Companies are starting to spend big to fund future growth. Goldman has a way to play it

Published Mon, May 3 20212:03 PM EDT

Corporate America is starting to ramp up its spending amid a rebounding economy after a big cash crunch last year, according to Goldman Sachs strategists, who believe shares of companies prioritizing growth will lead the next leg higher. Many major companies are opening up their wallets as much of the pandemic hit is now in the rearview mirror. For example, Apple, Intel and Walmart have all announced substantial new spending plans to facilitate future growth, Goldman noted. The Wall Street firm estimated a 19% rebound in S & P 500 companies' cash use this year, up from 10% growth previously forecast. "S & P 500 cash to asset ratios are at record highs and policy uncertainty has continued to fall," Goldman strategists led by head of U.S. equity strategy David Kostin, said in a note. "We expect investing for growth (capex, R & D, cash M & A) will continue to represent the largest share of wallet." Goldman is touting its high growth investment ratio basket, which contains S & P 500 stocks from every sector investing most for the future. The bank defines growth investment ratio as how much a company invest relative to its operating cash flow. The median stock in the basket has invested 78% of its trailing three-year operating cash flow in growth capex and R & D versus 11% for the median S & P 500 stock, Goldman said. Stocks with high growth investment ratio include a slew of classic reopening trades — Carnival , Norwegian Cruise Line , Delta Air Lines and Royal Caribbean . A number of health care names also made the list, including Incyte , DexCom , Regeneron Pharmaceuticals and Eli Lilly. Other stocks with elevated levels of cash spending include Electronic Arts , Twitter , AMD, Synopsys, and Juniper Networks. To be sure, Goldman noted that the likelihood of higher taxes poses a threat to the trajectory of S & P 500 cash spending. President Joe Biden proposed raising the corporate tax rate to 28% from 21% as well as a much higher levy on capital gains for wealthy Americans. Goldman's political economists expect that Democrats will pass a scaled-down version of tax reform later this year. "We expect less S & P 500 cash spending will occur than would have otherwise been the case without tax reform," Kostin said. "We also expect higher taxes will weigh on buybacks more than dividends, capex, and R & D. Repurchases have exhibited greater variability than nearly ever other use of cash."

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Many major companies are opening up their wallets as much of the pandemic hit is now in the rearview mirror. For example, Apple, Intel and Walmart have all announced substantial new spending plans to facilitate future growth, Goldman noted. The Wall Street firm estimated a 19% rebound in S&P 500 companies' cash use this year, up from 10% growth previously forecast.