested significantly in the firm’s investment strategies...</p>\n\n<a href=\"https://seekingalpha.com/article/4682859-distillate-capital-q1-2024-letter-to-investors\">Source Link</a>\n\n</div>\n","source":"seekingalpha","html":"<!DOCTYPE html>\n<html>\n<head>\n<meta http-equiv=\"Content-Type\" content=\"text/html; charset=utf-8\" />\n<meta name=\"viewport\" content=\"width=device-width,initial-scale=1.0,minimum-scale=1.0,maximum-scale=1.0,user-scalable=no\"/>\n<meta name=\"format-detection\" content=\"telephone=no,email=no,address=no\" />\n<title>Distillate Capital Q1 2024 Letter To Investors</title>\n<style type=\"text/css\">\na,abbr,acronym,address,applet,article,aside,audio,b,big,blockquote,body,canvas,caption,center,cite,code,dd,del,details,dfn,div,dl,dt,\nem,embed,fieldset,figcaption,figure,footer,form,h1,h2,h3,h4,h5,h6,header,hgroup,html,i,iframe,img,ins,kbd,label,legend,li,mark,menu,nav,\nobject,ol,output,p,pre,q,ruby,s,samp,section,small,span,strike,strong,sub,summary,sup,table,tbody,td,tfoot,th,thead,time,tr,tt,u,ul,var,video{ font:inherit;margin:0;padding:0;vertical-align:baseline;border:0 }\nbody{ font-size:16px; line-height:1.5; color:#999; background:transparent; }\n.wrapper{ overflow:hidden;word-break:break-all;padding:10px; }\nh1,h2{ font-weight:normal; line-height:1.35; margin-bottom:.6em; }\nh3,h4,h5,h6{ line-height:1.35; margin-bottom:1em; }\nh1{ font-size:24px; }\nh2{ font-size:20px; }\nh3{ font-size:18px; }\nh4{ font-size:16px; }\nh5{ font-size:14px; }\nh6{ font-size:12px; }\np,ul,ol,blockquote,dl,table{ margin:1.2em 0; }\nul,ol{ margin-left:2em; }\nul{ list-style:disc; }\nol{ list-style:decimal; }\nli,li p{ margin:10px 0;}\nimg{ max-width:100%;display:block;margin:0 auto 1em; }\nblockquote{ color:#B5B2B1; border-left:3px solid #aaa; padding:1em; }\nstrong,b{font-weight:bold;}\nem,i{font-style:italic;}\ntable{ width:100%;border-collapse:collapse;border-spacing:1px;margin:1em 0;font-size:.9em; }\nth,td{ padding:5px;text-align:left;border:1px solid #aaa; }\nth{ font-weight:bold;background:#5d5d5d; }\n.symbol-link{font-weight:bold;}\n/* header{ border-bottom:1px solid #494756; } */\n.title{ margin:0 0 8px;line-height:1.3;color:#ddd; }\n.meta {color:#5e5c6d;font-size:13px;margin:0 0 .5em; }\na{text-decoration:none; color:#2a4b87;}\n.meta .head { display: inline-block; overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nDistillate Capital Q1 2024 Letter To Investors\n</h2>\n\n<h4 class=\"meta\">\n\n\n2024-04-09 19:45 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4682859-distillate-capital-q1-2024-letter-to-investors><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>Distillate Capital Partners LLC was formed in 2017 and is based in Chicago, IL. The firm is 100% employee-owned, and DCP’s partners each have invested significantly in the firm’s investment strategies...</p>\n\n<a href=\"https://seekingalpha.com/article/4682859-distillate-capital-q1-2024-letter-to-investors\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"LU0128525689.USD","symbol_name":"TEMPLETON GLOBAL BALANCED \"A\"(USD) ACC","start_time":0,"source_url":"https://seekingalpha.com/article/4682859-distillate-capital-q1-2024-letter-to-investors","article_id":"2426934091","we_media_id":null,"thumbnails":["https://static.seekingalpha.com/cdn/s3/uploads/getty_images/182177306/image_182177306.jpg"],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2426934091","pubTimestamp":1712663100,"sourceInfo":{"source_id":"seekingalpha","name":"Seeking Alpha"},"weMediaInfo":null,"summary":"Distillate Capital Partners LLC was formed in 2017 and is based in Chicago, IL. 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The firm is 100% employee-owned, and DCP’s partners each have invested significantly in the firm’s investment strategies.In the face of a 2.6% headwind to relative performance from simply not owning NVIDIA, our large-cap U.S. FSV strategy lagged the S&P 500 by 0.99% in the first quarter with a total return net of fees of 9.57% compared to the S&P 500’s comparable 10.55%.Strong gains for the S&P 500 Index continued into 2024 with a total return of 10.55% in the first quarter.   