Our theme of Capex Cycle Stocks – which includes heavy equipment makers, electrical systems suppliers, automation solutions providers, and semiconductor fabrication equipment players – has gained about 20% year-to-date, marginally outperforming the broader S&P 500, which remains up 17% over the same period. Now the underlying trends for the theme have actually been quite mixed. While capital spending by U.S.-based companies remained strong in 2022, driven by low-interest rates and a focus by companies on boosting capacity to ease bottlenecks seen post Covid-19, things appear to be easing this year as the impact of the Federal Reserve’s rate hikes take effect. The target Federal funds rate stands at between 5.25% to 5.5% presently, at over 15-year highs. This is making it more expensive for companies to fund new projects. Uncertainties about the broader global economic recovery have also weighed on capital spending. Capex by companies in the S&P 1500 is poised to rise by just about 7% this year, compared to a growth rate of about 21% in 2022, per analysis by Citigroup. Moreover, capital expenditure growth is likely to slow to just about 2% in 2024, per the bank’s early estimates.
Interestingly, HON stock had a Sharpe Ratio of 0.4 since early 2017, which is lower than the figure of 0.6 for the S&P 500 Index over the same period. Compare this with the Sharpe of 1.2 for the Trefis Reinforced Value portfolio. Sharpe is a measure of return per unit of risk, and high-performance portfolios can provide the best of both worlds.
That being said, there is still good reason to invest in the capex theme. The U.S. government has been incentivizing companies to move production capacity back to the U.S., particularly in strategic areas such as fabricating semiconductor products. The U.S.’s big push into revamping infrastructure including roads, bridges, and railways could also provide tailwinds for the theme. Within our theme, Lam Research (NASDAQ:LRCX) has been the strongest performer with its stock up by about 61% year-to-date. The company provides wafer-fabrication tools and related services to the semiconductor industry. On the other side, Honeywell (NYSE:HON) has been one of the weaker performers, with its stock down by about 11% thus far in 2023.
|S&P 500 Return||-2%||17%||101%|
|Trefis Multi-Strategy Portfolio||-6%||21%||285%|
 Month-to-date and year-to-date as of 8/16/2023
 Cumulative total returns since the end of 2016