Long-term stock investors should focus on cash-rich companies poised to spend big rather than stimulus beneficiaries, Jefferies says

Lucas Jackson/Reuters

• Long-term investors should turn their focus to US businesses that are on the verge of a spending binge in a post-pandemic environment, Jefferies said in a note on Tuesday. 
• The current profit cycle for US corporations is unique due to their heightened levels of cash, which will be spent on stock buybacks, dividends, and mergers and acquisitions, Jefferies said. 
• "While investors want to be positioned for the Democrat stimulus beneficiaries, it might be better to play capex-spending recipients and those who can 'manage' the balance sheet since this tends to be a 'longer cycle," Jefferies said. 
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The COVID-19 pandemic and subsequent economic decline has created a unique environment for US corporations going forward, Jefferies said in a note on Tuesday.

A big difference between the recession in 2020 and prior economic downturns is heightened levels of cash for both businesses and individuals, Jefferies highlighted.

S&P 500 companies ended last year with a record amount of cash as a percentage of total assets, and US companies raised the largest amount of cash from bond and equity markets, according to Jefferies.

Now, with COVID-19 vaccines being administered and a post-pandemic environment within reach, companies are on the verge of a spending binge: stock buybacks, dividends, and mergers and acquisitions, Jefferies said.

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Long-term investors should turn their focus to these companies that are investing for the long haul over companies that are poised to benefit from another round of stimulus from Washington, D.C., according to Jefferies.

"The bottom line is that, while investors want to be positioned for the Democrat stimulus beneficiaries, it might be better to play capex-spending recipients and those who can 'manage' the balance sheet since this tends to be a 'longer cycle,'" Jefferies said.

And this longer cycle could start off with a bang given that every single balance sheet is spending at the same time and "all have plenty of money to spend": the government, households, and corporations, the note said.

"This is extremely rare post a credit shock," Jefferies noted, adding that businesses will have broad pricing power.

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