Avalon_Studio Letter Summary Last year’s concentrated market gains among the “Magnificent 7” have diverged entering 2024, and you might now argue that the Mag-7 has become the “Magnificent 1”, as staggering gains in NVIDIA (NVDA) have put the company nearly in a category of its own. NVIDIA’s rise in market capitalization to nearly $2.5 trillion, from around $350 billion at the start of last year, is stunning in an absolute sense, and large enough to have a meaningful impact on the overall market’s apparent valuation levels. We will explore that issue and the stock within our framework and provide some historical comparisons. Away from NVIDIA and AI, we continue to find interesting valuation opportunities that meet our quality standards, where we believe the risk/reward relationships are favorable for investors. Our large-cap U.S. FSV strategy’s free cash flow yield of 6.6% on next-twelve-month consensus estimates is over 60% higher than the S&P 500’s corresponding 4.1% yield, and this relative premium is the widest it has been in our strategy’s history (See Figure 1). Our small/mid U.S. and international portfolios likewise offer very attractive combinations of valuation and quality, with comparable free cash flow yields of 9.0% and 8.2%, respectively. Performance Summary U.S. Fundamental Stability & Value (U.S. FSV): In the face of a 2.6% headwind to relative performance from simply not owning NVIDIA, our large-cap U.S. FSV strategy (U.S. FSV) lagged the S&P 500 by 0.99% in the first quarter with a total return net of fees of 9.57% compared to the S&P 500’s comparable 10.55%. The strategy outperformed the Russell 1000 Value ETF’s total return of 8.94% by 0.63%. Annualized net of fee performance since inception in May 2017 is 2.49% ahead of the S&P 500 and 5.25% ahead of the Russell 1000 Value ETF. U.S. Small/Mid Cap Quality & Value (SMID QV): Our SMID QV strategy outperformed the Russell 2000 benchmark by 2.54% and the Russell 2000 Value benchmark by 4.86% in Q1 2024. Annualized excess net returns since inception in March 2019 are 9.77% and 9.83% ahead of those benchmarks. International Fundamental Stability & Value (Intl. FSV): Our International FSV strategy returned 3.07% after fees in the first quarter of 2024 and trailed the MSCI All Country Ex US ETF benchmark gain of 4.65%. Annualized net of fee performance since inception in January 2019 is ahead of the benchmark by 0.52%. U.S. Large Cap Value Long 130%/Short 30% (U.S. Value 130/30): Our 130/30 strategy, which by design produces more variable performance, returned 13.94% net of fees in Q1 2024 vs. the S&P 500 Index comparable rise of 10.55%. It remains 5.75% ahead of the S&P 500 on an annualized net of fee basis and above the Russell 1000 Value ETF by 10.64% since inception in December 2019. Additional performance and rebalance data for all strategies can be found in the Performance Appendix of this letter.    Market Commentary: Strong gains for the S&P 500 Index continued into 2024 with a total return of 10.55% in the first quarter. Continuing with last year’s trend, rising prices have steadily exceeded growth in underlying free cash flows (See Figure 2) such that the S&P 500 free cash flow yield has fallen from a recent high of 5.6% in October of 2022, to just 4.1% today. Crucially though, this overall yield is heavily influenced by very rich valuations among a select few stocks at the top of the market, and there are considerable opportunities among stocks that are not garnering the same share of investor attention as are NVIDIA and a few others.    As we hinted at earlier, NVIDIA has become an epic story in its own right, and is one of the key stocks pulling down the overall market free cash flow yield. To give some sense of perspective, NVIDIA’s market cap is scaled to global GDP in Figure 3. Representing more than 2% of global GDP, NVIDIA’s rise is evocative of Cisco’s similar move around 25 years ago. And while only one simple measure and hardly a complete assessment, NVIDIA’s current market cap versus global GDP is a third higher than was Cisco’s (CSCO) at the peak of the TMT bubble.      Taking a deeper dive into valuation, NVIDIA’s revenues and free cash flow generation tell a somewhat similar story. Cisco at its peak traded at 37.2x trailing twelve-month sales and 118x trailing free cash flows. NVIDIA is currently valued at a similar 37.1x trailing sales but a lower multiple of trailing free cash flows (83.6x). By comparison, the S&P 500 is currently valued around 2.7x sales and 27x trailing free cash flows. On a forward price to sales basis using consensus next-twelve-month estimates, NVIDIA trades at 20.0x vs. Cisco’s peak of 24.2. For NVIDIA, this is more reasonable than the trailing 39x, but still makes it the most expensive stock in the S&P 500 on this metric and leaves it at more than 7x the market average (See Figure 4). On forward free cash flows, NVIDIA looks somewhat more reasonable at 40.6x free cash flows vs. the S&P 500’s 24.4 (there is no comparable figure for Cisco as reliable forward free cash estimates were not available in 2000). The growth NVIDIA is generating helps explain why investors would pay such a high price for the shares. By any measure, NVIDIA’s growth, experienced and expected, is extraordinary. Figure 5 depicts the sales history along with analyst estimates for 2024 and beyond based on company guidance and commentary.    