Warren Buffett once wrote: “Growth is always a component in the calculation of value.”1 This makes a lot of sense. After all, if a growth company costs the same as a value stock, that’s a better valuation opportunity. But when seeking value, it’s important to avoid value traps.
Per Lance Humphrey, Senior Portfolio Manager at VictoryShares and Solutions, there are many value stocks with little to no long-term growth prospects.
“Very often, there’s a lot of companies that are attractively priced,” Humphrey said on a webcast hosted by VettaFi. “But it’s for a very good reason.”
For example, it could be “a company that has very little to no growth prospects moving forward.” On the other hand, the company may face a new threat, changing the trajectory of its prospects.
Filtering Out The Slow Growers
Whatever the reason, Humphrey explained that when looking to capture that value premium, it’s essential to avoid those cheap companies that don’t have prospects moving forward. That’s why the (VFLO ) applies a growth filter to eliminate some slower-growing names.
VFLO targets large-cap companies with high free cash flows. It seeks to track the performance of the Victory U.S. Large Cap Free Cash Flow Index2. The Index methodology assesses free cash flow (FCF) based on a historic and forward-looking basis.
The ETF targets large-cap companies with high free cash flows. It then filters these companies to select those with the most favorable growth prospects using trailing and forward-looking metrics.
The outcome is a 50-stock portfolio consisting of companies with the highest combination of free cash flow yields and growth rates3 to be included in the Index that is reconstituted and rebalanced every quarter.
For more news, information, and analysis, visit the Free Cash Flow Channel
VettaFi LLC (“VettaFi”) is the index provider for VFLO, for which it receives an index licensing fee. However, VFLO is not issued, sponsored, endorsed, or sold by VettaFi, and VettaFi has no obligation or liability in connection with the issuance, administration, marketing, or trading of VFLO.
1 Berkshire Hathaway Annual Letter, 1993
2 This Index calculates free cash flow yield by dividing expected free cash flow by enterprise value. Expected free cash flow is the average of trailing 12-month FCF and next 12-month forward free cash flow. Enterprise value (EV) measures a company’s total value, often used as a more comprehensive alternative to equity market capitalization.
3 Growth rate is defined as the long-term sales growth trend defined as an average of 5-years historical and 2-years forward sales growth.
Carefully consider a fund’s investment objectives, risks, charges, and expenses before investing. To obtain a prospectus or summary prospectus containing this and other important information, visit http://www.vcm.com/prospectus. Read it carefully before investing.
All investing involves risk, including the potential loss of principal. Please note that the fund is a new ETF with a limited history. The Fund has the same risks as the underlying securities traded on the exchange throughout the day. Redemptions are limited, and commissions are often charged on each trade. ETFs may trade at a premium or discount to their net asset value. The Fund invests in securities included in, or representative of securities included in, the Index, regardless of their investment merits. The performance of the Fund may diverge from that of the Index. Investments concentrated in an industry or group of industries may face more risks and exhibit higher volatility than investments that are more broadly diversified over industries or sectors.
Derivatives may not work as intended and may result in losses. Large shareholders, including other funds advised by the Adviser, may own a substantial amount of the Fund’s shares. The actions of large shareholders, including large inflows or outflows, may adversely affect other shareholders, including potentially increasing capital gains. Investments in mid-cap companies typically exhibit higher volatility. The value of your investment is also subject to geopolitical risks such as wars, terrorism, environmental disasters, and public health crises; the risk of technology malfunctions or disruptions; and the responses to such events by governments and/or individual companies.
The information in this article is based on data obtained from recognized services and sources and is believed to be reliable. The securities highlighted, if any, were not intended as individual investment advice.
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