Stocks were flat this morning ahead of more corporate earnings and crucial inflation data coming out later in the week. The Labor Department is set to release January’s consumer price index data on Thursday. The consensus expects a blistering 7.2% increase from one year ago.
Many experts predict a more hawkish Fed than initially anticipated in 2022, calling for multiple rate hikes starting in March with a potential 50 basis point increase. As the market adjusts to a more stringent central bank, investors continue to move away from high-priced growth names in search of undervalued stocks. But after the rotation out of growth and into value exploded in January, the job for bargain hunters is more difficult.
Anyone looking for companies trading for cheap valuations relative to their earnings and long-term growth potential would do well to expand the search to small and mid cap investments, which seem much more appealing right now than their large-cap counterparts.
“While large and mid-caps trade at a 35%-40% premium to history, small caps now trade in-line with history,” said Jill Carey Hall, equity and quant strategist for BofA Securities. “In addition to being the least expensive, they are also a better diversifier. … While asset class returns have grown more correlated vs. 20 years ago, the [small-cap] Russell 2000 is less correlated with other asset class returns on average than the Russell MidCap or S&P 500 both over the last three years and the last few decades.”
Today we’ve got a recommendation that allows investors to cast a wide net over small cap value names.
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The Pacer US Small Cap Cash Cows 100 ETF (CALF) provides access to U.S. small-caps with an unexpected twist. The fund uses free cash flow as its main metric for selecting holdings. Quarterly, the fund selects the top 100 S&P SmallCap 600 stocks based on their trailing 12-month free cash flow yield, then weights them by the metric (up to 2%).
CALF is outperforming its small-cap peers on a year-over-year basis. Over the past twelve months, the MSCI USA Small Cap Index has ticked 0.15% lower while CALF has risen nearly 15%.
We like this value play because, generally, high cash flows are an indicator that a company has a healthy business and can afford to invest in new opportunities. So there is a high likelihood for growth within the basket of names. The fund currently earns a full five stars from Morningstar, and independent research firm CFRA lists the fund among the highest-scoring small-cap equity ETFs it covers.
With nearly $670 million in assets under management, the small-cap fund is no small potato—the fund yields 0.60%. A low expense ratio of just 0.59% makes this one of 2022’s more appealing ETFs for those seeking value amid small cap names.
Where to invest $1,000 right now...
Before you consider buying CALF, you'll want to see this.
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And it's not CALF.
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Keith say’s he thinks investors will be able to turn a small $50 stake into $150,000.
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But you have to act now, because a catalyst coming in a few weeks is set to take this company mainstream... And by then, it could be too late.
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