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Owning Cash Cow Businesses Thumbnail

Owning Cash Cow Businesses

Global Market Commentary Investment Planning

  

Ben Thorson


The Wealth Group’s team of advisors (9 total) meets once per month for an Investment Committee Meeting (ICM). During this time, we:

  • Review current market events and trends.
  • Conduct a deep dive review of our investment models and what recent performance has meant to our clients.
  • Analyze and discuss whether any changes should be made to our investment models.
  • Scrutinize new potential investment opportunities for our clients.

Our team’s investment philosophy of asset allocation remains the same: we don't put all your eggs in one basket. We build diversified portfolios in a low-cost, tax-efficient manner -- while seeking the highest risk-adjusted returns possible for our client families. 

Our team is proactively monitoring our clients' portfolios daily. All clients (and our team members!) own the same investment holdings (albeit at different percentages)— and this ensures we are laser-focused on the small group of holdings owned by every single client and team member.

Two years ago, we first met with Pacer ETFs, a boutique Pennsylvania-based investment firm with a compelling lineup of funds. After multiple meetings and extensive due diligence, we added their US Cash Cows 100 ETF (symbol: COWZ) to our investment models. This fund owns the 100 American companies with the highest free cash flow yield. A simple way of explaining free cash flow yield: buying companies that are generating more cash than they need to run their business.

The Oracle of Omaha (Warren Buffett) has long touted the merits of investing based on this metric:


Our conviction in this particular investment metric has grown over the past two years. Accordingly, we recently added two more "Cash Cow" funds to client portfolios:


  • Pacer US Small Cap Cash Cows 100 ETF (CALF)
  • Pacer Developed Markets International Cash Cows 100 ETF (ICOW)

Each of these three funds has the same objective (finding cash cows) -- but each invests in a different segment of the market. COWZ finds large and mid-sized US stocks, CALF invests in small US stocks, and ICOW is hunting for cash cows abroad.

A couple of visuals to help explain how this works:

"Isn't this idea too good to be true?"

If you're like me, you're wondering: "If it's this easy, why doesn't everyone invest like this?" Because markets move in cycles, funds like this won't always be top performers in a given year -- or two. Yet over the long term, investing in companies like this has proven extremely fruitful. But it requires patience to stay fully invested in a fund like this during both feast and famine periods. Part of why our clients invest through our firm is to have a coach/partner in their corner to help them stay fully invested, year after year.

What will the returns look like?

We hope these Cash Cows funds outperform the broad stock markets over a full market cycle (5 years or longer). The chart below highlights how investing based on the highest free cash flow yields has produced higher annualized rates of returns than the broad stock market (measured by the Russell 1000 Index) -- while having fewer negative 12-month periods.

We acknowledge that past performance is not a guarantee of future returns. That said, it is a demonstrable fact that these funds are owning companies with nearly 2.5 times higher free cash flow yield vs. the broader US stock market. We anticipate these holdings could be core holdings in our models for many years to come.

If an investor is considering the purchase of a business, you can bet dollars to donuts he is looking at free cash flow yield to help analyze whether the business is worthy of purchasing. 

For more information on our team’s current market outlook, check out our recent blog post from our Director of Wealth Management, Mike Earl.

Until next time, remember...