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Free Cashflow Yield
Ben Myers
posted Nov 14, 2017
Finance Theory Getting Started Risk Model

I've been a long-time lurker on Quantopian but have only recently managed to get a grasp of the platform and put some backtests together.
Having finally figured out how to use the fundamental data and alphalens I've put together a very simple but alarmingly effective strategy based on Free Cash Flow yield. Interestingly it works very well until the start of this year - would be keen to hear thoughts. I suspect a lot of quality-based factor strategies are underperforming this year as we enter into these later stages of the bull market in equities.

Below a brief outline of the strategy - interested to hear thought/criticisms. Open to the possibility that I've made a fatal error somewhere.
1) Rank Q1500 universe by Free Cash Flow Yield
2) Long top Quintile, Short Bottom Quintile
3) Rebalance weekly

7 responses
Dan Dunn
Nov 14, 2017

Thank you for sharing.

This is exactly the type of thing that is great for Thursday's webinar. I ran a tear sheet for you. If you send that to [email protected], and register for the webinar, you can get a live analysis of your algo from our Managing Director of Research, Dr. Jess Stauth. I think she'd be able to tell you a lot.

Disclaimer

The material on this website is provided for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation or endorsement for any security or strategy, nor does it constitute an offer to provide investment advisory services by Quantopian. In addition, the material offers no opinion with respect to the suitability of any security or specific investment. No information contained herein should be regarded as a suggestion to engage in or refrain from any investment-related course of action as none of Quantopian nor any of its affiliates is undertaking to provide investment advice, act as an adviser to any plan or entity subject to the Employee Retirement Income Security Act of 1974, as amended, individual retirement account or individual retirement annuity, or give advice in a fiduciary capacity with respect to the materials presented herein. If you are an individual retirement or other investor, contact your financial advisor or other fiduciary unrelated to Quantopian about whether any given investment idea, strategy, product or service described herein may be appropriate for your circumstances. All investments involve risk, including loss of principal. Quantopian makes no guarantees as to the accuracy or completeness of the views expressed in the website. The views are subject to change, and may have become unreliable for various reasons, including changes in market conditions or economic circumstances.

Ben Myers
Nov 14, 2017

Thanks Dan, will do.

Mark
Nov 15, 2017

Yup I have been doing alot of testing on free cash flow yield too. But with the use of seasonality investing, monthly rebalancing. Performs very well!

Tony Morland
Nov 15, 2017

@Ben,
Completely agree, and this is one of my favorite numbers. The financial press loves to focus on Earnings (EPS, PE ratio, etc), but in fact there is sufficient scope within generally accepted accounting practices (GAAP) for companies to do a lot of sometimes less-than-completely-honest manipulating of their "Earnings", e.g. by changing depreciation methods, etc. Earnings is just an accounting number, but cash is cash, and there is a lot less scope for manipulating cash flow data.

Focusing on cash flow is a good idea. Even more instructive is what you can find if you start comparing earnings & cash-flow and the various component numbers related to each of them. In addition to making a useful valuation metric, it is also a good way to spot accounting fraud (e.g. Enron). See also Pietroski score item #4: Cash flow from operations > Net Income. Reference https://www.investopedia.com/terms/p/piotroski-score.asp

Tim Vidmar
Nov 15, 2017

Dan,

Is this the kind of algorithm that you would consider for allocation, and if not, what are its deficiencies that one can learn from in this regard? Is it the exposure to different factors, or something else, perhaps?

Many thanks in advance.

Dan Dunn
Nov 15, 2017

Tim - I don't mean to be coy, but Jess is going to be able to answer that better than I can. I think you will enjoy the webinar tomorrow for that reason.

Daniel Cascio (Blue Robin)
Mar 20, 2018

Hi Ben,

Perhaps consider adding a filter look at the market cap of each security in pipeline? As one's FCF increases it could be misleading if the market cap is decreasing.

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The material on this website is provided for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation or endorsement for any security or strategy, nor does it constitute an offer to provide investment advisory services by Quantopian.

In addition, the material offers no opinion with respect to the suitability of any security or specific investment. No information contained herein should be regarded as a suggestion to engage in or refrain from any investment-related course of action as none of Quantopian nor any of its affiliates is undertaking to provide investment advice, act as an adviser to any plan or entity subject to the Employee Retirement Income Security Act of 1974, as amended, individual retirement account or individual retirement annuity, or give advice in a fiduciary capacity with respect to the materials presented herein. If you are an individual retirement or other investor, contact your financial advisor or other fiduciary unrelated to Quantopian about whether any given investment idea, strategy, product or service described herein may be appropriate for your circumstances. All investments involve risk, including loss of principal. Quantopian makes no guarantees as to the accuracy or completeness of the views expressed in the website. The views are subject to change, and may have become unreliable for various reasons, including changes in market conditions or economic circumstances.