Election results on Tuesday will move the market. It’s not just the contentious fight for the presidency, but control of the U.S. Congress that is at stake. Investors trying to predict those results to find sectors that could prosper — and avoid those that won’t — should give infrastructure stocks a long look.
After all, it’s not hard to see multiple scenarios in which the sector rallies. President Trump promised to spend $1 trillion on infrastructure as a candidate in 2016, and hopes for a White House driven plan have persisted ever since. A Trump win plus a divided or Democratic-held Congress could leave infrastructure as one of the few areas where compromise could be reached, and an area where both sides can claim victory.
Should Joe Biden win, higher spending seems likely. And infrastructure would be a logical beneficiary, particularly as a way to boost novel coronavirus pandemic-driven unemployment early in Biden’s first term.
Politics aside, the country needs this spending. Experts project a funding gap this decade that could clear $2 trillion. And if the new pandemic drives an exodus from the cities, as many believe, the stress on existing highways will only increase.
As a result, the group offers a nice combination of an attractive long-term case and a potential near-term catalyst. And in that group, these eight infrastructure stocks look the most attractive:
- Caterpillar (NYSE:CAT)
- Valmont Industries (NYSE:VMI)
- U.S. Steel (NYSE:X)
- Aecom (NYSE:ACM)
- Gencor Industries (NASDAQ:GENC)
- Martin Marietta Minerals (NYSE:MLM)
- U.S. Concrete (NASDAQ:USCR)
- Infrastructure and Energy Alternatives (NASDAQ:IEA)
Infrastructure Stocks to Buy: Caterpillar (CAT)
As far as infrastructure stocks go, there are few more obvious than Caterpillar. The manufacturer of earth-moving equipment is a play on spending on highways, bridges, water lines and other projects.
There are two concerns. First, CAT stock has rallied quite a bit already. Shares actually are up 6% so far this year, despite the pressure on the worldwide economy. As a result, CAT stock trades at 29x 2020 consensus earnings estimates — a reasonably steep multiple.
Second, CAT may not be the best of the infrastructure plays at this point. It’s certainly not the most focused. The company retains significant exposure to oil and gas, where the industry is struggling. Mining demand looks more positive, yet seems unlikely to move much based on the election or any resulting infrastructure plans. (The U.S. business could face some modest pressure under more environmentally focused Democratic leadership, but the majority of that unit’s sales come from overseas.)
Still, CAT stock looks intriguing here. The earnings multiple isn’t a surprise given Caterpillar’s cyclical nature; that multiple should be higher with earnings at a bottom. Profits indeed are at a bottom: Caterpillar on an adjusted basis earned $11 per share last year, and Wall Street sees $7-plus in 2021.
And the company should be a beneficiary of infrastructure spending, no matter who wins and how, precisely, that spending plays out. As far as infrastructure stocks go, CAT stock is probably the simplest play.
Valmont Industries (VMI)
Valmont Industries is a company that can see a rather substantial lift from infrastructure spending. Per figures from the company’s Form 10-Q filed with the U.S. Securities and Exchange Commission, roughly one-quarter of year-to-date revenue came from lighting, traffic and highway safety products. Valmont’s coatings (used for galvanized steel and other products) and utility businesses could get a modest boost as well.
Like Caterpillar, Valmont admittedly isn’t a pure play on infrastructure spending. But the lift from a highway bill, in particular, could be enough to boost the stock, particularly given a still-attractive valuation. Shares trade at just 16x forward earnings despite long-running, cyclically driven weakness in Valmont’s irrigation business.
Meanwhile, VMI has been looking for a catalyst for years now; VMI stock has traded basically sideways since early 2013. A big highway bill could be enough to finally get VMI out of its long-held range.
U.S. Steel (X)
Steel producers are obvious infrastructure stocks, and, at the moment, investors have their pick. Despite its illustrious history, U.S. Steel is no longer America’s largest steel producer; that honor goes to Nucor (NYSE:NUE). But X stock might be the best play in the sector on an infrastructure bill, for a counterintuitive reason.
The reason is that U.S. Steel remains unprofitable. Analysts expect Nucor to earn almost $1 billion in profit next year (on an adjusted basis); U.S. Steel should lose about $350 million.
Those losses don’t mean U.S. Steel is headed for bankruptcy. The company closed its third quarter with $1.7 billion in cash. But they do make X stock a classic turnaround play. Infrastructure spending could provide a much-needed tailwind that changes the narrative surrounding the stock.
