“Cash cows” fed in the stock market tormented by inflation
(Bloomberg) — Investors seeking shelter from year-round stock sell-offs have found a home in cash-rich companies.
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Take, for example, the Pacer US Cash Cows 100 ETF (COWZ Tape), whose assets under management have risen to $5.6 billion from $1.3 billion at the start of 2022. The fund, which tracks medium and large companies with high free cash flow returns, has seen an influx of Every week so far this year, data compiled by Bloomberg appears. As of Monday, it’s up 2.3% since the start of the year, compared to the S&P 500’s loss of nearly 17%.
“If growth slows, cash flow becomes more valuable,” Eileen Hazen, chief market strategist and portfolio manager at FLPutnam, said over the phone. The market rewards companies with cash flow. And companies without cash flow, which we might call low-quality value, are starting to underperform; And we think that’s likely to continue.”
COWZ counts a number of energy companies among its largest components, including Valero Energy Corp. and Occidental Petroleum Corp. and Phillips 66 and Exxon Mobil Corp. Energy is one of the only sectors that recorded positive returns this year. Additionally, Hazen says that over the past decade, oil companies have responded to “investors’ continued insistence on returning money to shareholders and not spending their cash flow on capital expenditures,” she said. “This means that we have reduced investment in oil, which helps raise oil prices, but it also means that these companies have a freer cash flow.”
Cash flow ETFs stand out in a market plagued by persistently high inflation, a market in which very few investments have succeeded. Stocks, bonds and cryptocurrencies have all struggled this year amid the Federal Reserve’s rate hike regime, hurting speculative corners in the market in particular.
Energy outperforms utilities, the second-best category, by more than 45 percentage points and consumer ratings, the worst performing sector, by about 80 percentage points.
Investors focus on companies with strong fundamentals, which usually means companies with positive earnings and cash flow, according to Sean Cruz, senior trading analyst at TD Ameritrade. “If it’s an indication that they’re focusing on basics and quality, it makes sense,” he said over the phone. “At the other end of that, there are just the companies that are burning money, and they are not going to be profitable anytime soon. Those are the first ones to be taken out.”
Elsewhere, the Pacer Global Cash Cows Dividend ETF (GCOW) has also seen interest, with the focused fund receiving cash dividends each month so far this year with a total of nearly $283 million. Bloomberg data shows that this puts her on track for her best year ever.
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