Investors have been betting big on shares that can benefit from fiscal stimulus, such as consumer discretionary stocks. But the government isn’t the only one doing a lot of spending—many companies are poised to spend the piles of cash they built during the pandemic.
As the pandemic swept the globe, S&P 500 companies raised more than $2.5 trillion in 2020 through debt and equity issuances, the highest amount in two decades. Meanwhile, share buybacks and capital spending both fell significantly last year as companies faced an uncertain economy. That left firms with war chests to spend: Cash as a percent of total assets for the average S&P 500 company has been sitting at almost 8%, a record level. That’s up from roughly 6% to start 2020, according to Jefferies.
Investors might want to focus as much on corporate spending as they do on fiscal spending when picking winning stocks for this year. Congress recently passed a $900 billion stimulus bill, and analysts say more could be on the way as the Biden administration takes over with Democrats controlling both the House and Senate. That should benefit consumer-related stocks, as many Americans are receiving stimulus checks and have savings to spend. But with companies also expected to spend their cash stockpiles, it’s hard to predict where there will be more upside.
“While investors want to be positioned for the Democrat stimulus beneficiaries, it might be better to play capex-spending recipients,” wrote Jefferies’ global equity strategist Sean Darby in a note this week. He added that the capital spending cycle—when companies are confident in demand and need assets in place to meet the demand—can often last longer than the impact of government fiscal stimulus after a recession.
There are a few avenues through which investors can capture the corporate spending trend. One of them is looking for companies that will spend more to drive growth or companies that benefit from such spending. One place to start: Darby listed nine S&P 500 companies that have the highest correlation to capital spending, many of which benefit from other corporations’ capital expenditures.
Four out of the nine stocks on the list are financials—some banks can benefit significantly from higher capital spending because they lend to companies that are purchasing more capital equipment. One is S & T Bancorp (STBA); its stock is indeed up 12% year-to-date. (Banks also benefit from fiscal stimulus, which partially explains the stock’s rise.) The other financials on Darby’s list have also seen their shares rise year to date: First Commonwealth Financial (FCF), up 17%; New York Community Bancorp (NYCB), up 5%; and Cincinnati Financial (CINF), up 9%.
Stocks offering shareholder returns are another way for investors to play companies’ stockpiles of cash. Jefferies expects buybacks and dividends to return this year, after sharp declines in 2020. Buybacks fell to below $100 billion for the second quarter of 2020, from around $175 billion in the December 2019 quarter, according to Jefferies. Barron’s recently listed 13 affordable stocks that are expected to return more to shareholders this year. Among them are Target (TGT), Lowe’s (LOW), Best Buy (BBY), and Tyson Foods (TSN).
One thing that could get in the way of capital expenditures and corporate payouts: heightened debt levels. The aggregate net-debt-to-equity ratio for the S&P 500 has risen to above 50%, from just above 30% in 2018, according to Jefferies. A higher debt burden means companies have less flexibility to invest or return money to shareholders, so such companies will have to confront their rising debts. Investors should keep that factor in mind when choosing stocks that play off the corporate spending trend.
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