Admittedly, some investors might see a Trump loss as a negative, given the President’s oft-cited emphasis on boosting the industry. But Trump’s Presidency hasn’t done much for steel stocks. X stock is down about half from where it traded before the election (it skyrocketed after), and NUE is up only modestly.
There are risks. U.S. Steel has $4.6 billion in debt, and past turnaround efforts have stumbled. As far as infrastructure stocks go, this is one of the highest-risk plays. It has one of the highest-reward options as well.
When looking for infrastructure stocks, an investor can’t ignore Aecom. After all, Aecom bills itself as the “world’s premier infrastructure firm.”
Not all Aecom projects will benefit from federal infrastructure spending. Almost half of fiscal 2019 revenue came from private entities. About one-fourth of revenue through the first three quarters of FY2020 was generated overseas.
Still, there’s a big potential boost here. The U.S. federal government drove over 25% of revenue last year. State and local governments added another 16%.
And ACM stock looks set to break out if it can find a catalyst. Resistance has held repeatedly just above the current levels, setting up a nice chart if investors view election news as a positive. Fourth quarter earnings on Nov. 16 offer another possible source of optimism. And at 18x forward earnings, ACM stock looks reasonably valued for the mid to long term as well.
Gencor Industries (GENC)
Gencor Industries is one of the more unique stocks in the market. Gencor manufactures heavy equipment used in highway construction, making it an obvious play on infrastructure spending, and highway funds in particular.
Yet for much of the past decade, Gencor has traded near or below the value of its cash and marketable securities. The gap is a bit larger now, but Gencor still has a market capitalization of just $173 million. Cash and securities totaled $124 million as of June 30.
Part of the issue has been that Gencor has chosen to keep that growing balance on hand, instead of returning it to shareholders. The funds also are invested rather aggressively in the stock market. In fact, the U.S. Securities and Exchange Commission asked the company in 2011 whether it qualified as an investment company, rather than an operating business.
Those factors likely contribute to the relatively thin value investors place on the operating business. But they’ve ignored those factors when the federal spigots open. GENC stock gained nicely in late 2013 after a highway bill was signed. It soared when a broader package was put into place in 2015. With GENC down over one-third from 2017 levels, there’s potential for yet another rally if history repeats.
Martin Marietta Minerals (MLM)
S&P 500 component MLM is a simple infrastructure play. Martin Marietta supplies asphalt, sand, crushed stone, and other minerals to construction companies. Those customers should do well if federal spending picks up, making Martin Marietta an obvious winner.
One concern is whether the tailwind is already priced into MLM stock. A 26x forward price-to-earnings multiple is not exactly cheap, and MLM has nearly doubled from its March lows.
But private construction appears to be doing well, particularly on the residential side, so the buying over the past seven-plus months isn’t just about an infrastructure tailwind. If that tailwind isn’t yet priced in — and it may well not be — Martin Marietta could be one of the infrastructure stocks that becomes a big winner in 2021.
U.S. Concrete (USCR)
Investors who focus on the small-cap space can find a similar play in U.S. Concrete. U.S. Concrete also supplies aggregates and heavy minerals. But as the name suggests, its core business is providing ready-mixed concrete.
Both sides of the business should benefit from higher infrastructure spending, and USCR stock has already seen big rallies. When rumors of a new plan from the Trump Administration circulated in June, USCR gained more than 20%.
Meanwhile, at less than 20x forward earnings, the stock isn’t necessarily expensive. And results are already heading in the right direction: profit margins have expanded nicely in 2020 despite lower sales due to pandemic-driven project delays. Combine a return to normalcy with higher infrastructure spending and USCR could be one of the best infrastructure stocks out there — and maybe the best.
Infrastructure and Energy Alternatives (IEA)
The core worry with IEA stock at this point is that the market has figured the story out. IEA has more than doubled year-to-date.
Most of the rally, however, seems attributable to the company’s expertise in constructing solar projects. Solar stocks have soared across the board as that industry too should benefit from a Biden presidency as well as the general shift toward renewables.
But a recent sharp pullback seems to bring IEA stock back into buying range. And despite the growth opportunity, a 21x forward P/E multiple doesn’t seem particularly onerous. There’s a nice combination of growth, value and catalyst here. That all adds up to make IEA a potential small-cap winner among infrastructure stocks.
On the date of publication, Vince Martin did not have (either directly or indirectly) any positions in the securities mentioned in this article.
After spending time at a retail brokerage, Vince Martin has covered the financial industry for close to a decade for InvestorPlace.com and other outlets.