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Written by and copyright © 2005-2017 by Thomas N. Bulkowski. All rights reserved. Disclaimer: You alone are responsible for your investment decisions.
See Privacy/Disclaimer for more information.
My book,
Fundamental Analysis and Position Trading  ,
pictured on the left, has a complete chapter dedicated to capital spending, including, "Is Decreasing Capital Spending the Holy Grail?"
If you click on this link and then buy the book (or anything) at Amazon.com, the referral will help support this site. Thanks. -- Tom Bulkowski
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This page reviews a study concerning the stock performance of companies with growing or shrinking capital spending.
Capital Spending Summary
Value Line defines capital spending per share as "the outlays for plant and equipment for the year expressed on a per-share basis. Excludes funds spent for acquisitions."
The idea behind looking at capital spending is to discover what happens to the stock's performance when the number changes. If the company spends a lot of money on new plants,
does that hurt the stock's performance? Some might say that little capital spending is best. Try to find a company that requires little cash to keep it running, but throws off a
lot or cash when compared to another business that sucks most of the available cash to keep it going.
I discovered that companies showing lower capital spending from one year to the next have dramatic price changes in the coming years.
Capital Spending Methodology
I used the Value Line investment survey and typed in their capital spending numbers to build a database of 178 stocks with data ranging from 12/30/1991 to 7/11/2008.
After completing the database, I logged the close-to-close price change from 1 to 5 years out, looking
forward from the base year. The base year ranged from 1992 to 2006. Not all stocks covered the entire range.
Years with no numbers were excluded. The price change measured from the close on the last trading day of each year.
Years 2008 and later are not included since the year had not completed as of the time of this study.
Capital Spending Results
The following table shows the stock performance over time of companies with increasing or decreasing capital spending.
| 1 yr | Samples | 2 yrs | Samples | 3 yrs | Samples | 4 yrs | Samples | 5 yrs | Samples |
| Higher cap spending | 10.10% | 588 | 10.90% | 506 | 10.30% | 429 | 9.70% | 373 | 9.30% | 331 |
| Lower cap spending | 21% | 354 | 18.30% | 341 | 19.10% | 327 | 22.10% | 300 | 22.20% | 257 |
For example, the first year after companies had higher capital spending than the prior year, the stock climbed an average of 10.1% over the next year. This compares to a rise of 21% for
those stocks that had a decrease in capital spending. The average rise over 2 years was 10.9% versus 18.3% for higher and lower capital spending, respectively.
As you scan across the columns in the table, it shows that stocks with lower capital spending perform about twice as well as those with higher spending.
-- Thomas Bulkowski
Written by and copyright © 2005-2017 by Thomas N. Bulkowski. All rights reserved. Disclaimer: You alone are responsible for your investment decisions.
See Privacy/Disclaimer for more information.
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