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What Are Capex Cycle Stocks?

Companies that stand to gain from growing capital investments, including heavy equipment makers, electrical systems suppliers, automation solutions providers, and semiconductor fabrication equipment players6 stocks selected primarily based on relevance to theme Capex CycleCaterpillar (CAT), Oshkosh (OSK), Deere & company (DE), Rockwell Automation (ROK), Honeywell (HON), Applied Materials (AMAT)Cumulative return of 79.9% since 2018 and average YTD return of -2.2%

Capex Cycle Stocks: Market Performance

201720182019202020212022Total [1]AvgBestReturns Capex Cycle Stocks Return [2]50%-21%40%26%32%-2%170% S&P 500 Return19%-6%29%16%27%-7%97% Trefis MS Portfolio Return23%-2%34%68%46%-10%252% <---Monthly Win Rates [3] Capex Cycle Stocks Win Rate92%42%75%67%83%0% 60% S&P 500 Win Rate92%67%83%58%75%0% 62%<---Trefis Portfolio Win Rate89%58%75%58%83%0% 61% Max Drawdowns [4] Capex Cycle Stocks Max Drawdown0%-27%-3%-40%-1%-2% -12%<---S&P 500 Max Drawdown-3%-20%-7%-34%-5% -14% Trefis Portfolio Max Drawdown-4%-24%-11%-38%-14%0% -15% [1] Cumulative total returns since 2017[2] Capex Cycle Stocks: CAT, OSK, DE, ROK, HON, AMAT[3] Win Rate = % of calendar months in which monthly returns were positive[4] Max drawdown represents maximum peak-to-trough decline within a year

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How Capex Cycle Stocks Compare To S&P 500 On Evaluation Criteria?

[1] Market Valuation: At P/EBIT of 20.1, S&P 500 trading at a more expensive price compared to 19.6 for Capex Cycle Stocks

Market ValuationCapex Cycle StocksS&P 500vs S&P 500As of 1/24/2022 Price To Sales Ratio (P/S)-18.6-Price To OpInc Ratio (P/EBIT)-20.1-Price To Earnings Ratio (PE)-62.9-

[2] Growth & Profits: Considering the valuation, the market appears to be rewarding higher growth and demonstrated profit generation ability of S&P 500 - S&P 500: better revenue growth --> 19.3% last Q (qoq), 34.8% last Q (yoy), 15% LTM, and 3.5% annually in last 3 FY - In comparison, Capex Cycle Stocks: 3.3%, 29.4%, 12.3%, and 0.3% respectively, during the same periods - Similarly, S&P 500: greater profit generation promise --> 12.7% average margin, 4.1% average margin expansion, and 69.8% cash flow - The corresponding values for Capex Cycle Stocks stand at 17.3%, 2.1%, and 18.9%Note: Average margin is based on average of last Q, LTM, and last 3 FY, while margin change is based on last Q margin vs 3Y average

Growth & ProfitCapex Cycle StocksS&P 500vs S&P 500 As of 1/24/2022 Revenue GrowthLast Q Growth (QoQ)---Last Q Growth (YoY)---LTM Growth-0%-Last 3 Fiscal Year CAGR--- ProfitabilityLast Q OpInc Margin-16.4%-LTM OpInc Margin-9.4%-Last 3 Fiscal Year Average-12.3%-LTM FCF Margin-69.8%-

[3] Financial Risk: Then, is the market ignoring risk to S&P 500? Likely as there is apparent higher risk for S&P 500 vs Capex Cycle Stocks - Capex Cycle Stocks: better debt position, with debt as % of equity of 10.7% vs 24.7% for S&P 500 - Capex Cycle Stocks: more cash cushion, with cash as % of assets of 15.8% vs 9.9% for S&P 500

Financial RiskCapex Cycle StocksS&P 500vs S&P 500 As of 1/24/2022Debt as % of Equity-24.7%-Cash as % of Assets-9.9%-

[4] Market Returns: What about market returns of Capex Cycle Stocks vs S&P 500? - Capex Cycle Stocks: higher average annualized return of 17.7% vs 10.5% for S&P 500 based on key market periods - These key market periods include, year-to-date, pre-covid to now, and 3 years prior to covid

Precovid date is taken as end of Feb 2020

Notes:

[1] Q = quarter, LTM = last twelve months, FY = fiscal years, yoy = year-on-year, qoq = quarter-on-quarter

[2] Revenue growth decision is made by giving more weightage to long-term revenue growth (3-year average) and lesser weightage to quarterly growths

[3] Margin mentioned is average of last Q, LTM, and last 3 FY; margin increase is average of increase in last Q vs LTM and increase in last Q vs 3-FY average

Capex Cycle Stocks: Individual Stock Returns

Return & Risk Comparison Across Selected Stocks

MetricsDECATOSKHONROKAMAT Recent Returns YTD6.2%3.7%3.6%-1.9%-10.6%-11.5%LTM22.1%14.4%25.1%1.3%19.5%28.8%Pre-Covid To Now132.6%72.5%61.8%26.1%69.9%139.7% Last 3 Years Returns129.8%61.5%69.4%44.8%91.6%268.3%Sharpe Ratio1.130.830.760.731.171.53Max Drawdown-31.2%-32.9%-30.5%-26.7%-27.5%-4.1%

What Next?

(1) Learn more about Caterpillar (CAT), Oshkosh (OSK), Deere & company (DE), Rockwell Automation (ROK), Honeywell (HON), Applied Materials (AMAT) to understand their investment potential better

(2) Compare performance and potential of Capex Cycle stocks vs the other investment themes that we track

(3) Alternatively, invest with our portfolios that have significantly outperformed S&P 500 in the last few years

Capex Cycle Stocks: FAQ

[1] Why Should I Care About Capex Cycle Stocks?Investing in Capex Cycle is about taking advantage of specific opportunity that lies in the sectorWith demand for basic materials and finished products surging following the Covid-19 lockdowns, companies are seeing strong pricing trends and profit growth. It is s likely that they will deploy these profits into capital goods to improve capacity and enhance productivity, after years of underinvestment. [2] Which Other Stocks Can Be Categorized As Capex CycleWe currently do not include any other tickers as part of Capex Cycle stocksWhile other stocks may qualify this category, our system removes stocks that have exceptionally high growth due to very low revenue base to avoid skew in comparison [3] What Are The Risks Associated With Investing In Capex Cycle Stocks?The stocks in the theme are quite cyclical and buying at the right point in the cycle is important. [4] What Other Type Of Stocks Do You Look At?We look at nearly 78 different investment themes, each categorized by specific industry or trend that presents an opportunity for returns or risk diversificationWe update information on these stocks every day. You can find them here.

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