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A Troubling Chart = An Opportunity


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. 

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