You may not know that the common expression “cash cow” was coined by the great management guru Peter F. Drucker in the 1960s to refer to a product or business that continues to retain its sizable market share, even as the market itself is stagnant or declining.
Such a business or product can continually churn out profits with little maintenance, investment or oversight, in much the same way that a cow is able to generate milk virtually endlessly if simply provided with grass for grazing. Meanwhile, the funds that are generated are then able to be used by the parent company for investment or research and development purposes.
Nowadays, it seems that many investors are looking for their own cash cows in anticipation of the release of the December Consumer Price Index (CPI) data tomorrow and the prospect of interest rate cuts sometime this year. While the start of 2024 was mixed, with the Nasdaq falling by more than 1%, more than a few investors have argued that small-caps are the “cash cow” the market has been waiting for.
As I wrote in my Eagle Eye Opener (and if you aren’t a subscriber yet, why aren’t you?) that while small-caps performed poorly in 2023 when juxtaposed against the broader market, small-caps lagged the S&P 500 by more than 10%, after Chairman Jerome Powell and the Fed began singing a more dovish tune. In addition, small-cap stocks shifted to trading at reduced valuations, such as 20% below their historical measures.
One of the exchange-traded funds (ETFs) that aims to provide investors with access to the world of small-cap stocks is the Pacer US Small Cap Cash Cows 100 ETF (BATS: CALF).
Although the base of its portfolio is the S&P Small Cap 600 Index, the fund’s managers quickly weed out financial companies (other than real estate investment trusts) and companies that will likely have negative free cash flow or earnings in the following two years. The companies that make the cut are sorted by trailing 12-month free cash flow yield, then the top 100 companies are weighted by their trailing cash flow yield.
Some of the stocks currently in the portfolio include Alpha Metallurgical Resources, Inc. (NYSE: AMR), Boise Cascade Co. (NYSE: BCC), M/I Homes, Inc. (NYSE: MHO), Tri Pointe Homes, Inc. (NYSE: TPH), M.D.C. Holdings, Inc. (NYSE: MDC), Mueller Industries, Inc. (NYSE: MLI), Meritage Homes Corporation (NYSE: MTH) and Cal-Maine Foods, Inc. (NASDAQ: CALM).
As of Jan. 9, CALF has been up 4.39% over the past month and up 14.57% for the past three months. The fund has an annual expense ratio of 0.59%.
Chart courtesy of www.stockcharts.com
In short, while CALF does provide an investor with a way to invest in small-cap stocks, this kind of ETF may not be appropriate for all portfolios. Thus, interested investors should always conduct their due diligence and decide whether the fund is suitable for their investing goals.
Finally, remember that I am happy to answer any of your questions about ETFs, so do not hesitate to send me an email. You may just see your question answered in a future ETF Talk.
