Wall St Week Ahead-Tax-cut plan prompts fund managers to bet on automation
06/10/2017 12:00
By David Randall
NEW YORK, Oct 6 (Reuters) - 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 Management Investment Advisers,
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 labor costs
over time.
That would be a boon for companies such as Cognex Corp
CGNX.O , which makes so-called machine vision systems that are
used to quickly sort and fill orders in e-commerce warehouses,
and Faro Technologies Inc FARO.O , which makes
three-dimensional measuring tools that can help lower labor
costs on aerospace assembly lines.
"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 LACAX.O fund, who owns shares of Cognex. Shares
of the company are up 80 percent year-to-date.
Automation companies have rallied overall this year as
corporate America look 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 ROBO.O , which includes a mix of large-cap companies such
as Rockwell Automation and Intuitive Surgical, is up over 35
percent for the year to date, nearly triple the 13.5-percent
gain in the broad S&P 500 index.
Numerous fund holdings are up over 90 percent for the year
to date, including drone manufacturer AeroVironment Inc
AVAV.O , gear manufacturer Harmonic Drive Systems Inc 6324.T ,
and laser company IPG Photonics Corp IPGP.O .
Large-cap automation companies, such as Rockwell Automation
Inc ROK.N and Emerson Electric Co EMR.N , 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 percent, from 35 percent.
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 the 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 MIDD.O , 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
labor 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.
(Reporting by David Randall; Editing by Jennifer Ablan, Nick
Zieminski and Cynthia Osterman)
((David.Randall@thomsonreuters.com; 646-223-6607; Reuters
Messaging: david.randall.thomsonreuters.com@reuters.net))
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Keywords: USA STOCKS/WEEKAHEAD