Swing Trading For Dummies® by Omar Bassal CFA

Author:Omar Bassal, CFA
Language: eng
Format: epub
Publisher: Wiley
Published: 2010-03-10T05:00:00+00:00

Source: Google Finance

Low capex may mean higher profits

Capital expenditures (affectionately shortened to capex) represent investments by firms into their businesses. So you may think that the more a company invests in itself, the better the performance of its stock. In reality, high capex isn’t correlated with strong stock price performance. Jeremy Siegel, a professor of finance at the Wharton School of Business (and former teacher of mine) writes in his book The Future for Investors (Crown Business, 2005):

There is strong evidence that firms with the highest level of capital expenditures suffer the worst performance across the entire stock market. Five portfolios are formed, ranging from the firms with the lowest to the firms with the highest capex to sales ratios. The portfolios are rebalanced each December 31 using the last twelve months’ sales and capital expenditures . . . those firms that engaged in the most capital expenditures provided investors with the worst returns, while those that had the lowest expenditures had overwhelming better returns — more than 3.5 percent per year higher than the S&P 500 Index over almost half a century.

The two sectors Siegel identifies as having the lowest capex to sales are the healthcare sector at 0.07 and the consumer staples sector at 0.044. Interestingly, the healthcare sector posted the best return of all sectors in the market between 1957 and 2003.

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