VALUE: After Hours (S07 E24): Avoiding Value Traps by Tracking Free Cash Flow

During their recent episode, Taylor, Carlisle, and Jim and Abigail Zimmerman discussed Avoiding Value Traps by Tracking Free Cash Flow. Here’s an excerpt from the episode:

Believe me, [chuckles] we’ve been stuck with some value traps, but we try to get out of them. If the cash from ops starts going the wrong way, we’re gone. The company will always have an explanation. We looked at all Buffett’s acquisitions, the companies that Berkshire acquires. They all have very prodigious cash flow operations. Well, not always, but almost always. If the cash flows, isn’t coming in, he wants to know how it’s going to come in over the next year or two to catch him up too. So, it’s almost turning the company and its cash flows into a bond. So, we’re getting a 10% free cash flow yield, we think unlevered, that’s attractive, and if they can actually grow, right, Abi?

Abigail: Yeah, I would agree. I’d say one thing that we’ve utilized to refine our strategy over time is focusing on buying gross businesses at value prices and really focusing on that growth, because you can have a highly cash generative business, but it could not go anywhere if it’s not utilizing its capital allocation effectively. Everyone makes mistakes in this business and we’ve had made mistakes before of getting into highly cash generative businesses and not fully recognizing what the moat was or–

Jim: That it can grow.

Abigail: Yeah. Yeah.

Jim: Yeah.

Abigail: Or, that it can grow or we were in a retailer and that was more of a beneficiary of COVID and didn’t recognize that even though it was very highly cash generative. So, it’s great to be laser focused on cash generation. I would say that that’s our primary filter to refine thousands of companies we look at.

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VALUE: After Hours (S07 E24): Avoiding Value Traps by Tracking Free Cash Flow

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