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Easter offers children the opportunity to seek and devour chocolate eggs by the dozen. But older bargain seekers wait for postholiday sales to load up on the sweet stuff.

Similarly, investors hunting for bargains might like what the Canadian Free Cash portfolio has to offer. The portfolio generated sweet returns over the past 24 years but, much like eating too much chocolate, it can cause discomfort from time to time.

Starting with the sweet returns, the Canadian Free Cash portfolio gained an average of 14.9 per cent annually from the end of 1999 to the end of February, 2024. By way of comparison, the S&P/TSX Composite Index climbed by an average of 6.7 per cent annually over the same period. (All of the returns herein are based on data from Bloomberg and the portfolios are rebalanced monthly. The returns include dividend reinvestment but not fund fees, taxes, commissions or other trading costs.)

The Canadian Free Cash portfolio starts its search for bargains by looking at the largest 300 common stocks on the Toronto Stock Exchange by market capitalization. It then invests an equal amount of money in the 10 stocks with the lowest ratios of enterprise value to free cash flow (EV/FCF).

The EV/FCF ratio is a variant of the more familiar price-to-cash-flow ratio. In this case, EV is equal to a firm’s market capitalization plus its net debt, while FCF is the amount of money a company can distribute to its shareholders while maintaining its operations. Here FCF is approximated by subtracting a company’s capital expenditures from its cash flow from operations.

The original Canadian Free Cash portfolio holds 10 stocks but it also has 20- and 30-stock variants. The new portfolios start with the same 300 big Canadian stocks but pick the 20, or 30, with the lowest EV/FCFs.

The larger portfolios didn’t perform quite as well as the original, which gained an average of 14.9 per cent annually from the end of 1999 to the end of February, 2024. The 20- and 30-stock versions grew by an annual average of 13.8 and 13.9 per cent, respectively, over the same period.

You can examine the performance record of all three portfolios, and the market index, in the accompanying graph.

While the returns of the larger portfolios weren’t as good as the original, they provided a slightly smoother ride over the years. The 20-stock portfolio was about 10 per cent less volatile than the original and the 30-stock portfolio was 16 per cent less volatile. The risk-adjusted returns of the portfolios (as measured by their Sharpe ratios) were roughly identical for the 10- and 20-stock versions while the 30-stock version fared a bit better.

The downside history of the three portfolios is highlighted in the second graph, which shows how far they fell from their prior peaks in hard times. (The market index is not included in an effort to avoid cluttering up the graph.)

To set the stage, the market index’s worst downturns over the past 24 years started with the 43 per cent collapse in the early 2000s when the internet bubble burst. It was followed by another 43 per cent decline in the financial crisis of 2008-09. Its third-worst showing came in early 2020, when it fell 22 per cent.

On the other hand, the portfolios fared relatively well in the early 2000s. But they performed poorly in the financial crisis of 2008-09 when the 10-, 20- and 30-stock portfolios plunged 58, 56 and 49 per cent, respectively.

The second-worst period for the portfolios culminated in 2020 but started years earlier. The 10-, 20- and 30-stock portfolios declined 42, 47 and 47 per cent, respectively, to their March, 2020, lows.

The third-worst decline for the 10- and 20-stock portfolios occurred after rebounding from the financial crisis when the 10-, 20- and 30-stock portfolios gave up 30, 25 and 16 per cent, respectively, to their 2012 lows. The third-worst decline for the 30-stock portfolio came in 2022 when it fell 17 per cent.

Much like Easter chocolate, many investors should moderate their consumption of the Canadian Free Cash portfolio because its sugary highs have been accompanied by some nauseating crashes. But the portfolio might fare quite well over the long term for those who develop a taste for it.

You can find the stocks in the 30-stock Canadian Free Cash portfolio via this link, which also provides updates to many of the other portfolios I track for The Globe and Mail.

Norman Rothery, PhD, CFA, is the founder of

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