A rising-rate environment spells risk for overvalued stocks. Companies with high cash flows can give investors some protection.
Value stocks have been outperforming growth stocks over the past six months, in part, because a change in Federal Reserve policy is signaling an extended period of rising interest rates. Within the value world, investors might be best-served by focusing on cash flow.
In the low-interest-rate environment through most of the coronavirus pandemic, growth strategies have worked best. But check out this six-month chart showing the total return of the $1.3 billion Pacer U.S. Cash Cows ETF compared with those of the Russell 1000 Growth and Value indexes and the benchmark S&P 500 Index:
COWZ has beaten all three of the indexes over the past six months, and this action might continue, as stocks trading at high price-to-earnings valuations -- including the high-flying tech companies that have led the long bull market -- may continue to be more sensitive to rising interest rates than value stocks.
COWZ is rebalanced quarterly to hold the 100 stocks among the Russell 1000 that have the highest free cash flow yields for a rolling 12-month period. The stocks are equally weighted when the portfolio is rebalanced.
Pacer defines a company's free cash flow as its cash flow from operations after capital expenditures, which include expenses, interest, taxes and long-term investments. That figure for the past 12 months is divided by current market capitalizations each quarter when the exchange traded fund's portfolio is rebalanced. That means recent high-flyers are likely to be dropped from the portfolio.
Screening the cash cows
The COWZ strategy might appeal to investors who wish to diversify beyond the cap-weighted indexes that are most commonly tracked by index funds. For example, the top five companies held by the $456 billion SPDR S&P 500 ETF Trust -- Apple Inc., Microsoft Corp., Amazon.com Inc., Alphabet Inc. and Tesla Inc. -- make up 23% of the portfolio.
But some investors want to look at individual stocks. Here are three screens of the 100-stock COWZ portfolio. Each list includes market capitalization (in billions of dollars), dividend yields and a summary of opinions among analysts polled by FactSet:
Fattest cash cows
Here are the 10 largest stocks held in the COWZ portfolio, by market capitalization:
Then read Tomi Kilgore's detailed guide to the wealth of information available for free on the MarketWatch quote page.
Highest-yielding cash cows
Here are the 10 stocks in the COWZ portfolio with the highest dividend yields as of the close on Jan. 5:
Wall Street's favorite cash cows
Finally, here are the 12 stocks in the COWZ portfolio with the highest percentage of "buy" or equivalent ratings among analysts polled by FactSet. This group includes a dozen stocks, not 10, because three were tied with 82% "buy" ratings:
