Group 1: Investment Strategy - The combination of high free cash flow yield and dividends is a powerful investment strategy that has been proven over 30 years of data across multiple market cycles [2][26][27] - From 1990 to 2016, stocks in the top quintile for both dividend yield and free cash flow yield generated an annual excess return of 6.03% compared to the market [3][16] - High dividend yield stocks without free cash flow produced only a 0.10% excess return, while high free cash flow yield stocks without dividends achieved 3.57% [4][16] Group 2: Importance of Free Cash Flow - Free cash flow is a more reliable indicator than earnings, as it reflects actual cash available for dividends [8][10] - Companies that generate strong free cash flow but do not pay dividends often waste cash on unproductive projects, which can destroy shareholder value [9][10] - High free cash flow dividend payers have shown superior characteristics, including lower leverage and higher returns on equity [10][11] Group 3: Payout Ratios and Dividend Growth - The optimal payout ratio for dividends is around 40 to 50% of free cash flow, allowing for sustainable dividend growth [12][13] - Companies with a 40 to 50% payout ratio can maintain dividends during economic downturns, while those with higher ratios are at risk of cuts [15][21] - The Pacer Cash Cows Index, focusing on high free cash flow yield companies, has delivered annual dividend growth of 9.2% while maintaining a sustainable payout ratio [13][18] Group 4: Performance During Market Cycles - High free cash flow dividend payers recover faster from market downturns, averaging 15 months compared to 28 months for non-payers [11][22] - The S&P study from 1990 to 2017 found that the top quintile combining dividend yield and free cash flow yield outperformed 75% of the time [16] - During bear markets, this strategy provided meaningful downside protection, outperforming 50% of the time [16] Group 5: Company Examples - Archer-Daniels-Midland (ADM) has a dividend yield of 3.4% and a payout ratio of 24%, demonstrating stability and strong free cash flow generation [28][31] - HNI Corp. has a dividend yield of approximately 3.3% with a payout ratio of 43 to 45%, showing resilience despite market uncertainties [33][37] - OneSpan operates in digital security with a dividend yield of 4.03% and a low payout ratio under 8%, indicating strong cash flow and growth potential [39][41] - Luxfer Holdings has a dividend yield of approximately 4.3% and a payout ratio of 43%, focusing on high-performance materials with steady demand [45][48]

Core Thesis - Electronic Arts Inc. (EA) is viewed as a steady compounder rather than a high-growth tech stock, with modest returns over the past five years compared to the S&P 500 [2] Financial Performance - EA's trailing and forward P/E ratios are 58.73 and 24.39 respectively, indicating a premium valuation [1] - The company has maintained a 10-year median Return on Invested Capital (ROIC) of 16%, supported by strong franchises like FIFA/EA Sports FC and Madden [3] - EA's debt-to-equity ratio is approximately 32%, suggesting manageable leverage [3] - The current free cash flow yield is around 4%, indicating that investors are paying for reliability rather than deep value [3] Revenue and Market Position - EA's revenue growth has historically been in the mid-single digits and is expected to remain steady, which is modest compared to faster-growing peers like Activision Blizzard and Take-Two [3] - The company maintains unmatched market dominance in sports gaming globally, with recurring revenue from live services strengthening its portfolio [4] Strategic Initiatives - The recent rebranding from FIFA to EA Sports FC is seen as a potential growth catalyst, allowing for flexibility in partnerships and monetization [4] - EA prioritizes consistency over rapid expansion, with stable guidance and resilient margins [5] Valuation Insights - The stock trades at a premium around $172 versus a fair value estimate of $150, reflecting market willingness to pay for brand strength and dependable cash flows [5] - Despite the quality and stability of the shares, they appear overvalued, offering limited upside [5] Historical Context - Since a previous bullish thesis in January 2025, EA's stock price has appreciated approximately 73.32%, as investors rewarded the company's reliability [6]

Core Insights - The current market environment is characterized as a "golden age of active investing," driven by mispricings and opportunities in smaller market cap securities and international stocks [10][14][61] - There is a significant disparity in market capitalization among the largest companies, with some reaching valuations of over $4 trillion, while smaller companies like American Airlines have market caps around $15 billion [12][13] - The focus on free cash flow yields is emphasized, with many large-cap tech companies exhibiting low yields compared to smaller or undervalued companies [19][90] Market Trends - Active investing has gained traction since 2020, largely due to the dominance of large-cap technology companies and the distortions caused by passive investing [10][11] - International markets, particularly in Europe, have shown strong performance, with the Italian ETF up 52.7% this year, indicating opportunities outside the U.S. [14][57] - The S&P 500's P/E ratio is currently around 31, which, while high, is not unprecedented compared to historical peaks [35][36] Investment Strategies - The strategy of being contrarian is highlighted, suggesting that investors should look for mispriced opportunities and consider free cash flow yields as a critical metric for investment decisions [9][89] - REITs, particularly Realty Income, are suggested as potentially undervalued due to a long period of underperformance, setting the stage for future gains [32][34] - The importance of starting valuation is reiterated, with a focus on companies that have high free cash flow yields as attractive investment opportunities [94] Valuation Metrics - Price-to-sales ratios are discussed as a key valuation metric, with many companies trading at multiples significantly above historical norms, indicating potential overvaluation [45][46] - The current market environment shows a bifurcation where some stocks are highly valued while others remain undervalued, suggesting a need for careful selection [47][61] Macro Economic Factors - The U.S. dollar's performance is noted as a significant factor influencing market dynamics, with a weaker dollar benefiting international investments and commodities [85][86] - The potential for interest rate cuts by the Federal Reserve is anticipated, which could impact various sectors differently, particularly those reliant on economic growth [68][71]

Core Insights - Gentex (GNTX) is expanding beyond automotive mirrors and smart glass technologies into advanced safety and connected vehicle systems, indicating a strategic shift in its business model [2] - The company has maintained steady profitability supported by a strong balance sheet and disciplined management, with innovation driving growth opportunities through new products and acquisitions [2] - Gentex's acquisition of VOXX resulted in an 8% increase in consolidated sales during Q3 2025 and improved gross margins due to operational synergies [3] Financial Performance - The anticipated shipments for Full Display Mirror technology are expected to rise by 200,000 to 300,000 units in 2025 compared to the previous year, reflecting robust demand [3] - The management updated the 2025 consolidated revenue forecast to $2.5-$2.6 billion, showcasing confidence in the company's growth trajectory [3] - Gentex boasts a free cash flow yield of 9.4%, with an operating margin of 19.0% over the last 12 months, and a revenue growth of 3.0% [10] Valuation Metrics - GNTX stock is currently trading at 35% below its 2-year high and 14% below its 1-month high, with a price-to-sales ratio lower than its 3-year average, indicating an appealing valuation [10] - The average forward returns for GNTX are projected at 10.4% for 6 months and 20.4% for 12 months, with a win rate of around 74% for positive returns over the 12-month period [11]

Core Insights - Simply Good Foods (SMPL) is well-positioned in the high-protein, low-sugar snack market, primarily through its Atkins and Quest brands, despite facing near-term challenges such as brand-specific slowdowns and inflationary pressures [2][3] - The company has demonstrated strong cash generation and disciplined expansion, suggesting that the market may be overly pessimistic about its valuation, presenting potential upside for patient investors [2][7] Financial Performance - The Quest brand saw a 13.4% increase in Q4 FY25 net sales, particularly in savory snacks, while the Atkins brand experienced a 12.9% decline, leading to a $60.9 million impairment charge [3] - Q4 FY25 net sales fell by 1.8% year-over-year, resulting in a net loss of $12.4 million, with anticipated fiscal 2026 net sales growth projected between -2% and +2% [3] - Simply Good Foods plans to invest $30-$40 million to enhance its salty snack production capacity, aiming to strengthen future growth avenues despite immediate margin pressures from inflation [3] Cash Flow and Valuation - The company boasts an impressive cash flow yield of 7.9%, with a revenue growth of 9.0% over the past 12 months, indicating an increase in cash reserves [7] - SMPL stock is currently trading 35% lower than its 3-month high, 51% below its 1-year high, and 54% below its 2-year high, suggesting a valuation discount [7]

Core Viewpoint - Bath & Body Works (BBWI) has seen a significant decline in stock price since its peak in November 2021, raising questions about its valuation and future growth potential [4][5][6]. Financial Performance - In fiscal 2021, Bath & Body Works reported sales of $7.88 billion, which was 23% higher than 2020 and 46% higher than 2019 [3]. - The company's net income for 2021 was $1.33 billion, translating to earnings of $4.88 per share [3]. - The stock's price-to-earnings (P/E) ratio was 16.8 times its earnings in November 2021, which is considered reasonable for a company with double-digit growth [2]. Market Position - The stock hit a 20-year high of $82 in November 2021 but has since fallen to one-quarter of that value, indicating a significant loss of market confidence [6]. - BBWI's stock has reached 25 new 52-week lows in the past year, reflecting ongoing challenges in the market [5][6]. Growth Trends - The compound annual growth rate (CAGR) for sales was 9.3% from 2015 to 2018, increased to 18.2% from 2018 to 2021, but has since declined to -2.5% from 2021 to 2024 [7]. - Despite the decline, projected sales for 2024 are expected to be $7.31 billion, which is still 35% higher than 2019 sales of $5.41 billion [8]. Operational Metrics - In Q2 2025, Bath & Body Works reported a gross margin of 43.3%, which is an improvement of 90 basis points year-over-year, but its operating margin was only 12.4% [9]. - The company has a total debt of $4.99 billion, which is 109% of its market cap, raising concerns about its financial health [13]. Strategic Focus - The new CEO, Daniel Heaf, has been in position for six months and is expected to implement strategies aimed at accelerating growth and enhancing operational excellence [9][10]. - The company is focusing on three priority areas: top-line growth, operational excellence, and deploying cash flow for growth and shareholder value [10]. Capital Allocation - In the first half of the fiscal year, Bath & Body Works paid out $85 million in dividends and repurchased $254 million of its shares, indicating a commitment to returning value to shareholders [14]. - The company repaid $522 million of its debt in 2024 but has not made significant debt repayments in 2025 so far [16]. Analyst Sentiment - Among 17 analysts covering BBWI, 11 have rated it a Buy, with no sell recommendations, suggesting a generally positive outlook despite current challenges [12].

