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Jan. 10, 2022, 12:14 p.m. EST

This ‘cash cow’ value-stock strategy can fatten your portfolio even if you fear the Fed

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By Philip van Doorn

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.

Click here for an explanation of how the Russell 1000 Index /zigman2/quotes/210598144/delayed RUI +0.01% is divided into overlapping subsets in the Russell 1000 Growth Index /zigman2/quotes/210598136/delayed RLG -0.24% and the Russell 1000 Value Index /zigman2/quotes/210598148/delayed RLV +0.25% .

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 /zigman2/quotes/206486571/composite COWZ -0.25% compared with those of the Russell 1000 Growth and Value indexes and the benchmark S&P 500 Index /zigman2/quotes/210599714/realtime SPX +0.01% :

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 /zigman2/quotes/209901640/composite SPY +0.04% — Apple Inc. /zigman2/quotes/202934861/composite AAPL +0.17% , Microsoft Corp. /zigman2/quotes/207732364/composite MSFT -0.23% , Amazon.com Inc. /zigman2/quotes/210331248/composite AMZN +0.25% , Alphabet Inc. /zigman2/quotes/202490156/composite GOOGL -1.34% /zigman2/quotes/205453964/composite GOOG -1.29% and Tesla Inc. /zigman2/quotes/203558040/composite TSLA -6.42% — 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:

Company Ticker Market cap. ($bil) Dividend yield Share “buy” ratings Closing price – Jan. 5 Consensus price target Implied 12-month upside potential
Pfizer Inc. /zigman2/quotes/202877789/composite PFE $312 2.88% 42% $55.63 $57.87 4%
Exxon Mobil Corp. /zigman2/quotes/204455864/composite XOM $283 5.27% 38% $66.75 $73.47 10%
AbbVie Inc. /zigman2/quotes/202428675/composite ABBV $240 4.15% 77% $135.87 $137.57 1%
Intel Corp. /zigman2/quotes/203649727/composite INTC $219 2.58% 28% $53.87 $54.78 2%
CVS Health Corp. /zigman2/quotes/209664499/composite CVS $140 2.08% 75% $105.81 $113.31 7%
Bristol-Myers Squibb Co. /zigman2/quotes/202559280/composite BMY $138 3.47% 63% $62.16 $71.92 16%
International Business Machines Corp. /zigman2/quotes/203856914/composite IBM $124 4.75% 28% $138.22 $142.74 3%
ConocoPhillips /zigman2/quotes/207605056/composite COP $100 2.43% 87% $75.65 $92.24 22%
Gilead Sciences Inc. /zigman2/quotes/210293917/composite GILD $91 3.93% 42% $72.18 $76.38 6%
Altria Group Inc. /zigman2/quotes/208895754/composite MO $89 7.40% 39% $48.64 $52.69 8%
Source: FactSet

You can click on the tickers for more about each company.

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:

Company Ticker Market cap. ($bil) Dividend yield Share “buy” ratings Closing price – Jan. 5 Consensus price target Implied 12-month upside potential
Antero Midstream Corp. /zigman2/quotes/208787863/composite AM $5 9.05% 0% $9.94 $10.28 3%
Lumen Technologies Inc. /zigman2/quotes/200067545/composite LUMN $13 7.81% 14% $12.80 $11.30 -12%
Altria Group Inc. /zigman2/quotes/208895754/composite MO $89 7.40% 39% $48.64 $52.69 8%
Exxon Mobil Corp. /zigman2/quotes/204455864/composite XOM $283 5.27% 38% $66.75 $73.47 10%
Dow Inc. /zigman2/quotes/203121064/composite DOW $43 4.80% 36% $58.35 $65.48 12%
International Business Machines Corp. /zigman2/quotes/203856914/composite IBM $124 4.75% 28% $138.22 $142.74 3%
LyondellBasell Industries NV /zigman2/quotes/200036808/composite LYB $32 4.70% 52% $96.27 $111.30 16%
H&R Block Inc. /zigman2/quotes/207406664/composite HRB $4 4.53% 33% $23.86 $25.80 8%
Xerox Holdings Corp. /zigman2/quotes/201169674/composite XRX $4 4.29% 0% $23.33 $17.60 -25%
AbbVie Inc. /zigman2/quotes/202428675/composite ABBV $240 4.15% 77% $135.87 $137.57 1%
Source: FactSet

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:

Company Ticker Market cap. ($bil) Dividend yield Share “buy” ratings Closing price – Jan. 5 Consensus price target Implied 12-month upside potential
Grand Canyon Education Inc. /zigman2/quotes/200091871/composite LOPE $3 0.00% 100% $85.78 $103.75 21%
Loyalty Ventures Inc. /zigman2/quotes/230562556/composite LYLT $1 0.00% 100% $31.97 $63.00 97%
Targa Resources Corp. /zigman2/quotes/200494488/composite TRGP $12 0.74% 91% $54.06 $67.05 24%
Laboratory Corp. of America Holdings /zigman2/quotes/203174601/composite LH $27 0.00% 89% $286.57 $349.85 22%
ConocoPhillips /zigman2/quotes/207605056/composite COP $100 2.43% 87% $75.65 $92.24 22%
Lithia Motors Inc. /zigman2/quotes/202974783/composite LAD $9 0.48% 86% $292.93 $464.58 59%
LKQ Corp. /zigman2/quotes/210317139/composite LKQ $17 1.70% 85% $58.72 $65.50 12%
Diamondback Energy Inc. /zigman2/quotes/201200230/composite FANG $21 1.69% 85% $118.11 $137.30 16%
Olin Corp. /zigman2/quotes/200456258/composite OLN $8 1.52% 83% $52.69 $74.00 40%
Nexstar Media Group Inc. Class A /zigman2/quotes/202513438/composite NXST $6 1.88% 82% $149.14 $187.67 26%
Boyd Gaming Corp. /zigman2/quotes/206215159/composite BYD $7 0.00% 82% $62.38 $83.80 34%
Victoria’s Secret & Co. /zigman2/quotes/228075478/composite VSCO $5 0.00% 82% $56.10 $82.73 47%
Source: FactSet

Don’t miss: These tech stocks have fallen 20% to 51% from their 52-week highs

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Volume: 3.38M
May 20, 2022 4:04p
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Dividend Yield
N/A
Market Cap
$3.74 billion
Rev. per Employee
$199,559
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