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Animal Spirits Podcast

Talk Your Book: Investing in Free Cash Flow

Sep 16, 2024
Michael Mack, an Associate Portfolio Manager at Victory Capital, discusses the pivotal role of free cash flow in investment strategies. He emphasizes its significance over traditional metrics and how it can unveil a company's true strength, using Amazon as a primary example. The conversation delves into avoiding value traps, sector dynamics, and the rising trend of free cash flow investing, particularly in today's market landscape. Mack also highlights the importance of financial health in growth versus value investing, featuring case studies like Nvidia and Apple.
33:29

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Quick takeaways

  • Using free cash flow as a key valuation metric offers a more accurate assessment of a company's financial health beyond traditional metrics.
  • A disciplined portfolio strategy focusing on high free cash flow yields can lead to better investment opportunities while avoiding sectors with unique cash flow challenges.

Deep dives

The Shift to Free Cash Flow

Using free cash flow as a valuation metric is gaining traction as an alternative to traditional metrics like price-to-book ratio. Free cash flow gauges a company's financial health by focusing on the cash available after reinvestments are made, which is vital for assessing a company's potential to return capital to shareholders. For instance, applying free cash flow analysis to Amazon revealed its potential as a solid investment, despite its reported losses under conventional accounting metrics. This shift acknowledges that free cash flow provides a clearer picture of a company's profitability and sustainability.

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