Fundamental Analysis and Position Trading: Evolution of a Trader

CHAPTER 4

Capital Spending

Capital spending sounds like something Congress does when they pass one of their pork-laden bills. The full phrase is capital spending per share of stock, and it refers to the amount of money a company spends annually to buy property like tools, equipment, factories, and the real estate on which they stand (usually), divided by the number of shares outstanding.

When management discusses their quarterly results with analysts and shareholders, you will hear the term capex. It is short for capital expenditures or capital spending.

When I started researching capital spending, I imagined that a company increasing its capital spending would add value to the enterprise, helping to ensure a rise in future earnings and a higher stock price. What I found during testing surprised me.

• Capital spending is the amount of money a company spends annually to buy property, divided by the number of shares outstanding.

IS DECREASING CAPITAL SPENDING THE HOLY GRAIL?

In the first test, I used 788 stocks from 1992 to 2007 that reported capital spending, but not all stocks covered the entire period. Dividends were not included in the results.

Table 4.1 shows whether a company increased capital spending in year 0 and the resulting change in stock price over the next one to five years. Each column represents the average change in stock price from one year to the next.

Table 4.1 Capital Spending versus Change in Stock Price

If a company increased capital spending, then the following ...