Sales have risen sharply amid a frenzied surge in demand in their product set that not only enabled the company to sell significantly more graphics processing units, but also to sell them at very high prices. This pricing power is evident in profitability, with EBITDA margins rising from an average of around 33% between 2018 and 2022, to 55% in 2023, and further gains are projected, with expectations averaging to a 65% margin in 2024 and beyond. A similar surge in demand and sales propelled Cisco to the levels it reached in 2000. This is evident in the sales growth prior to 2000 as well as from estimates in 2000 for expected sales in 2001 and 2002. However, when demand cooled for Cisco’s products, estimates proved optimistic, and actual sales fell well short of expectations. This is evident in Figure 6 which shows actual sales for Cisco and projected sales for 2001 and 2002 in the year 2000. At the same time that sales moderated, Cisco’s valuation multiple compressed sharply, causing the market value of the stock to fall from $550 billion in 2000 to $70 billion at its low in 2002 (See Figure 7). Cisco has recovered in value since, but its valuation multiple has remained well anchored at a fraction of its previous peak.      We draw this comparison between Cisco and NVIDIA not to suggest that NVIDIA is destined to follow the same path, but to highlight the downside risk of lofty valuations should expectations not be met. NVIDIA certainly seems incredibly well-positioned amid the current AI boom and may well sustain its value should it continue to achieve or exceed expectations. Our investment process emphasizes capital preservation and insulating our clients from downside risks as best we can—what Benjamin Graham referred to as “margin of safety.” Should end demand for AI and the profitability of supplying those services not live up to current expectations, demand could moderate. High prices and profitability levels could also entice more competition that over time that could erode NVIDIA’s competitive advantage or may encourage customers to find ways to become more productive and efficient, hence needing less NVIDIA product. If this were to happen, or were any other number of other unforeseen events to occur, there is substantial downside risk. Our process seeks to avoid these situations. Much like prior sweeping structural changes, the market senses something big is afoot, and armed with the knowledge that structural change is always underestimated, players become more willing to pay to be involved, no matter the price. While we are optimistic about what AI will bring, we are not naive enough to think we have any idea exactly how it will play out and who the long-term winners will be. Investors who poured money into the Railway Mania of the 1840s were absolutely correct that trains would change the world, but lost vast amounts of money by overpaying for shares amid excess investment by the rail companies. Similarly, to paraphrase Warren Buffett, at the advent of the automobile in the early 1900s, since it would have been very difficult to predict Ford or GM as the ultimate long-term winners from among the 2,000 auto companies that failed or nearly did, the better bet would have been to short the horse. Likewise, in the tech boom of the late 1990s and early 2000, investors were right to predict that the internet would have profound changes to our world, but no one accurately anticipated that cell phones would become the key vehicle for that technology and that Apple Computer would ultimately dominate the space (the iPhone didn’t debut until 2007). Even when a transformative technology comes along and is correctly identified as such, it can be difficult to accurately predict how it will play out and which companies will be long-term winners or losers. Or, as Yogi Berra put it more succinctly, “it’s difficult to make predictions—especially about the future.” Our investment process instead relies on what is knowable today—valuation. Rather than take on the downside risk where an unknowable future might disappoint lofty expectations embedded in rich prices, we prefer to own shares of companies where valuation and quality might limit downside and where discounted valuations leave plenty of room for upside surprises relative to what is implied in share prices. In this light, we would not have owned Cisco in 2000 at 118x trailing free cash flows, but are happy to own it today at 13.5x estimated forward free cash flows to enterprise value.    