Research.LeutholdGroup

We take a look at how the market rewards different uses for cash and what drives management decisions about the use of cash over time. The focus here is on the three main cash applications: investment (Capex and R&D), return of cash (via buybacks and dividends), and M&A spending.

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With optimistic views on capex in late 2017, we built a thematic group of companies that appeared to be potential beneficiaries of higher spending going forward. This group has outperformed the market; but, the capex trend is disappointing and quite concerning.

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While the bond market doesn’t believe it, the past couple of months leave no doubt that the U.S. industrial economy has recovered from the energy-related slump of 2015-2016.

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We examine past capex spending patterns and identify industries with sales growth rates that have historically been the most responsive to capex cycles.

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Companies are returning cash to investors at a level never before seen. Does the historically high level of cash being returned to shareholders crowd out the use of cash elsewhere? One wide-spread concern is that by shelling out cash through dividends and share buybacks, companies are spending less on capital expenditures. Is that a real concern?

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The Leuthold Materials sector jumped five spots to #3 in the June Group Selection (GS) rankings, its highest ranking in eight years and the first reading outside of the bottom four in almost four years.

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We’ve been highlighting the overinvestment (or malinvestment) risks in commodity-oriented equity sectors for the past three years, but we certainly did not foresee those risks exploding the way they have in the oil market over the last seven months.

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Nine Technology groups are in the top quintile of our group model, and the sector has strengthened on a relative basis after twice “testing” a trendline that dates back to the early 2000’s tech wreck. There’s reason to believe the new uptrend has longer-term legs.

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There are four key decisions a company’s management has to make: Dividend Policy, External Financing, Capital Expenditure (Capex), and Research & Development (R&D).  We studied how the market rewards each of these management decisions.

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Share repurchases have been a major driver in the extension of the bull market, but this month’s “Of Special Interest” outlines several factors which are likely to contribute to a deceleration in corporate repurchase activity over the next several quarters.

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We dig deeper into the capital spending data to determine which industries still could benefit from recent CAPEX trends and which ones are likely to get hurt.

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Capex spending on the rise. Eric Bjorgen segments the spending areas and theorizes about which groups will be the most significant beneficiaries of spending. Great idea generator for those looking for ways to play the rising capex spending.

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Technology continues to be a hot topic. This month’s “Inside The Stock Market” takes an objective look at the Tech sector.

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Real GDP in Q4 was not too robust, but the numbers will likely be revised upward.

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Real growth in capital spending remained at an above-median rate in Q2, and it now looks like it might hold at or near these levels if an inventory rebuilding scenario plays out during the rest of the year.

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Bull market still intact, but investor appetite for risk remains subdued. April’s preference was for defensive and conservative strategies. Old axiom “Sell in May and go away” doesn’t seem to apply during the 130 days leading up to election day.

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Another confirmation of the strength of the recovery.

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Still overweight Info Tech, but stock selection likely to get tougher in coming months.

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Stock selection and small cap focus have provided the only hopes of surviving this decimated sector.

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