Companies are starting to get rewarded for spending cash—at least in the stock market.
After nearly a year of being penalized for spending on new capital and equipment, these companies saw their stocks outperform the rest of the stock marketin September.
The move is not yet a trend but worth noting on a couple of levels.
One is that it offers investors a different path from the usual plays from high-dividend and growth stocks that have dominated the rally since June.
But more importantly, it could reflect that corporate CEOs are gaining more confidence in the future.
"In the prior nine months, investors did well by betting against high capital spenders. The trajectory of capital spending is important to equity markets and the economy, and market feedback could play a role in corporate capital use decisions," Adam Parker, chief U.S. equity strategist at Morgan Stanley, said in a note.
"Perhaps the market could begin to reward capital spending, as only companies highly confident that spending will be merited with return above cost would be investing today," he added.
With the anemic U.S. economystruggling for growth, investors have been concerned about company cash positions. As a result, nonfinancial corporations have amassed abut $2 trillion in cash on their balance sheets.
Companies that deployed cash or had weak cash positions have been among the weaker performers on the Standard & Poor's 500 during the market's relatively strong performance otherwise.
"High-yield stocks sold off in September, perhaps on concerns about looming dividend tax increases," Parker said. "Alternatively, investors may be less pessimistic on growth — something that would justify more capital spending."
The spending appears to be directed primarily at capital expenditures towards growing business rather than share buybacks or dividends. Corporate selling of stock exceeded buying by $22.7 billion September, according to data research firm TrimTabs.
Parker composed a list of stocks that had the highest capital expenditures compared to sales that performed positively in September after falling in the previous three and six months.
Among the best were Corning (up 7.1 percent in September), Kosmos Energy(up 15.1 percent) and Penn National Gaming (up 7.1 percent). Six of the top 13 were in the energy sector. The S&P 500 overall gained 2.6 percent for the month.
Still, the road ahead appears far from clear regarding capex.
Corporate advisory firm CEB reported Wednesday that most chief investment officers at information technology firms expect capex to be flat in 2013 amid budget constraints.
Also, Barron's earlier this week said a survey of hospitals showed a weak capex environment ahead.
"One month does not make a trend, but the performance of capital spending factors bears watching in the months ahead," Parker said.
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