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 RUI is divided into overlapping subsets in the Russell 1000 Growth Index RLG and the Russell 1000 Value Index RLV.
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 COWZ compared with those of the Russell 1000 Growth and Value indexes and the benchmark S&P 500 Index SPX :
FactSet
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 $456 billion SPDR S&P 500 ETF Trust SPY — Apple Inc. AAPL, Microsoft Corp. MSFT, Amazon.com Inc. AMZN, Alphabet Inc. GOOGL GOOG and Tesla Inc. TSLA — make up 23% of the portfolio.
But some investors want to look at individual stocks. Here are three screens of the 100-stock COWZ portfolio. Each list includes market capitalization (in billions of dollars), dividend yields and a summary of opinions among analysts polled by FactSet:
Fattest cash cows
Here are the 10 largest stocks held in the COWZ portfolio, by market capitalization:
Company
Ticker
Market cap. ($bil)
Dividend yield
Share “buy” ratings
Closing price – Jan. 5
Consensus price target
Implied 12-month upside potential
Pfizer Inc.
PFE
$312
2.88%
42%
$55.63
$57.87
4%
Exxon Mobil Corp.
XOM
$283
5.27%
38%
$66.75
$73.47
10%
AbbVie Inc.
ABBV
$240
4.15%
77%
$135.87
$137.57
1%
Intel Corp.
INTC
$219
2.58%
28%
$53.87
$54.78
2%
CVS Health Corp.
CVS
$140
2.08%
75%
$105.81
$113.31
7%
Bristol-Myers Squibb Co.
BMY
$138
3.47%
63%
$62.16
$71.92
16%
International Business Machines Corp.
IBM
$124
4.75%
28%
$138.22
$142.74
3%
ConocoPhillips
COP
$100
2.43%
87%
$75.65
$92.24
22%
Gilead Sciences Inc.
GILD
$91
3.93%
42%
$72.18
$76.38
6%
Altria Group Inc.
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.
AM
$5
9.05%
0%
$9.94
$10.28
3%
Lumen Technologies Inc.
LUMN
$13
7.81%
14%
$12.80
$11.30
-12%
Altria Group Inc.
MO
$89
7.40%
39%
$48.64
$52.69
8%
Exxon Mobil Corp.
XOM
$283
5.27%
38%
$66.75
$73.47
10%
Dow Inc.
DOW
$43
4.80%
36%
$58.35
$65.48
12%
International Business Machines Corp.
IBM
$124
4.75%
28%
$138.22
$142.74
3%
LyondellBasell Industries NV
LYB
$32
4.70%
52%
$96.27
$111.30
16%
H&R Block Inc.
HRB
$4
4.53%
33%
$23.86
$25.80
8%
Xerox Holdings Corp.
XRX
$4
4.29%
0%
$23.33
$17.60
-25%
AbbVie Inc.
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.
LOPE
$3
0.00%
100%
$85.78
$103.75
21%
Loyalty Ventures Inc.
LYLT
$1
0.00%
100%
$31.97
$63.00
97%
Targa Resources Corp.
TRGP
$12
0.74%
91%
$54.06
$67.05
24%
Laboratory Corp. of America Holdings
LH
$27
0.00%
89%
$286.57
$349.85
22%
ConocoPhillips
COP
$100
2.43%
87%
$75.65
$92.24
22%
Lithia Motors Inc.
LAD
$9
0.48%
86%
$292.93
$464.58
59%
LKQ Corp.
LKQ
$17
1.70%
85%
$58.72
$65.50
12%
Diamondback Energy Inc.
FANG
$21
1.69%
85%
$118.11
$137.30
16%
Olin Corp.
OLN
$8
1.52%
83%
$52.69
$74.00
40%
Nexstar Media Group Inc. Class A
NXST
$6
1.88%
82%
$149.14
$187.67
26%
Boyd Gaming Corp.
BYD
$7
0.00%
82%
$62.38
$83.80
34%
Victoria’s Secret & Co.
VSCO
$5
0.00%
82%
$56.10
$82.73
47%
Source: FactSet
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