Please Note: Blog posts are not selected, edited or screened by Seeking Alpha editors.

A Troubling Chart = An Opportunity

Summary

CAPEX hurts cash flow but leads to shareholder value in the long run.

The relationship between CAPEX and share price has broken down recently, presenting an opportunity for investors.

Every once in awhile I see a chart that just jumps out at me. In this morning's Daily Shot, the chart below was an eye-opener. As you can see from the period from January to now, the Goldman Sachs CAPEX and R&D Index correlates highly with the movement of the S&P 500. Or rather, the S&P 500 correlates highly with the index. Going back further, the correlation is just as high. 

This relationship makes sense and it was part of a project we took on at Accenture many years ago that showed how companies that continue to invest through economic downturns end up creating more shareholder value over the long-run. We're not in an economic downturn, but the concept still holds true that companies that invest in their business tend to outperform those that don't. 

With the market recently punishing those companies, the relationship has broken down somewhat. The opportunity is in buying those companies that have continued to invest in capex and R&D but have lagged the broader market. Even in a downturn, these will be the companies that hold up better and recover faster than the others. 

Disclaimer: Please note, this article is meant to identify an idea for further research and analysis and should not be taken as a recommendation to invest. It is intended only to provide information to interested parties. Readers should carefully consider their own investment objectives, risk tolerance, time horizon, tax situation, liquidity needs, and concentration levels, or contact their advisor to determine if any ideas presented here are appropriate for their unique circumstances.

  • Past performance is not an indicator of future performance.
  • Investing in any security has risks and readers should ensure they understand these risks before investing.
  • Real Estate Investment Trusts are subject to decreases in value, adverse economic conditions, overbuilding, competition, fluctuations in rental income, and fluctuations in property taxes and operating expenses.
  • This post is illustrative and educational and is not a specific offer of products or services.
  • Information on this blog is not an offer to buy or sell, or a solicitation of any offer to buy or sell the securities mentioned herein, nor is the author compensated by any of the products mentioned.
  • Information presented is believed to be factual and up-to-date, but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the topics or subjects discussed.
  • Information presented is not believed to be exhaustive nor are all the risks associated with the topic of each article explicitly mentioned. Readers are cautioned to perform their own analysis or seek the advice of their financial advisor before making any investment decisions based on this information.
  • Investment decisions should be based on an individual’s own goals, time horizon, and tolerance for risk. Nothing in this content should be considered to be legal or tax advice and you are encouraged to consult your own lawyer, accountant, or other advisor before making any financial decision.
  • All expressions of opinion reflect the judgment of the author, which does not assume any duty to update any of the information
  • Any positive comments made by others should not be construed as an endorsement of the author’s abilities to act as an investment advisor.

REITs, Opportunities, & Income (ROI): High potential ROI investment ideas for your portfolio

ROI is focused on more than single REIT stock ideas. It’s highly valuable, in-depth research designed to save you time while helping you become a better-informed investor. At ROI, I share my best ideas on REITs and less followed stocks, including a concentrated REIT portfolio designed to outperform the MSCI US REIT Index with lower volatility. Start a free trial now

Recently published on ROI:

This Little REIT is a Sleeper

New Homes Sales Data Confirms Apartment Opportunity in the South

Why We Sold the REIT from the City That Never Sleeps

Existing Home Sales Decline - Apartment and Single Family REITs Benefit.