Core Viewpoint - Skyworks Solutions (SWKS) is considered an attractive investment option due to its strong cash yield, solid fundamentals, and undervalued price [1]. Financial Performance - Skyworks reported Q4 fiscal 2025 revenue of $1.1 billion, exceeding guidance [3]. - The company has a free cash flow yield of 10.4%, which is notably high [7]. - Over the last 12 months, Skyworks experienced a revenue growth of -2.2% and an operating margin of 12.8% [7]. Valuation Metrics - SWKS stock is currently trading at 40% below its 2-year high and 13% below its 1-month high [7]. - The price-to-sales ratio is lower than its 3-year average, indicating potential undervaluation [7]. Strategic Developments - In late October, Skyworks announced a $22 billion merger agreement with Qorvo, aimed at creating a global leader in high-performance RF, analog, and mixed-signal semiconductors [3]. - The merger is expected to enhance Skyworks' reach in mobile and diversified markets, including AI and the automotive sector [3]. Industry Context - Skyworks develops proprietary semiconductor products for various sectors, including aerospace, automotive, broadband, cellular, connected home, entertainment, industrial, medical, military, and wearable technology markets [4].

Core Insights - Cabot Corporation (CBT) has established a strong financial foundation while its stock remains undervalued compared to recent highs, presenting a potential investment opportunity [2][3] - The company generates solid cash flow, maintains resilient margins, and offers an attractive valuation, making it appealing for income and value-focused investors [2] Financial Metrics - Cabot's free cash flow yield stands at 10.8%, which is notably high compared to many stocks [8] - The company has experienced a 3-year average revenue growth of -2.5% and maintains an operating margin of 15.0%, indicating sound fundamentals despite revenue challenges [8] - CBT stock is currently trading 47% below its 2-year high and 18% below its 1-month high, with a price-to-sales ratio lower than its 3-year average [8] Market Performance - Historical data shows average forward returns of 10.4% over 6 months and 20.4% over 12 months, with a win rate of approximately 74% for positive returns over a 12-month span [9] - The investment strategy applied to high free cash flow yield stocks has yielded nearly 18% average return over 12 months, even during non-crash periods, with a 70% win rate [10] Risk Considerations - CBT has experienced significant declines in the past, including an 83% drop during the Global Financial Crisis and a 55% drop during the Covid sell-off, highlighting its vulnerability to market volatility [11] - The stock can also decline in strong market conditions due to factors like earnings announcements and business updates, indicating that sound fundamentals are crucial for stability [12]

Core Insights - GoodRx (GDRX) stock is considered a viable investment due to its expansion, cash generation, and notable valuation discount [1] Financial Performance - GoodRx has a free cash flow yield of 10.0%, indicating strong cash generation capabilities [8] - Revenue growth over the last 12 months is 3.2%, suggesting potential for increased cash reserves [8] Valuation Metrics - GDRX stock is currently priced at 35% below its 3-month high, 46% under its 1-year high, and 63% lower than its 2-year high, highlighting a significant valuation discount [8] Market Trends - The stock has experienced substantial declines, including a 41% drop during the Covid pandemic and a nearly 93% decline during the inflation crisis, indicating vulnerability to market fluctuations [6] - Despite favorable aspects, the stock can still face considerable declines during market shifts [6] Investment Strategy - The average forward returns for GDRX over 6-month and 12-month periods are 25.7% and 57.9% respectively, with a win rate exceeding 70% for both intervals [9]

Core Insights - IBM reported its highest adjusted free cash flow (FCF) margin in history at 15% for the year-to-date ending September 30 [1] - The company raised its full-year 2025 adjusted FCF outlook to $14 billion, up from $13.5 billion projected in Q2 [3] - IBM stock closed at $313.09, reflecting a 13.5% increase from a recent low of $275.97 [1] Financial Performance - Year-to-date adjusted FCF was $7.181 billion, indicating an expected $6.189 billion for Q4, slightly above last year's Q4 adjusted FCF of $6.163 billion [3] - Analysts project a full-year 20.9% FCF margin for 2025 based on expected revenue of $67.02 billion [4] - For 2026, assuming a 21% adjusted FCF margin and $70 billion in revenue, the estimated FCF could rise to $14.7 billion [4] Stock Valuation - The trailing 12-month adjusted FCF yield is 4.56%, suggesting a potential market cap increase to $322.4 billion in 2026 [5] - This implies a target stock price of $345.00, representing over a 10% increase from the current price [5] - Analysts have an average price target of $313.09, with some estimates as high as $345.69 [5] Conclusion - IBM stock appears undervalued based on its strong FCF performance and analysts' target prices [6]