XOM - Who Likes Cash COWZ?

Summary

• As many of you know, I'm in the process of launching my own REIT Index.
• I thought it would be interesting and educational to learn about other popular exchange-traded funds.
• So, I decided to take a closer look at Pacer US Cash Cows 100 ETF.

Investors through the first month of the new year have turned back to “risk on” assets, which have propelled the likes of the Nasdaq (COMP.IND) and S&P 500 (SP500) higher by nearly 15% and 8%, respectively.

The performance by the Nasdaq was the best one-month performance since 2001, which comes after a year in which the index fell 33%.

Investors are signaling that the Federal Reserve is leaning towards only one more rate hike before pausing and potentially cutting rates in the back half of the year. I am not in that camp - but I do believe we'll see a pause and hold for a longer period.

Regardless, the worst of the rate hikes and inflation are clearly (hopefully) behind us. There are still a few things that could keep inflation levels elevated, the largest being the reopening of China.

China has had its global zero-COVID policy for an extended period and is finally beginning to return to normal. Although that may be beneficial for many businesses, it could also put pressure on inflation as spending from a global power like China could be very big.

As such, considering this and the run of the stock market to start the year, we again find ourselves at inflated valuations. Regardless of the run we have seen in the short term, my strategy remains unchanged: invest in high-quality companies with strong free cash flows.

One way to do this is through exchange-traded funds ("ETFs"), and today we will cover a specific ETF that focuses primarily on companies with solid cash flows. I introduce to you the Pacer US Cash Cows 100 ETF ( COWZ ).

The Cash Cow ETF

The Pacer US Cash Cows 100 ETF is a strategy-driven exchange-traded fund that seeks to invest in the stocks of companies operating across diversified sectors, excluding the financial sector.

It invests in growth and value stocks of companies across diversified market caps. The fund seeks to track the Pacer US Cash Cows 100 Index , by using full replication technique, and aims to provide capital appreciation over time by screening the Russell 1000 for the top 100 companies based on free cash flow yield.

The fund calculates free cash flow after the company has paid expenses, taxes, and capital expenditures. The funds remaining are considered free cash flow, or FCF, which can then be used to pay down debt, pay dividends, stock repurchases, or expand the business through transactions.

When researching the safety of a dividend, many look at the payout ratio, which can be calculated as the company's dividend per share divided by EPS, which determines what percentage of the company’s EPS is utilized for a dividend.

A higher percentage could be a red flag. To take things a step further, I like to look at a company’s FCF yield because this is actually where dividends are paid from.

As free cash flow expands, this can give insights as to the health of not only a business but also the company’s ability to grow their dividend. A fluttering FCF amount could be a warning that a dividend could be in danger of being cut.

As such, now that you have a better understanding of cash flow and its importance to not only the health of the company but also the dividend, you can see why I prefer strong businesses with growing cash flows. This is exactly what the ETF COWZ is looking for when building out its portfolio.

Top Positions Within COWZ

The Pacer US Cash Cows 100 ETF has $12.5 billion of assets under management and maintains a portfolio of 103 positions . The top 10 positions and their weightings within the fund are as follows:

1. Meta Platforms ( META ) 3.0%
2. PayPal Holdings Inc ( PYPL ) 2.3%
3. Dow Inc. ( DOW ) 2.3%
4. Nucor Corp ( NUE ) 2.2%
5. LyondellBasell Industries ( LYB ) 2.2%
6. Zillow Group ( Z ) 2.1%
7. Valero Energy ( VLO ) 2.0%
8. HP Inc ( HPQ ) 2.0%
9. Marathon Petroleum ( MPC ) 2.0%
10. Exxon Mobil ( XOM ) 2.0%

The top 10 positions make up 22% of the entire portfolio. Let’s take a look at valuation for each of these individual stocks.

As you can see from the chart above, six of the top 10 positions are actually trading at a lower valuation than their historical 5-year average. Here is a quick look at the top 2 holdings within the portfolio.

Meta Platforms

Meta Platforms is a social media company, formerly known as Facebook, with a strong advertising business. The company has been under fire for much of the past 12 months, but recently issued its Q4 earnings and 2023 guidance, to which investors praised the company for cutting costs.

Facebook and Instagram, both owned by Meta, have the opportunity to build out their short form content in order to garner more views and more advertisement.

META needs to continue to lower their spending, especially when it comes to the metaverse spending, which has yielded very little in terms of revenue, although not expected at this time.

Currently, shares of META trade at 19.6x next year's earnings compared to a 5-year avg of 22.9x, even after the big run up in the stock.

PayPal Holdings

PayPal as you know is a payment platform, but it too got caught up in the valuation craze in 2021 and since then, the stock is down over 30% the past 12 months.

PayPal is not the fast-growing alternative payment company of the past, instead, they are much more mature. Thus, as the company reports Q4 earnings, investors are looking for more clarity in terms of guidance, and like Meta, they are looking for the company to take cost cutting measures.

Being that the stock is down so much from their 2021 highs, investors can now add the stock at a forward multiple of just 18x, which is more than half of what their 5-year average is, telling you just how insane their valuation was in the past few years.

COWZ Fundamentals

When it comes to Morningstar, they rate the COWZ ETF 5-stars. In addition, when looking at some key metrics, the ETF looks enticing.

Here is a look at some of those metrics when compared to the Russell 1000 Index.

This data was as of the end of the year, but as you can see, the fund as a whole has a solid free cash flow yield of nearly 13% and a P/E ratio of only 7x, roughly half of the Russell 1000 index.

The index rebalanced at the end of the year, as the managers expanded the funds exposure to energy and information technology, while decreasing its exposure to materials and health care.

The health care sector reduction was interesting, but when reading the rebalance highlights, the fund managers noted that the reduction in exposure was more so due to taking profits and that the health care sector is still a top sector.

The fund's latest quarterly announced dividend was in December for $0.32 per share, which equates to an annual dividend of $1.28. This calculates out to a dividend yield of 2.6%.

Within the top 10, only Meta, PayPal, and Zillow Group, do not pay a dividend.

COWZ overall seems like a solid ETF trading at a nice valuation. However, the fund does have heavy exposure to the energy and materials sector, so that is something to note before opening a position, as these sectors can be cyclical in nature.

What do you think?

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