Are Capex Cycle Stocks Poised To Outperform This Year?

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Our theme of Capex Cycle Stocks – which includes heavy equipment makers, electrical systems suppliers, automation solutions providers, and semiconductor fabrication equipment players – fared well through 2021, rising by about 32% over the year, outperforming the S&P 500 which was up by about 27% over the same period. The theme is also up by about 3% so far in 2022, compared to the S&P 500 which is down about -2%. So is the theme set to outperform this year as well? It appears likely for a couple of reasons.

With the global economic recovery likely to continue over 2022, companies are expected to prioritize improving capacity and easing supply chain bottlenecks that were increasingly obvious through the Covid-19 reopening. Moreover, companies could also invest more into automation solutions to mitigate the impacts of a tight labor market and soaring wages. Separately, the passage of the U.S. infrastructure bill last year should also drive government spending on physical infrastructure. These trends could drive demand for the goods and services provided by the companies in our theme. There are some technical factors that could help these stocks, as well. As most of the stocks in our theme are relative value picks (average price to sales multiple of 3.7x) this could also be attractive as the Federal Reserve plans multiple rate hikes through this year.

Within our theme, Applied Materials (NASDAQ:AMAT), a company that supplies equipment used in the production of semiconductor and display products, has been the strongest performer over the past year with its stock up by 53% over the last 12 months, as the semiconductor supply crunch has resulted in rising demand for fabrication equipment. On the other side, industrial major Honeywell (NYSE:HON)  has been the weakest performer, with its stock up by just 2% over the last 12 months, as it witnesses a slow recovery following Covid, given its exposure to the aerospace segment, which was one of the worst-hit businesses through the pandemic.

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Below you’ll find our previous coverage of the Capex Cycle theme where you can track our view over time.

[11/8/2021] Stocks To Pick Following The Passage Of The U.S. Infrastructure Bill

The $1 trillion infrastructure bill was finally passed by the House of Representatives on Friday, following months of delays. The bill will authorize current spending and will commit about $550 billion in new funds into areas including improving infrastructure such as roads, bridges, highways, drinking water, besides also expanding access to broadband internet, and upgrading the electric grid. This could lead to stronger demand for our theme of Capex Cycle Stocks which includes heavy equipment makers, electrical systems suppliers, automation solutions providers, and semiconductor fabrication equipment players that stand to benefit from higher capital spending by businesses and the government.

The theme has already outperformed year to date, rising by around 32% since early January, compared to the S&P 500 which was up by around 25% over the same period. The stocks have also outperformed through the Covid-19 pandemic, rising by around 93% since the end of February 2020, and we think there could be more scope for outperformance, given the potentially stronger revenue growth rates going forward, and also the relatively lower earnings multiples that the stocks in the theme trade at.

Within our theme, Applied Materials (NASDAQ:AMAT), a company that supplies equipment used in the production of semiconductor and display products, has been the strongest performer with its stock up by 78% year to date, as the semiconductor supply crunch has resulted in rising demand for fabrication equipment. On the other side, industrial major Honeywell (NYSE:HON)  has been the weakest performer, with its stock up by just 6% year-to-date, as the company is seeing a slow recovery following Covid, given its exposure to the aerospace segment, which was one of the worst-hit businesses through the pandemic.

[10/6/2021] Honeywell, Caterpillar: Delayed Infrastructure Bill An Opportunity To Buy Capex Stocks?

Our theme of Capex Cycle Stocks includes heavy equipment makers, electrical systems suppliers, automation solutions providers, and semiconductor fabrication equipment players that stand to benefit from higher capital spending by businesses and the government. While the theme remains up by about 20% year-to-date, compared to the S&P 500 which was up by around 16% over the same period, it has declined a bit in recent weeks, due to delays in the passage of the $1 trillion infrastructure bill amid some disagreement within the Democratic party. The party now expects to pass the bill toward the end of October.

However, this might be a good time to take a look at these stocks. The passage of the bill could be a key catalyst for many stocks in our theme, as the bill calls for around $550 billion in new infrastructure spending over the next five years along with about $450 billion in already-approved funds to modernize roads, passenger rails, bridges, the power grid, and drinking water. This could lead to stronger demand growth for industrial products, heavy equipment, and machinery.

