Berkowitz’s Free Cash Flow Yield Screen

Advisor Perspectives turns out another good interview, this time with Fairholme Fund manager Bruce Berkowitz. Berkowitz’s leadership has helped turn the Fairholme Fund into one of the most successful funds around.

Berkowitz takes time to discuss his investment process. Specifically, he says “we look at a company’s free cash flow relative to its price. Ideally, we look for a free cash flow yield of 10% or better. Then we ask what management will do with that cash. If management has a record of investing wisely, that’s great. But we also worry about what can go wrong – what I referred to earlier as ‘killing the company.’ If there are signs that value will be destroyed by actions such as over-leveraging the balance sheet or other stupid management decisions, or if there are certain questions we cannot answer, then we move on to the next investment candidate.”

Berkowitz is also known for taking a deep dive into earnings call transcripts and texts of speeches. He wants to get an understanding of how management has behaved under adversity, and looking at the paper trail management leaves behind can give him some sense of what decisions they made during difficult times.

Berkowitz shies away from giving a prediction on the market. He says trying to predict what will happen in the stock market in 2009 is an “impossible question”. But he does go on to say that “prices today are as attractive as I have seen in my career and it will be worth the wait for the market to deliver the true value of these companies.”

In the spirit of Berkowitz’s free cash flow yield criteria, we decide to run a quick screen for firms that have high cash flow yields. By clicking on the image, you can view a list of stocks that have a free cash flow yields of between 14 and 30 percent.

Free cash flow yield screen