Ranking the Growth of Free Cash Flow and Finding the Leaders

Intuitively, most investors would assume that consistent growth in free cash flow within a company, would result in a high performing stock. Well today we're going to test out that theory with the "Free Cash Flow Growth Leaders Stock Screener".

Intuitively, most investors would assume that consistent growth in free cash flow within a company, would result in a high performing stock. Well today we’re going to test out that theory with the “Free Cash Flow Growth Leaders Stock Screener”. With this screener, we’re looking for:

·
Large and stable companies; companies that have a market cap over a billion dollars sectioned off into their respective sectors.

·
Companies that rank in the top 15% of their sectors for free cash flow growth over the last trading year as long as their FCF is greater than 0.

We plotted two extra variables, capital expenditures and sales growth. We scrutinized capital expenditures because we wanted to see which companies were expecting growth in the near future and took the initiative to invest in operations that may offer a return down the road. Next, we looked at sales growth over the past year to see which companies were putting the money spent on capital expenditures to good use.

Taking it a step further, we also plotted all red and green flags over top of the individual ticker overviews. This allows us to more quickly screen out potential investments for our portfolio. If you’ve been following our most recent Red & Green Flag article series you’ll have a better grasp on what these individual values mean. If you aren’t familiar with that series, you can find them here.

Now that we have a group of companies and we have the analysis of these companies, we can look at the results to see if this strategy has performed well over the last 17 years. Even though past results don’t indicate future performance, it does give us an idea of how these companies perform in real market environments over an extended period of time. From the looks of our chart, these set of companies have consistently performed well in comparison to the S&P. These companies may not outperform the market by another 500% in the next 17 years, but now we know that they’re worth taking a look at. Now let’s take a look at the backtest results.

Diving deeper into the backest, we see that our average return for each one of our positions is 3.5%. With an average holding period of around 107 days, we didn’t have to incur a lot of trading cost, 0.1%, while implementing this screener. Granted, we held 127 positions every time we traded, but we just want to get a general idea of how the companies in this area perform.

Our best position, SHS, gave us a return of 152% over the last 17 years

 

Our worst position, ARBA, only gave us a loss of 96%.

Now let’s take an even bigger view and look at every position we’ve held in the last 17 years.

LOOK AT ALL THAT GREEN! In every sector, there seems to be way more green than red. When we take a closer look we see that there’s more red, relatively, in the technology sector than in other sectors. Generally, all positions look like they either lost or gained about 10%. Overall, it looks like more companies gained over that 10% mark. Going into a couple of examples of positions we’ve held in the past, we see that only a couple of the positions are bad.

Over the 17 years that we held positions, the screener always gave us something to choose from. During the financial crisis you can see that we held Enel Americas and in the early 2000’s we held Health Management. Even though we’re going back almost two decades with some of the positions, this screener still gave us good picks while not knowing the future.

 

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