Should NVIDIA or any other of the mega-cap tech stocks (other than Alphabet (GOOG) (GOOGL) which we do own) become attractively valued on current prices, we will gladly own the shares. As we noted at the beginning of this letter, there has been a healthy divergence in performance among the largest stocks, and the consequence is a greater range of valuations, with some of the Mag-7 looking more reasonably valued after underperforming. While some of these stocks may eventually become cheap enough for us to own, there are a large number of other stocks that already fit our investment criteria and where valuations have become attractive. Distillate’s U.S. FSV strategy is consequently at a record valuation spread over the S&P 500. The current free cash flow to market cap yield on next-twelve-month consensus estimates of 6.6% substantially exceeds the 4.1% comparable yield for the S&P 500 (See Figure 8). This 2.5 percentage point gap is at a record level since we funded the strategy, both in absolute and relative terms, with the 6.6% yield representing a 61% premium to the S&P 500’s valuation (See Figure 9). Notably, our strategy achieves this valuation advantage while also investing in a portfolio of stocks that have low levels of debt and more stable cash generation than the broader market average.    Small/Mid Some of the same dynamics of AI and NVIDIA in the large cap space are also playing out among smaller U.S. stocks. Super Micro Computer is benefitting from similar exposure and has increased in market value from $4.4 billion at the start of 2023 to almost $60 billion now (See Figure 10.) The valuation compares to estimated free cash flow generation in 2024 of $300 million. The stock has contributed 1.4% to the Russell 2000’s 2.6% year-to-date gain and was recently added to the S&P 500. Not to be outdone, MicroStrategy has also surged recently largely as a bitcoin beneficiary. The company owns 214k bitcoin worth $14 billion and has been issuing debt to purchase more. The company redeployed all of the proceeds from a $592 million convertible debt issue at the end of March into additional bitcoin purchases. The strategy is so far being richly rewarded with the stock’s market cap now at $26 billion, up from $1.3 billion at the start of 2023.    As we avoid these types of situations in large cap, so do we in smaller companies, but more important in our estimation is navigating two other systemic risks we see at play. First, we have discussed on several occasions that there is substantially more leverage among smaller companies than larger firms and how this is a critical risk for many companies that will have to replace less expensive debt with more expensive financing in the coming years. Second, there is an enormous number of unprofitable companies in the smaller section of the U.S. equity market, with 15% of the Russell 2000 by weight not expected to generate positive next-twelve-month free cash flows. This lack of profitability is also distorting traditional measures like price-to-earnings ratios that exclude negative earning companies and so flatter market averages that include such companies. We worry that investors who are invested in smaller stocks only through the broad benchmarks are exposed to each of these key risks—owning richly valued companies; highly leveraged situations facing rising borrowing costs that are not well telegraphed; and many unprofitable businesses. In our strategy, we seek to avoid each of these issues and compile a next-twelve-month free cash flow to market cap yield of 9.0% versus the Russell 2000’s comparable yield of just 4.1%. The difference is substantial. When debt is included in valuation, which is critical in assessing smaller stocks at present, and free cash flow (FCF) is measured relative to enterprise value (EV), the gap between Distillate’s Smid QV strategy and the smaller stock benchmarks is even more stark. The FCF/EV for Distillate’s Smid QV strategy is 7.7% while that of the Russell 2000 is 3.1% and the Russell 2000 Value’s is 3.8%. This FCF/EV valuation metric that includes negative earning companies and incorporates leverage also paints a very different picture of the attractiveness of small cap stocks in aggregate. But as is highlighted in the metrics for Distillate’s strategy, if the expensive, unprofitable, and highly leveraged stocks are avoided, there are outstanding opportunities to be had. Figure 11 plots the FCF/EV valuation on the vertical axis and leverage on the horizontal axis and contrasts Distillate’s SMID QV strategy with its small cap benchmarks as well as the S&P 500.    