Within our theme, Applied Materials (AMAT), a company that supplies equipment used in the production of semiconductor and display products, has been the strongest performer with its stock up by 49% year to date, as the semiconductor supply crunch has resulted in rising demand for fabrication equipment. On the other side, industrial major Honeywell (HON)  has been the weakest performer, with its stock up by just 2% year-to-date, as the company is seeing a slow recovery following Covid, given its exposure to the aerospace segment, which was one of the worst-hit businesses through the pandemic.

Interested in picking specific stocks within this theme? Check out our dashboard on Honeywell vs Rockwell: Industry Peers; Which Stock Is A Better Bet?

[8/13/2021] Caterpillar, Rockwell Automation: Stocks To Pick As Capex Cycle Takes Hold

Our theme of Capex Cycle Stocks is up by 30% year-to-date, outperforming the S&P 500 which is up by 19% over the same period. The theme includes heavy equipment makers, electrical systems suppliers, automation solutions providers, and semiconductor fabrication equipment players that stand to benefit from higher capital spending by businesses and the government.

There are signs that demand is picking up nicely following the Covid-19 lockdowns, with Q2 earnings for the companies in our theme that have reported, coming in stronger-than-expected. Caterpillar (CAT), for instance, saw revenues from its construction and resources segments rise by roughly 40% year over year, with earnings comfortably beating estimates. Caterpillar’s order backlog rose by $5.5 billion versus last year. Rockwell Automation (ROK)  also saw revenue rise 33% year-over-year and raised its full-year guidance, with orders rising by 50% versus last year, outpacing sales growth. Separately, there is increasing optimism that the $1 trillion-plus U.S. infrastructure bill will be passed by Congress, leading to stronger demand for major industrial companies.

Within our theme, Applied Materials (AMAT), a company that supplies equipment used in the production of semiconductor and display products, has been the strongest performer with its stock up by 50% year to date, as the semiconductor supply crunch has resulted in rising demand. On the other side, industrial major Honeywell (HON)  has been the weakest performer, with its stock up by about 9% year-to-date.

[8/2/2021] Stocks To Consider As The $1 Trillion Infrastructure Bill Advances

Our theme of Stocks That Benefit From Capital Spending is up by 31% year-to-date, outperforming the S&P 500 which is up by 17% over the same period. The theme is also up by a solid 72% since the end of 2019. The theme includes heavy equipment makers, electrical systems suppliers, automation solutions providers, and semiconductor fabrication equipment players that stand to benefit from higher capital spending by businesses and the government. On Friday, the United States Senate voted by a significant margin to advance the $1 trillion infrastructure bill, which prioritizes the renovations of roads, bridges, rail, water, and related public works. If the bill is eventually signed into law, it could set off the largest investment in U.S. infrastructure in about a century. Separately, businesses also have a lot of incentive to prioritize capital spending, given low interest rates, solid growth in corporate profits, and rising prices through the Covid-19 reopening.

Within our theme, Applied Materials (AMAT), a company that supplies equipment used in the production of semiconductor and display products, has been the strongest performer with its stock up by a solid 62% year to date, as the semiconductor supply crunch has resulted in rising demand. On the other side, industrial major Honeywell (HON)  has been the weakest performer, with its stock up by about 10% year-to-date.

[6/30/2021] Caterpillar, Honeywell, Deere: Will The Fed’s Hawkish Stance Hurt CapEx Stocks?

Our theme of Stocks That Benefit From Rising Business Spending is up by 30% year-to-date, significantly outperforming the S&P 500 which is up by around 15% over the same period. The theme includes heavy equipment makers, electrical systems suppliers, automation solutions providers, and semiconductor fabrication equipment players that stand to benefit from higher capital spending by businesses. Within our theme, Applied Materials (AMAT), a company that supplies equipment used in the production of semiconductor and display products, has been the strongest performer with its stock up by a solid 64% year to date. On the other side, industrial major Honeywell (HON)  has been the weakest performer, with its stock up by just about 2% this year.

So what’s the outlook like for the theme? The U.S. Federal Reserve has turned increasingly hawkish following its mid-June meeting indicating that it could start hiking interest rates from 2023, rather than 2024. Now the expectation of higher rates has strengthened the U.S. dollar and this, in turn, could impact U.S. industrial and manufacturing companies to an extent, making their products more expensive overseas. That said, we think that any negative impacts of the rate hikes will be more than offset by growing domestic demand. Corporate profits have been soaring in 2021 giving companies the incentive to invest in capacity upgrades and expansion. Moreover, trends of re-shoring of manufacturing capacity from overseas and the sizable U.S. government infrastructure plan are also likely to help these stocks in the medium to long term.

