The markets are frustrated, waiting for a decline in interest rates. There is now the added concern of rates going higher. In a recent note, I showed that when credit risk is tight, as it is now, FCF yield (Free Cash Flow per share divided by current share price) moves in tandem with the direction of interest rates. The reason is that the cash flow duration is shorter for value companies than for growth companies. Hence, increasing rates benefit value, and declining rates hurt. The FCF yield factor for value stocks that I use is a long-short portfolio of stocks from the top 500 market cap US stocks, long the top FCF yield stocks, and short the lowest in each sector (i.e., sector neutral). It is produced and rebalanced weekly using Finsera platform.
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