At the end of the first quarter, our Small/Mid QV strategy achieved the milestone of a five-year track record. We will send out a specific packet examining its track record, as we did when our large-cap U.S. strategy hit the same signpost, but the quick highlight is that annualized performance after fees since inception is 9.77% ahead of the Russell 2000 benchmark and 9.83% above that of the Russell 2000 Value. The upside capture vs. the Russell 2000 of 128.2% compares favorably with the downside capture of 96.8%. These are obviously results we are pleased with, but more importantly, we are optimistic that the strategy’s current relative valuation and quality measures bode well for continued performance differentiation going forward. With NVIDIA and all things AI the center of investor focus, we believe international opportunities are also being overlooked. Around 15 years ago in the wake of the financial crisis and following a period of international outperformance, sentiment favored foreign stocks despite that they were more expensive with a lower free cash flow yield than domestic indexes (See Figure 12). Versus domestic peers, international stocks also had more leverage, less fundamental stability, and lower expected growth, which made domestic equities seem the more attractive opportunity at the time. But now, after an extended period of underperformance, international stocks (proxied by the MSCI ACWI-Ex U.S. index) offer a better starting valuation than their domestic counterparts, as is evident again in Figure 12. Leverage is still higher abroad and fundamental stability lower and so foreign stocks broadly look less appealing on these risk metrics, but with selectivity these risks can be mitigated. Our International Fundamental Stability & Value strategy attempts to do this by selecting stocks with low leverage, more consistent cash flow generation, and better valuations. While the valuation can be somewhat volatile, we are encouraged by the differentiated 7.3% FCF/EV yield vs. the benchmark’s 4.2%, especially given the strategy’s substantially lower debt and significantly greater cash flow stability.    We typically do not highlight individual holdings, but Stellantis, the parent company of Chrysler, Dodge, Fiat, Jeep, Maserati, Peugeot, and Ram was the largest new purchase in the international strategy in the quarter, and offers a good example of how the strategy is constructed and what kinds of opportunities are available abroad. The company has a market value of around €80 billion with roughly €20 billion of net cash. It is projected to earn around €11 billion of free cash flow in each of the next three years, which amounts to over 40% of the market capitalization and 50% of the enterprise value. The company has already committed to returning €7.7 billion, or around 12.5% of enterprise value, to shareholders in 2024 through a €3 billion share repurchase and €4.7 billion in dividends — a very large return of capital indeed. Stellantis has a somewhat lower level of cash flow stability, but this has improved enough recently (see Figure 13) that it now passes the threshold for inclusion in our strategy and is well above the stability level of the average international stock. While lacking the appeal of AI, the stock does have a large net cash position, produces relatively stable cash flows, and is priced at a valuation at which it will earn back its entire enterprise value in just six years. The margin of safety consequently looks very appealing with a favorable skew to the upside given the inexpensive valuation.    Turning to geographic weights, our current positioning fairly well matches the underlying geographic weights of the ACWI-Ex U.S. benchmark. Said differently, our relative valuation advantage is not achieved by leaning into any one country or region offering opportunities. Distillate’s strategy and the benchmark weight in Europe are both around 43%, and Distillate’s Japan weight of 17% is slightly ahead of the ACWI-Ex U.S. weight of 16%, though less than it was before the recent rebalance which resulted in a reduction in weight given strong recent performance. The weight of emerging markets in Distillate’s strategy of 30% is also in line with the benchmark weight of 29%. As a reminder, geographic weights are determined by bottom-up stock selection per the strategy’s parameters, but are limited to 150% of the benchmark weight to avoid outsized currency or other country specific influences. Distillate’s international strategy does own several Chinese stocks, but through Hong Kong shares rather than U.S. ADR listings given the Variable Interest Entity (VIE) ownership issues. With regards to China, the strategy has a slight overweight at 9% vs. 8% for the benchmark. Importantly, however, our exposure does not include the highly levered state-owned enterprises (SOEs), banks, developers, or construction related stocks that are at the epicenter of current woes. The Chinese economy is highly distorted with massive levels of construction skewing its world share of demand for things like aluminum, iron ore, steel and electricity. Conversely, China has a very low relative level of household consumption and health care expenditures compared to global peers. Figure 14 highlights these differences in China’s share of the world total for various categories.    