As November brings gloomy weather to Toronto, investors might find warmth in a proven investment strategy that has consistently outperformed the market. The Canadian Free Cash portfolio has demonstrated remarkable success, climbing by an average of 16.1 percent annually over nearly 26 years from December 1999 through October 2025.
The Power of Bargain Hunting in Stocks
This impressive performance significantly outpaced the broader Canadian stock market, as measured by the S&P/TSX Composite Index, which gained an average of 7.9 percent annually over the same period. These exceptional returns stem from the portfolio's disciplined focus on stocks with low enterprise value to free cash flow ratios.
Enterprise value represents a company's total market capitalization plus its net debt, while free cash flow measures the money a company can distribute to shareholders while maintaining operations. The portfolio identifies bargains by selecting the ten stocks with the lowest positive EV/FCF ratios from the TSX's largest 300 companies.
Portfolio Variants and Their Performance
For investors wary of smaller companies, researchers created two variants of the original strategy. The large variant selects from the TSX's top 100 stocks, while the medium variant picks from the largest 200 companies. This week, the large variant considered stocks with market capitalizations exceeding $8.2 billion, while the medium variant looked for companies larger than $1.9 billion.
However, both variants trailed the original portfolio's performance. The medium variant returned 13.5 percent annually, and the large variant gained 11.8 percent annually from 1999 through October 2025. While both still beat the market index, they couldn't match the original strategy's returns.
The performance gap arises from having fewer bargain opportunities among larger stocks. The original portfolio maintains a median EV/FCF ratio of 4.2, compared to 7.1 for the medium variant and 12.0 for the large variant.
Risk Considerations and Market Performance
Investors should note that these strategies aren't risk-free. During the 2008-2009 financial crisis, the original portfolio fell 59 percent, while the large and medium variants plunged 54 percent and 52 percent respectively. The market index declined by 43 percent during the same period.
This demonstrates that the larger stock variants didn't provide substantial downside protection and suffered more than the broader market during severe downturns.
Despite recent economic uncertainty and the Canadian stock market reaching all-time highs, the Canadian Free Cash portfolio continues to offer a valuable approach for long-term investors. The strategy's consistent outperformance suggests it remains a reliable path for those seeking to navigate market complexities.
The portfolio's current holdings range in size from $652 million to $79 billion in market capitalization, showcasing the diversity available within this investment framework.
