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April 17, 2021, 9:29 a.m. EDT

These stocks are ‘cash cows’ that give you a better way to play the value sector

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    Pacer U.S. Cash Cows 100 ETF (COWZ)
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    Lowe's Cos. (LOW)

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By Philip van Doorn

Investors will always argue about growth versus value strategies. Growth strategies have trounced value for years. But with U.S. stocks near record levels, a different approach to value may serve cautious investors well.

Sean O’Hara, the president of Pacer ETFs, argues that traditional measures of value, especially book value, aren’t useful any longer because most of the value of U.S. companies is now made up of “intangible assets, including patents, networks, brand value and customer lists.”

O’Hara, in an interview, said “traditional value is broken,” and that “valuation based on companies’ free cash flow is more useful.”

“You get paid for [those] intangible assets today,” he said.

The Pacer US Cash Cows 100 ETF /zigman2/quotes/206486571/composite COWZ +0.25% holds 100 U.S. stocks selected from the components of the Russell 1000 Index /zigman2/quotes/210598144/delayed RUI -0.58% . The broad index is screened by free cash flow yield quarterly. The ETF’s performance benchmark is the Russell 1000 Value Index RLV .

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. The fund looks back at a rolling 12 months of free cash flow and divides that by the current market capitalization to calculate each company’s free cash flow yield.

COWZ holds the 100 stocks among the Russell 1000 with the highest free cash flow yields, excluding financial companies, which cannot be screened by this method. The screening also excludes any company that has reported negative earnings per share for two years.

The 100 stocks are ranked by free cash flow (in dollars), but each holding is capped at 2% of the portfolio when the screen is run each quarter. A stock that has risen significantly may well make up more than 2% of the portfolio between quarterly screenings.

So a stock that has had a quick jump is likely to be screened out of the fund soon because its free cash flow yield will decline.

The following list of the fund’s top holdings doesn’t necessarily match the ranking by free cash flow — it incorporates stock-price movement through the end of the first quarter.

Here are the top 10 holdings as of March 31 with their trailing free cash flow yields, as calculated by Pacer ETFs:

Company Ticker FCF yield
Lowe’s Cos. /zigman2/quotes/205563664/composite LOW 5.88%
Lennar Corp. Class A /zigman2/quotes/202536373/composite LEN 12.57%
Target Corp. /zigman2/quotes/207799045/composite TGT 7.48%
Altria Group Inc. /zigman2/quotes/208895754/composite MO 6.81%
Cisco Systems Inc. /zigman2/quotes/209509471/composite CSCO 7.17%
Best Buy Co. /zigman2/quotes/205918291/composite BBY 15.55%
McKesson Corp. /zigman2/quotes/206975466/composite MCK 14.65%
International Business Machines Corp. /zigman2/quotes/203856914/composite IBM 8.73%
HP Inc. /zigman2/quotes/203461582/composite HPQ 8.89%
CVS Health Corp. /zigman2/quotes/209664499/composite CVS 7.75%

Performance

COWZ was established in December 2016. The fund is ranked four stars (out of five) by Morningstar. The fund’s annual expenses are 0.49% of assets under management.

Here are total return figures (after expenses) for 2021, 12 months and three years through April 14 for COWZ, Morningstar’s Large Value category, the Russell 1000 Value Index, the full Russell 1000 Index and the S&P 500 Index /zigman2/quotes/210599714/realtime SPX -0.49% :

COWZ has handily beaten its category for all periods and all the indexes shown this year and over the past 12 months. It has also outperformed its category and its benchmark, the Russell 1000 Value index for three years. It has underperformed the broad market-cap-weighted indexes for three years, but that shouldn’t be surprising, as rapidly growing technology companies with lower FCF yields have been the drivers of that performance.

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/zigman2/quotes/206486571/composite
US : U.S.: Cboe BZX
$ 43.36
+0.11 +0.25%
Volume: 264,312
May 17, 2021 2:23p
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/zigman2/quotes/210598144/delayed
US : US Composite
2,329.05
-13.60 -0.58%
Volume: 1.68M
May 17, 2021 2:08p
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/zigman2/quotes/205563664/composite
US : U.S.: NYSE
$ 193.76
-5.15 -2.59%
Volume: 4.03M
May 17, 2021 2:23p
P/E Ratio
25.01
Dividend Yield
1.24%
Market Cap
$142.65 billion
Rev. per Employee
$263,521
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/zigman2/quotes/202536373/composite
US : U.S.: NYSE
$ 98.18
-1.53 -1.53%
Volume: 1.45M
May 17, 2021 2:23p
P/E Ratio
10.03
Dividend Yield
1.02%
Market Cap
$30.44 billion
Rev. per Employee
$2.37M
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/zigman2/quotes/207799045/composite
US : U.S.: NYSE
$ 210.26
-0.90 -0.43%
Volume: 1.61M
May 17, 2021 2:23p
P/E Ratio
24.26
Dividend Yield
1.30%
Market Cap
$105.07 billion
Rev. per Employee
$228,756
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/zigman2/quotes/208895754/composite
US : U.S.: NYSE
$ 50.25
-0.03 -0.06%
Volume: 3.03M
May 17, 2021 2:23p
P/E Ratio
21.57
Dividend Yield
6.85%
Market Cap
$93.05 billion
Rev. per Employee
$2.94M
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/zigman2/quotes/209509471/composite
US : U.S.: Nasdaq
$ 52.82
-0.08 -0.15%
Volume: 7.76M
May 17, 2021 2:23p
P/E Ratio
22.10
Dividend Yield
2.80%
Market Cap
$223.33 billion
Rev. per Employee
$636,155
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/zigman2/quotes/205918291/composite
US : U.S.: NYSE
$ 119.63
-0.77 -0.64%
Volume: 644,536
May 17, 2021 2:23p
P/E Ratio
17.49
Dividend Yield
2.34%
Market Cap
$30.15 billion
Rev. per Employee
$463,353
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/zigman2/quotes/206975466/composite
US : U.S.: NYSE
$ 200.52
+5.52 +2.83%
Volume: 730,936
May 17, 2021 2:23p
P/E Ratio
N/A
Dividend Yield
0.84%
Market Cap
$30.85 billion
Rev. per Employee
$3.13M
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/zigman2/quotes/203856914/composite
US : U.S.: NYSE
$ 145.45
+0.77 +0.53%
Volume: 2.38M
May 17, 2021 2:23p
P/E Ratio
24.30
Dividend Yield
4.51%
Market Cap
$129.27 billion
Rev. per Employee
$196,163
loading...
/zigman2/quotes/203461582/composite
US : U.S.: NYSE
$ 32.98
+0.05 +0.17%
Volume: 3.88M
May 17, 2021 2:23p
P/E Ratio
13.92
Dividend Yield
2.35%
Market Cap
$41.23 billion
Rev. per Employee
$1.07M
loading...
/zigman2/quotes/209664499/composite
US : U.S.: NYSE
$ 84.94
+0.61 +0.72%
Volume: 2.58M
May 17, 2021 2:23p
P/E Ratio
15.12
Dividend Yield
2.36%
Market Cap
$111.03 billion
Rev. per Employee
$895,513
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/zigman2/quotes/210599714/realtime
US : S&P US
4,153.39
-20.46 -0.49%
Volume: 1.36B
May 17, 2021 2:23p
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