Our exposures in China lean into these trends with holdings like Alibaba and JD.com (JD) in the retail sector, Li Auto (LI) in the auto segment, and Baidu (BIDU) and Kuaishou Technology (OTCPK:KUASF) in the tech sector. Though the trends are more favorable for these names, crucially, the valuations for many of these stocks are extremely depressed as they have been swept up in the broader concern, giving us attractive entry points. Alibaba (BABA), for example, has a market cap of around $180 billion and cash net of debt of roughly $70 billion. It is projected to generate free cash flow of around $22 to $24 billion per year in each of the next three years, or roughly 40% of its market capitalization. JD.com is similarly valued with a market cap of around $43 billion with net cash of $21 billion. It is forecast to produce free cash flows of $4 to $6 billion per year for the next three years, which sums to roughly $16 billion, or 40% of its market capitalization. While there are clearly strains in the Chinese economy and other valid concerns, these are notably inexpensive valuations for companies that have large net cash positions, stable cash flow generation, and are exposed to the segments of the Chinese economy that will likely grow in relative terms in the coming years. The risk/reward profiles for these stocks consequently look very attractive. A Final Word We do not pretend to know what will happen with any individual stock. NVIDIA could well continue to ascend to new heights and dominate the AI landscape for years to come, such that it continues to favorably surprise the expectations that have pushed the stock to current valuations. The same could be true of Super Micro Computer (SMCI) or MicroStrategy (MSTR). Stellantis (STLA), Alibaba, and JD.com could also disappoint and underperform going forward. Our strategy aims to tip the odds in the favor of our clients. If expectations for our holdings do disappoint, low debt levels, consistent cash generation, and cheap valuations should help cushion the downside. In the same light, stocks such as NVIDIA (NVDA) or Super Micro Computer look especially risky as rich valuations demand that results well into the future surpass current not-shy expectations, with the potential for substantial downside if they do not. For us, it is this upside to downside skew that is so critical, as capital protection is paramount to generating good long-term returns. We’ve written this before, but in our collective careers that date back to the 1980s, we’ve yet to see a “normal” market. Just the seven years since we started Distillate Capital have seen market gyrations relating to a taper tantrum, a government shutdown, the pandemic, meme stocks, AI, inflation fears, trade wars, and actual wars in Europe and the Middle East. The underlying causes of what can propel or perturb market sentiment are varied and unpredictable, but greed and fear and their effect on prices is enduring. Fortunately, these immutable forces also continually create opportunities to invest in attractive stocks that for various reasons are being overlooked or cast aside. When such stocks with favorable upside/downside skews are then aggregated into a larger portfolio, there is an even greater benefit. It is precisely with this dynamic in mind that our portfolio construction and strategy will remain steadfast, and why regardless of circumstance we will invest in companies with consistent cash flow generation, low leverage, and attractive free cash flow valuations. Distillate Capital Partners LLC (“Distillate”), is a registered investment adviser with the United States Securities and Exchange Commission in accordance with the Investment Advisers Act of 1940. The firm’s list of composite descriptions is available upon request. Distillate claims compliance with the Global Investment Performance Standards (GIPS®). GIPS® is a registered trademark of CFA Institute. CFA Institute does not endorse or promote this organization, nor does it warrant the accuracy or quality of the content contained herein. To receive a GIPS Report and/or our firm’s list of composite and broad distribution pooled funds descriptions, please email your request to info@distillatecapital.com. The U.S. Dollar is the currency used to express performance. Returns are presented net of management fees and include the reinvestment of all income. For non-fee-paying accounts, net of fee performance was calculated using a modeled management fee equal to the highest investment management fee that may be charged for the applicable composite (see fee schedule below). For accounts calculated with a per share, net-of fee NAV, gross performance was calculated by adding back the unitary fee associated with that fund. Policies for valuing investments, calculating performance, and preparing GIPS Reports are available upon request. The investment management fee schedule for the strategies discussed are as follows: 0.39% for U.S. Fundamental Stability & Value; 0.55% for U.S. Small/ Mid Quality & Value; 0.79% for U.S. Large Cap Value 130/30; and 0.55% for International Fundamental Stability & Value. Management fees may vary and are negotiable. Data for the Firm’s investment strategies are based on a representative account for each composite. Actual holdings and performance may differ between accounts or vehicles offered by the Firm due to the size of an account, client guidelines, or other constraints and restrictions related to that account or vehicle. This material is provided for informational purposes only and is not intended as an offer or solicitation for the sale of any financial product or service or as a recommendation or determination by Distillate that any investment strategy is suitable for a specific investor. Investors should seek financial advice regarding the suitability of any investment strategy based on their objectives, financial situations, and particular needs. The investment strategies discussed herein may not be suitable for every investor. This material is not designed or intended to provide legal, investment, or other professional advice since such advice always requires consideration of individual circumstances. If legal, investment, or other professional assistance is needed, the services of an attorney or other professional should be sought. The opinions, estimates, and projections presented herein constitute the informed judgments of Distillate and are subject to change without notice. Any forecasts are subject to a number of assumptions and actual events or results may differ from underlying estimates or assumptions, which are subject to various risks and uncertainties. All investments in securities, options and derivatives involve a risk of loss of capital and no guarantee or representation can be made that an investment will generate profits or that an investment will not incur a total loss of invested capital. Past performance does not guarantee future results and there can be no assurance that the future performance of any specific investment, investment strategy, or product will be profitable, equal any corresponding indicated historical performance level(s), or prove successful. Investment returns and value will fluctuate in response to issuer, political, market, and economic developments, which can affect a single issuer, issuers within an industry, economic sector or geographic region, or the market as a whole. Furthermore, nothing herein is intended to imply that Distillate’s investment strategies may be considered “conservative”, “safe”, “risk free” or “risk-averse.” Portfolio holdings and sector allocations are subject to change at any time and should not be considered recommendations to buy or sell any security. The information in this presentation has been obtained or derived from sources believed to be reliable, but no representation is made as to its accuracy or completeness. This presentation contains forward looking statements, which can be identified by the use of forward-looking terminology such as “may”, “will”, “should”, “expect”, “anticipate”, “target”, “project”,” estimate”, “intend”, or “believe”, or the negatives thereof or any other variations thereon or other comparable terminology. Because such forward looking statements involve risk and uncertainties, actual results may differ materially from such expectations or projections. Any such forward-looking statements should not be construed to be indicative of the actual events that will occur nor should they be considered guarantees of future events in any form. The U.S. Fundamental Stability & Value composite seeks to distill a starting universe of large cap U.S. equities into only the stocks where quality and value overlap using Distillate’s proprietary definitions. Its goal is to achieve superior compounded long-term returns by limiting downside in periods of market stress, while still providing strong performance in up markets. This composite was created in May 2017. The U.S. Small/Mid Cap Quality & Value composite seeks to distill a starting universe of small- and mid-cap U.S. equities into only the stocks where quality and value overlap using Distillate’s proprietary definitions. Its goal is to achieve superior compounded long-term returns by limiting downside in periods of market stress, while still providing strong performance in up markets. This composite was created in March 2019. The International Fundamental Stability & Value composite seeks to distill a starting universe of large- and mid-cap non-U.S. equities into only the stocks where quality and value overlap using Distillate’s proprietary definitions. Its goal is to achieve superior compounded long-term returns by limiting downside in periods of market stress, while still providing strong performance in up markets. This composite was created in January 2019. The U.S. Large Cap Value 130/30 composite seeks long-term capital