[6/17/2021] Capex Cycle Stocks 

Our theme of Stocks That Benefit From Rising Business Spending, which includes heavy equipment makers, electrical systems suppliers, automation solutions providers, and semiconductor fabrication equipment players that stand to benefit from higher capital spending, is up by 29% year-to-date, significantly outperforming the S&P 500 which is up by just 13% over the same period.

There are multiple trends that point toward a big upcycle in capital spending across the economy. With demand for nearly everything surging following the Covid-19 lockdowns, companies are seeing strong pricing trends and profit growth. This could incentivize them to double down on capacity expansions and upgrades. Moreover, companies have under-invested in their capacity for decades as they moved to asset-light models that rely on outsourcing production to lower-cost markets. However, events such as Covid-19, the trade war with China, and the recent semiconductor crunch are serving as a wake-up call, and governments and corporations are very likely to focus on fortifying their supply chains, moving crucial production back home. Separately, the government’s plan to overhaul aging infrastructure in the U.S. could also drive demand for some of the companies in our theme.

Within our theme, Applied Materials (AMAT), a company that supplies equipment, services, and software used in the production of semiconductor and display products, has been the strongest performer with its stock up by a solid 59% year to date. On the other side, industrial major Honeywell (HON)  has been the weakest performer, with its stock up by just about 3% this year.

[6/2/2021] Capex Cycle Stocks 

The prices of a variety of basic materials and products – ranging from metals and building products to semiconductors – have surged over the last few quarters, driven by pent-up demand following the Coivd-19 lockdowns, moves by companies to replenish or build up inventory, and also due to supply-side disruption. This has led to strong profit growth and stock price appreciation for manufacturing companies. While manufacturing and basic materials stocks remain a decent near-term play on the initial re-opening of the economy, there are risks that prices are peaking. On the other hand, we think that industrials and manufacturing equipment stocks might be the better long-term play, as companies look to upgrade their capabilities and invest in new capacity in order to meet demand. There are other trends that point to a big upcycle in corporate capital expenditure.  Companies have witnessed rising profitability in recent quarters and the sizable stimulus efforts by governments worldwide following the Covid-19 pandemic could also incentivize investments. Moreover, President Biden’s plans to revamp America’s aging infrastructure and boost manufacturing capabilities, particularly in strategic areas such as semiconductors, are also likely to help these companies.

In our theme on Stocks That Benefit From Rising Business Spendingwe’ve put together a list of companies that stand to benefit from stronger investment by businesses in the coming years. The theme is up by about 33% year-to-date, significantly outperforming the S&P 500 which is up by just 12% over the same period. Below is a bit more about the companies in our theme and how they have fared this year.

Caterpillar (CAT) is one of the largest producers of heavy machinery and construction equipment. The company stands to benefit from higher infrastructure spending by the Federal government and capital expenditure by businesses. The stock is up by 32% year-to-date.

Deere & Company (DE) manufacturers machinery used in agricultural, construction, and forestry. The company also sells diesel engines and drivetrains used in heavy equipment. The stock is up by about 34% this year.

Honeywell (HON) an industrial company that has products focused on aerospace, building technologies, performance materials, and safety and productivity solutions. The stock is up by just about 9% year-to-date.

Rockwell Automation (ROK) is a provider of industrial automation solutions. The company sells software, electromechanical equipment, and services that help businesses boost productivity and efficiency. The stock is up by about 5% year to date.

Applied Materials (AMAT) supplies equipment, services, and software used in the production of semiconductor and display products. The stock is up by 60% year-to-date, driven by the ongoing semiconductor crunch which is boosting demand and also due to increasing production complexity in the industry.

Oshkosh (OSK) is an industrial company that designs and builds trucks, airport fire apparatus, and access equipment such as lifts. The stock is up by about 53% year-to-date.

What if you’re looking for a more balanced portfolio instead? Here’s a high-quality portfolio that’s beaten the market consistently since the end of 2016.

Returns Jan 2022
MTD [1]
2022
YTD [1]
2017-22
Total [2]
 AMAT Return -5% -5% 364%
 S&P 500 Return -2% -2% 109%
 Trefis MS Portfolio Return -5% -5% 273%

[1] Month-to-date and year-to-date as of 1/11/2022
[2] Cumulative total returns since the end of 2016

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