Bridge over ocean
1 September 1994 Financial Analysts Journal Volume 50, Issue 5

The Free Cash Flow/Small-Cap Anomaly

  1. Kenneth S. Hackel
  2. Joshua Livnat
  3. Atul Rai
Among small-capitalization firms, defined as those having market values below $2 billion, some are consistent free cash flow generators, have low financial leverage, and sell at low free cash flow multiples. Presented herein is an investment strategy that selects such securities into a "long" portfolio with returns that outperform the market index, returns of similar-sized securities, returns of firms with similar book-to-market-value ratios, and returns of similar-risk (beta) securities.
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