It’s important to remember that many of today’s best-performing growth stocks were once unfavorable value stocks. It wasn’t that long ago that these companies had fallen out of favor with investors. With expectations low, it was their free cash flow (FCF) yields at the time that pointed to a potentially brighter future.
Free cash flow remains after a company has paid expenses, interest, and taxes, and has reinvested in the business. The uses include buying back stocks, paying dividends, or participating in mergers and acquisitions. It also arguably provides a more comprehensive and accurate snapshot of a company’s potential profitability.
Michael Mack, Associate Portfolio Manager for VictoryShares and Solutions, said “Because FCF yield focuses on profitable companies trading at a discount, it can naturally present interesting opportunities. FCF yield may actually be a useful contrarian indicator,” he said.
See more: “New VFLO ETF: High Free Cash Flow Yield Without Sacrificing Relative Growth Potential”
Don’t Rely Solely on Growth Indexes
According to Mack, the market can underestimate a company’s ability to reinvent itself. Often, they can do this by finding new growth markets, whether that new market is the cloud or AI. Investors don’t have to rely solely on the growth indexes to find future growth leaders.
“There are many companies that are out of favor today that may be the growth leaders of the future,” Mack said. “You don’t always have to chase the shiniest new object to identify the strong growth companies of the future.”
For investors looking to target future growth companies with high FCF yields, the VictoryShares Free Cash Flow ETF (VFLO) may be worth looking into. VFLO tracks an index1 focused on large-cap companies with high free cash flows. These companies are then filtered to select those with the most favorable growth prospects using trailing and forward-looking metrics.
For more news, information, and strategy, 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.
Free cash flow (FCF) represents the cash that a company generates after accounting for cash outflows to support operations and maintain its capital assets.
1/ The Victory U.S. Large Cap Free Cash Flow 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.
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