Tax-cut plan prompts managers to bet on automation


NEW YORK: The Trump administration’s plan to cut corporate taxes may add more fuel to the already hot rally in the shares of automation companies. Fund managers from Columbia Threadneedle Investments, Hodges Capital and Hood Capital say that they expect that companies will use part of their tax savings to invest in high-cost machines that will allow them to reduce labour costs over time.
That would be a boon for companies such as Cognex Corp, which makes so-called machine vision systems that are used to quickly sort and fill orders in e-commerce warehouses, and Faro Technologies Inc, which makes three-dimensional measuring tools that can help lower labour costs on aerospace assembly lines.
Cognex shares touched a 52-week high on Friday, while Faro shares at $38.20 were closing in on their year-high of $40.60 reached in August.
“Scarcity of capital is the thing that keeps companies from spending money when it makes sense to do so.
Investing in automation would be something that pays for itself quickly,” said Matt Litfin, a portfolio manager of the $4.8 billion Columbia Acorn fund, who owns shares of Cognex.
Shares of the company are up 80 per cent year-to-date.
Automation companies have rallied overall this year as corporate America looks for ways to maintain margins and productivity at a time when wages are rising and unemployment is low.
The $1.4 billion Robo Global Robotics and Automation Index ETF, which includes a mix of large-cap companies such as Rockwell Automation and Intuitive Surgical, is up over 35 per cent for the year to date, nearly triple the 13.5 per cent gain in the broad S&P 500 index.
Numerous fund holdings are up over 90 per cent for the year to date, including drone manufacturer AeroVironment Inc, gear manufacturer Harmonic Drive Systems Inc and laser company IPG Photonics Corp.
Large-cap automation companies, such as Rockwell Automation Inc and Emerson Electric Co, have also posted solid returns so far this year, though smaller-cap companies have seen larger share price gains overall.
The Robo ETF has posted positive inflows every week since President Donald Trump’s November election, partly due to investor anticipation of a corporate tax cut.
Investors have sent $461 million into the fund since early August, when the Trump administration began publicly discussing its plans to cut the top corporate tax rates to 20 per cent, from 35 per cent.
Prominent Republican senators such as Bob Corker and Rand Paul have criticized the Trump administration’s plan for its potential to increase the federal deficit, leaving its passage far from certain.
Yet fund managers say that they see gains in automation companies continuing regardless of whether a tax bill passes.
“Even eight years after the financial crisis, companies are still very focused on their bottom lines and maintaining efficiency and productivity as much as possible,” said Eric Marshall, a portfolio manager of the $743 million Hodges Small Cap fund.
Middleby Corp, which makes smart ovens and other kitchen equipment used in restaurant chains such as Panera Bread, will likely benefit as companies look for ways to reduce labour costs as more states raise the minimum wage, he said.
Shares of Middleby are flat for the year, in part due to slow sales of its Viking line of high-end ovens after the company had to recall some freestanding gas ranges that turned on by themselves with customers unable to turn them off.
Hodges said that despite the overhang, the company looks poised to continue to grow as restaurants expand and high real-estate prices prompt more homeowners to upgrade their kitchens.
“This is a company that’s got some real secular trends going for it, and a corporate tax cut will only accelerate those trends,” he said.
US STOCKS: The S&P 500 eased on Friday, ending a six-day run of record highs as the first monthly decline in US nonfarm jobs in seven years dampened sentiment and pharmacy shares fell on Amazon competition fears. The Nasdaq ended up for a ninth straight day, however, and set its sixth straight record high close, its longest such streak since seven records in February.
Walgreens Boots Alliance and CVS Health fell and were among the biggest drags on the S&P 500 after a CNBC report that Amazon was close to a decision on selling prescription drugs.
Walgreens shares dropped 4.9 per cent and CVS was down 4.9 per cent, while Amazon shares rose 0.9 per cent.
The Labour Department’s closely watched jobs report showed nonfarm payrolls fell by 33,000 in September as hurricanes Harvey and Irma left displaced workers temporarily unemployed and delayed hiring.
A bright spot was a better-than-expected rise in average wages.
“It’s been amazing how resilient our US stock market has been, going up on no news or bad news, so there’s no surprise on a day where most people feel it was a mixed jobs report at best that the market actually is reacting in a way that makes sense,” said Jake Dollarhide, Chief Executive Officer of Longbow Asset Management in Tulsa, Oklahoma.
“It’s a logical move for this illogical stock market.” The Dow Jones Industrial Average fell 1.72 points, or 0.01 per cent, to end at 22,773.67, the S&P 500 lost 2.74 points, or 0.11 per cent, to 2,549.33 and the Nasdaq Composite added 4.82 points, or 0.07 per cent, to 6,590.18.— Reuters