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While we expect some near-term disappointments on the consumer spending front into soft tax refund trends, our sense is that capital spending is poised for a pick-up. More specifically, our favorite capex forward indicators, such as capacity utilization and corporate profits, are consistent with U.S. capex growth of roughly 8% in 2019. This compares to consensus calling for 3%-4%. Additionally, we expect improving business confidence on the back of a U.S.-China trade deal and the immediate expensing of capital investments under the ‘Tax Cuts & Jobs Act’ to provide additional capital spending tailwinds.
Each month, we publish our favorite long idea stock screens. They encompass many investment styles and themes including value, growth, capital creation, cash usage, corporate actions, dividends, and financial institutions.
Our quarterly earnings quality (EQ) score is an objective way to identify potential accounting related short ideas and as a risk tool to avoid potential blow-ups in the portfolio. Our EQ Score uses seven financial ratios along with sentiment and valuation metrics to find potential underperforming stocks. The EQ Score ranges from a minimum of 0 (lowest quality) to a maximum of 100, and we rank companies within each sector on a relative basis, using ‘Q4 2018 reported financial information. This analysis covers ~2,000 companies, representing Russell 3000 companies with market cap’s over $250 million, excluding the FIN sector. See inside for details.
Yesterday afternoon (03/14/19), the IRS posted data from Week 6 of tax season (ending March 8nd). The release showed a decline in the average refund. We now believe that a positive turnaround in the data is very unlikely.
Elanco Animal Health (ELAN) [Market Cap ~ $11bn] completed its separation from Eli Lilly and Company (LLY) via an exchange offer. Elanco Animal Health offers animal disease prevention products and had FY 2018 revenue of $3.1bn.
Yesterday (03/15/19), the IRS reported that average tax refunds (through 6 weeks of tax season) are flat y/y, a very modest decline vs. the prior week with approximately 50% of tax returns filed. Tax refunds ($) and returns processed have both fallen approx. 3%. Our sense is that the numbers now reflect the most meaningful benefits of the delayed February 15th deadline to fully incorporate the tax returns with refundable credits (Earned Income Credits and Child Tax Credits). For this group of taxpayers, our detailed work suggests that refunds should be up 8-10% y/y ($24b) and the majority of this has likely been paid out to date.
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