Woah – we are in deep bear market. The indices are down, but I can also tell from some of these nasty bear market rallies (or squeezes) – these bear market rallies are ferocious with many stocks moving up 9-10% with no news.
When stocks are moving 9-10% up or down on no fundamental news, you know that it is driven by significant fund flows in these stocks – i.e. some people are taking risk off, there is not a lot of liquidity in the market in a bear market, so as they move in (covering the stock) or move out (selling their holdings), the stocks inevitably move because there is not a lot of people taking the other side.
While it is clear that we are in the bear market, it is NOT clear when we will go back into bull market. My sense is that we may not get to bull market for a while (not bear market rallies) as long as US federal reserve continues to raise rates to normal level.
there are three things that seem inevitable to me-
First : Bull market will inevitably return, but until then we will continue to have high volatility market.
Second: Inflation likely stays elevated medium-term.
Third: Rate will continue to go up
As such I am repositioning my portfolio accordingly and I have been leveraging ETFs as investment vehicles for this. I want to discuss them below.
First ETF: Pacer US Cash Cows 100 ETF (COWZ)
COWZ! Because it is an ETF of CASH COWS!
COWZ screens for Russell 1000 for top 100 companies based on free cash flow yield – these companies have significant cash flow margin, which is a sign of pricing power over their customers and allows the companies to either return capital and deploy capital to acquire attractive assets.
These are particularly important for now for three reasons –
- Excess capital returned to shareholders as dividend can give cash flow to shareholders to supplement other income sources.
- Excess capital returned to shareholders as repurchase support stock price and dampens some volatility.
- In bear market, asset buyers can acquire assets at attractive valuation – which likely become highly attractive in bull market (when it comes).
At 2% dividend yield, it is the not highest yield generating ETF, but it generates some cash flow that is durable and has potential to grow.
As seen below, top holdings have history of consistent increase in dividend and/or repurchase – that is enabled by having highly consolidated, oligopolistic market positioning.
For instance, $BMY has been raising dividends constantly –
$COWZ is one that I randomly came across. I am investing in it and wanted to share.
It is tough time to be investing in growth stock – it is a bear market that is essentially triggered by the central bank that is pulling back in liquidity (quantitative tapering). Multiples can contract, and capital preservation is highly critical.
$COWZ offers some cash flow through dividend and as these companies buy back their stock or other assets at highly attractive valuation, it should strongly participate in the bull market as they will have reduced their float (freely traded shares) and the assets that they acquired should see multiple expansion – even though their current stable base business become less sexy.
This is not investment advice and please make sure you do your own due diligence!