appreciation by holding approximately 130% of an account's value in the most attractively valued large cap U.S. stocks, measured using Distillate’s proprietary free cash flow valuation method. The market exposure in this composite is brought back to approximately 100% by selling short 30% of an account's value of the least attractively valued stocks among the same starting set. This composite was created in December 2019. Free Cash Flow refers to a company’s operating cash flow, less its capital expenditures. Enterprise Value refers to a company’s market capitalization plus its net debt balance. Free Cash Flow to Enterprise Value Yield refers to a company’s or group of companies’ free cash flow divided by the company’s (or companies’) Enterprise Value, with a higher resulting ratio indicating a more attractive valuation. This metric is a valuation measure and not a form of investor yield. Normalized Free Cash Yield (or Distilled Cash Yield) refers to the firm’s proprietary valuation measure that looks at estimated, adjusted free cash flow relative to a company’s adjusted enterprise value. References to historical stocks that ranked well using this methodology refer only to these stocks’ historical valuation and not their inclusion in any actual or hypothetical strategies/accounts managed by Distillate Capital Partners LLC. This metric is a valuation measure and not a form of investor yield. Fundamental (or Cash Flow) Stability is Distillate Capital’s proprietary measure of through-cycle cash flow stability, with a higher value indicating greater stability. Leverage is based on Distillate Capital’s proprietary measure of indebtedness which looks at the ratio of adjusted net debt to an adjusted measure of forecast Earnings Before Interest, Taxation, Depreciation, and Amortization (EBITDA.) Methodology note for Figures including free cash flow yield (FCF) or free cash flow to enterprise value yield (FCF/EV):figures reflect consensus estimates of next-twelve-months (NTM) FCF in comparison to market capitalization or enterprise value (EV) for the relevant portfolio/strategy or benchmark. Stocks without data are excluded and portfolios are reweighted accordingly. Stocks with FCF/Market Cap or FCF/EV values of greater than 50% or less than -20% have been eliminated to avoid distorting overall averages. Methodology Notes for Portfolio Characteristics Tables (Appendix): 1Free Cash Yield to Market Cap and Enterprise Value (EV) are based on the next twelve-month free cash flow estimates relative to market capitalization and EV, which adds Distillate’s proprietary measure of indebtedness. Stocks without estimates are excluded and the remaining names are reweighted based on those exclusions. 2P/E is based on consensus estimates for next twelve months and excludes P/Es over 250 and under 0 to avoid the distortion from outliers. 3Leverage is based on Distillate Capital’s proprietary measure of indebtedness which looks at the ratio of adjusted net debt to an adjusted measure of forecast Earnings Before Interest, Taxation, Depreciation, and Amortization (EBITDA.) 4Fundamental stability is Distillate Capital’s proprietary measure of through-cycle cash flow stability with a higher value indicating greater stability. 5Negative FCF weight is measured as the weight of stocks with negative free cash estimate as a share of those with any estimate. The S&P 500 Index is an index of roughly the largest 500 U.S. listed stocks maintained by Standard & Poor’s. The S&P 500 Equal Weight Index is an index of the same stocks as the S&P 500 Index, but weights the constituents equally. The iShares Russell 1000 Value ETF is an investable benchmark used as a proxy for its underlying index, the Russell 1000 Value Index, an index of U.S. listed stocks that possess attractive valuation as measured by FTSE Russell. The iShares MSCI ACWI Ex-US ETF is an investable benchmark used as a proxy for its underlying index, the MSCI ACWI ex USA Index, an index managed by MSCI representing large and mid cap stocks outside of the U.S. The iShares Russell 2000 ETF and iShares Russell 2000 Value ETF are investable benchmarks used as a proxies for the underlying indexes of the Russell 2000 Index (an index of U.S. listed small cap stocks) and the Russell 2000 Value Index (an index of U.S. listed small cap stocks that possess attractive valuation as measured FTSE Russell). Indices are not available for direct investment. Investment in a security or strategy designed to replicate the performance of an index will incur expenses, such as management fees and transaction costs, which would reduce returns. © Copyright 2024 Distillate Capital Partners LLC; published April 3, 2024  Original Post Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.1","shortVersion":"4.29.1","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2426934091"}