COWZ: Relative weakness continues, and the big bet is on energy

S&P 500 companies generate large amounts of free cash flow. But this does not mean that the market represents comprehensive value today. Moreover, many growth sectors in the local stock market are rather small Free cash flow yields. Value investors tend to look for ideas primarily in cyclical areas such as energy, materials, consumer discretionary, and industrials. We’ve seen value and cyclical sectors outperform at times over the past four years, but momentum always seems to end up returning to areas like IT and communications services.

I Repeats Comment Rating on Pacer US Cash Cows 100 ETF (Bat: COWZ). I was lukewarm on the fund in late 2022, shortly before the technology came along. In fact, over the past 18 months, the COWZ has underperformed the S&P 500 by more than 15 percentage points. Today, I like his rating but with As relative strength continues to grow, I’m not overly excited about this free cash flow-focused ETF.

S&P 500 Sector Valuations: Energy hits new highs on FCF return scale

According to the Source, COWZ is a strategy-based exchange-traded fund that aims to increase capital over time by screening the Russell 1000 top 100 companies based on their free cash flow yield. Free cash flow is the cash remaining after a company pays expenses, interest, taxes, and long-term investments. It can be used to buy back shares, pay dividends, or participate in mergers and acquisitions.

COWZ is a large ETF with over $23 billion in assets under management as of June 1, 2024. Because of what it does, the product features a moderate Annual expense ratio 0.49% while 12-month dividend yield It is only about 0.4 percentage points higher than the SPX. Stock price momentum It has been strong in the past few months, especially after the late October 2023 decline in the overall US market.

The fund also ranks well Risk based Given its modest historical standard deviation profile, though, there is a big bet in the sector towards energy currently. I expect this to continue in light of the free cash flow generation seen by small and large oil and gas companies. Finally, COWZ is among the most popular ETFs for value investors, so… Daily liquidity The fund is extremely healthy, receiving an A+ ETF grade by Seeking Alpha. More specifically, the average daily volume over the past 90 days was 2.2 million shares, while the 30-day average bid/ask spread is tight at just 0.1%, per Pacer ETFs.

Looking more closely at the portfolio, the 5-star Morningstar-rated Silver fund plots in the far left column of the style box, indicating the slope of its value. However, there is some diversification in size, with three-quarters of the allocation invested in small- and mid-cap stocks. Only 9% of the COWZ is considered growth. With a current P/E ratio of 11.6, it is a full nine cycles cheaper than the S&P 500’s P/E, while COWZ’s long-term EPS growth rate is actually quite low at 6.6%, resulting in a moderate P/E ratio of 11.6%. 1.8x.

COWZ: Portfolio Profiles and Factors

COWZ is very much a play on energy and materials. Of course, energy represents the largest weight at 23%, an increase of 20 percentage points compared to the broad US stock market. The 9.2% material is 6 ppm excess weight. The growth-intensive IT sector represents less than 10% of the COWZ even though many of today’s largest companies generate significant amounts of free cash flow. There is also no financial or real estate exposure because the FCF metric does not apply to how accounting is done in those sectors.

Therefore, I prefer to use COWZ as a small affiliate position rather than allocating it aggressively to control a long-term portfolio.

COWZ: Large power weight

Seasonally, June and July are often strong months, but historically fluctuations have been seen from August through mid-October. So, now is a good time to join ETFs, but selling calls on COWZ can help increase portfolio return in the event of a downward price movement again in the later summer months.

COWZ: Typically bullish from June to July, but fluctuations can occur later in the third quarter

Technical take

With a mixed valuation and fairly focused sector positioning, COWZ’s technical chart is generally favorable. Notice in the chart below that shares are above the key area of ​​$51 to $51. This is also where the longer-term bullish 200 day moving average comes into play, so there is some important technical confluence there. In the near term, COWZ has struggled to rise back above the $56 level and the same difficulty has been seen on the RSI Momentum indicator at the top of the chart.

I would like to see COWZ not only rise to the $56 level thanks to improving momentum, but also perform better against the S&P 500. Relative strength has been weak since November 2022. The ETF has, in effect, been an opportunity cost for investors, assuming there is money . The ETF could have been invested in a low-cost S&P 500 index fund. COWZ also has negative alpha this quarter with its recent decline while the overall market is not far from all-time highs.

Overall, while the COWZ technical chart is healthy, relative strength is weak and there have been some bearish moves in the near term, which the flat and negatively sloping 50DMA now indicates.

COWZ: Above key support, monitoring RSI trends after a poor start to Q2

Bottom line

I repeat the comment rating on COWZ. The strategy is sound, but the sectors and styles the fund invests in are still underperforming while the ETF’s valuation is not incredibly cheap considering the EPS growth rate.