Many of we retail stock investors focus on fund managers who use qualitative judgement in their investment decisions. But funds can post strong returns deploying exclusively quantitative filters too.
One of those funds is Cambria Shareholder Yield ETF (SYLD) -). It focuses on dividends, share buybacks, debt reduction, quality and valuation to pick its stocks.
The mid-cap value fund has generated total annualized returns of 11% for the 12 months through Aug. 31, 24% for three years, 12% for five years and 13% for 10 years, according to Morningstar. That beats the mid-cap value stock category for every period.
We recently chatted with the fund’s manager Mebane Faber about how he runs it. Here’s what he had to say.
TheStreet: What’s your investment philosophy?
Faber: Dividend investors are doing it wrong. They are missing how the majority of companies distribute cash, which is through stock buybacks.
We use a holistic measure of shareholder yield. That’s dividends, net share buybacks and net debt reduction. Then we use valuation and quality filters, the latter of which helps us avoid hugely leveraged companies.
Lastly, we use momentum filters to avoid value traps – stocks going straight down. All this gives us high quality companies that are gushing cash flow and trading at low valuations.
Also, we have sector caps [to avoid over-concentration]. No single sector will account for more than one-third of the fund. We rebalance quarterly.
TheStreet: What do you like about share buybacks?
Faber: Buybacks can be an effective way for managers to return profits to shareholders – similar to dividends – yet without triggering the taxable event that occurs with dividends.
This means shareholders are receiving value, but it’s subtler – generally camouflaged in the stock’s market price, rather than the obvious dividend payment that appears in your brokerage account.
We like dividends too. We just think an investor can potentially do better by combining good dividend yields with good buyback yields, rather than by focusing on dividend yield alone.
TheStreet: Can you talk a little about valuations?
The basket of shares in our Cambria Shareholder Yield ETF trades at a price-earnings ratio of just 7. That’s the biggest discount from the overall market and mid-cap value universe we have seen since 2013.
This is one of the best times in history to put on a value trade. Growth has beaten value for so long, and the valuation spread has expanded since spring. [That has made value stocks attractive.]
TheStreet: How do you determine when to sell stocks?
Faber: Our sell decisions are not a mirror image of our buy decisions. We sell if a stock is no longer cheap – if the stock goes up a lot. We also sell if shareholder yield is no longer in the top bucket – if the company stops distributing cash flows.
We have held stocks for eight years. We held Apple from 2013-2020. We can hold if the metrics say hold. It depends what’s happening. We have a turnover rate of 20% to 40% per year.
TheStreet: You have heavy weightings in energy, financial services, consumer cyclicals and basic materials. Is there any significance to that?
Faber: No, we are agnostic on industries, so the numbers float. We target double-digit shareholder yields.
TheStreet: Can you talk about three of your favorite stocks?
Faber: I don’t really have favorites, given our quantitative style. But our holdings include:
Dillard’s
Dillard's (DDS) -), The department store.
This is a stock I never would have picked based on what I knew. That shows the benefits of a quantitative style. People thought retailers [were in trouble]. But the stock has done well post-pandemic.
It screens reasonably cheap in all metrics. A majority of its shareholder yield comes from buybacks. It has decreased its share count to less than 17 million from 100 million 20 years ago.
Toll Brothers
Toll Brothers (TOL) -), a luxury home builder.
It has a small dividend but has reduced its share count almost 40% since 2015. And it’s cheap. [The company had a forward price-earnings ratio of 6 Tuesday, according to Morningstar. That compares to 19 for the S&P 500 as of Sept. 1, according to FactSet].
Reliance Steel & Aluminum
Reliance Steel & Aluminum (RS) -)
It has reduced shares since 2015. It has a small dividend and an attractive valuation. [Its forward P-E ratio is 12, according to Morningstar]. It has soared by a factor of 20 in the last 20 years, and has further to go.
