Infrastructure stocks have been on fire. That’s in anticipation that Washington passes some sort of infrastructure plan. However could these stocks really be a group of risk stocks masquerading as bull stocks?
The first order of business was rolling out a vaccination program. After that, it was agreeing to a stimulus bill, sending a lifeline to U.S. businesses and American citizens. Now that the government has done both of those things, infrastructure has become a clear focus.
President Biden is talking about a $2.3 trillion infrastructure program. That’s a massive amount of money. Senate Republicans countered with a $568 billion plan. Given that the Democrats currently control the House, Senate and White House, it’s likely to be closer to the first number than the second number.
However, the prior Administration also hoped to do an infrastructure bill. It never happened despite also controlling the House, Senate and White House. Then the novel coronavirus pandemic hit.
As a result, infrastructure stocks turned into risk stocks as that blank check of revenue suddenly vanished overnight. Could the same outcome be brewing here?
Let’s look at eight stocks that could be impacted in that scenario:
- Caterpillar (NYSE:CAT)
- U.S. Concrete (NASDAQ:USCR)
- Vulcan Materials (NYSE:VMC)
- U.S. Steel (NYSE:X)
- Nucor (NYSE:NCR)
- Cummins (NYSE:CMI)
- United Rentals (NYSE:URI)
- Cleveland-Cliffs (NYSE:CLF)
Risk Stocks to Watch: Caterpillar (CAT)
Caterpillar is the go-to infrastructure stock for most investors. However, there’s also risk in this name too.
Shares are up 162% from the 2020 low, as the stock is working on its 13th consecutive monthly gain. When was the last time Caterpillar did that? Not only is the stock at new all-time highs, but it’s almost 40% above its prior all-time highs, which were set in January 2018.
Does the stock really deserve such a big rally?
Well, it does if President Biden’s infrastructure aspirations come to fruition. However, if those plans don’t come to fruition, this stock and many others will likely find themselves ravaged in a bear market.
On the plus side, global economies will also be looking to recover. Companies will turn to new projects, construction, mining and other methods to generate growth and that will mean big business for Caterpillar.
Surprisingly though, analysts are only predicting 11.5% revenue growth this year and 9.6% growth next year. On the earnings front, estimates sit at just 27% and 30% for this year and next year, respectively.
While solid, it’s worth questioning if that type of growth justifies a 162% rally to new all-time highs and a valuation of 27 times this year’s earnings.
U.S. Concrete (USCR)
U.S. Concrete is also working on its 13th consecutive monthly gain, although down 13% so far in April and it seems likely that its streak will come to an end. Unlike Caterpillar though, the stock has not taken out its 2018 high.
However, shares are still up 845% from the March 2020 low and were up almost 1,100% at the 2021 high. So to say that USCR stock has enjoyed a nice recovery would be a bit of an understatement at this point.
President Biden’s proposed plan would be a boon for concrete companies. More than one-quarter of the proposal is earmarked for transportation. The category encompasses highways, bridges, roads, railways and airports, among others.
With $621 billion marked for this group under this proposal, concrete companies would see incredible demand. Obviously these funds would be stretched out over several years, but still, it would be a huge win.
Now imagine if the plan doesn’t come to fruition. U.S. Concrete and its 10-bagger returns will likely be under intense selling pressure.
Risk Stocks to Watch: Vulcan Materials (VCM)
Vulcan Materials would be a similar story. Vulcan is a provider of crushed stone, sand and gravel used to make asphalt and concrete. So if there’s going to be a large infrastructure deal, Vulcan will be a big winner. From the company:
“What we mine and sell — aggregates — are indispensable to infrastructure and growth … We take care of the land through the entire cycle of productive use from mining to restoration and re-use. We serve our customers and communities well. Always with the long view in mind. This is how we sustain success.”
As the largest producer of aggregate in the country, Vulcan is in prime position to benefit from a huge infrastructure bill.
Here’s another risk that investors don’t seem to be considering: What if the final bill is considerably smaller than $2.3 trillion?
Up 96% from its March 2020 low and Vulcan would likely be under pressure, even though it will enjoy a rebound in the global economy.
U.S. Steel (X)
Steel stocks have been all the rage lately. However, unlike some of the names above, U.S. Steel and its peers are not hitting new highs. They’re also not enjoying rallies that have been underway for more than a year.
At the beginning of October, U.S. Steel was up about 60% from the March 2020 low. However, since then, it has rallied in 5 of the past 6 months, climbing more than 225% in that span. From the lows, shares are up more than 420%.
U.S. Steel is climbing on the faster-than-expected U.S. recovery. That has been a huge driver for a number of these stocks.
However, steel is an enormous resource for infrastructure projects. If the U.S. government can green light a massive project — spanning housing, construction, transportation, digital infrastructure and more — steel companies will be a huge beneficiary.
Risk Stocks to Watch: Nucor (NCR)
What if we don’t get the bill or if it’s much smaller than expected? Well, steel stocks could become risk stocks.
Like U.S. Steel, Nucor has been riding the U.S. recovery to nice gains lately. The rally really took hold at the start of November, but we’ve seen a nice move from the lows in Nucor.
Just from the March 2020 low, Nucor bounced 67% by the end of the month. To current levels, shares are up 300%. With a $5.5 billion market capitalization, the company is only slightly smaller than U.S. Steel and its $6.4 billion market cap.
That said, Nucor is the country’s largest steel producer. Keep this in mind in case of disappointment.
Cummins has stormed its way higher too. Up 160% from the March lows and this engine maker has vaulted to new all-time highs. That said, is it getting stretched up here?
Cummins is an interesting consideration in this group. Trading at about 18.5 times this year’s earnings estimates isn’t out of line here, especially with estimates calling for roughly 17% earnings growth in each of the next two years. As a large producer of big engines, it will benefit from an uptick in orders related to infrastructure.
That said, its success is not as highly correlated to an infrastructure bill as many of the other names on this list.
While Cummins will likely trade with the group to some degree (both up and down), I think it’s less impacted by the bill than others. Does that still make it one of our risk stocks?
It’s at least one to watch.
Risk Stocks to Watch: United Rentals (URI)
United Rentals could be in the best position to benefit from a multi-trillion dollar infrastructure project.
Providing all sorts of equipment for virtually any job, United Rentals is here to help get the job done. It doesn’t matter if it’s a highway infrastructure project or a new commercial building going up downtown. In hundreds of scenarios between these situations, companies need a company to count on.
United Rentals has two main businesses: Trench, power and fluid solutions, and general rentals.
The general rentals unit is pretty simple, consisting of tools, components and machines that workers need to get a job done. The other group is a bit more specialized and includes everything from trench shields to construction lasers, HVAC and generators.
No matter what part of the new bill is under development, United Rentals will likely be playing a role. That said, URI stock is now up 440% from the March 2020 lows and has rallied in 11 of the past 12 months. In the one “down month,” shares fell 1.5%.
There is risk to this stock if the infrastructure bill disappoints.
Last but not least is Cleveland-Cliffs. The iron ore miner has undergone a transformation in recent years, but it’s still one of the largest at what it does. The company is the “largest flat-rolled steel company and the largest iron ore pellet producer in North America.”
However, CLF finds its way on our list of risk stocks. Not just because the stock is up 580% from last year’s lows (and up almost 700% at the April high). Instead, it’s because of the drop off in expectations.
While analysts expect a robust year for both sales and revenue in 2021, consensus expectations call for a big dip in 2022. Analysts estimate that revenue will fall more than 10% and that earnings will plunge more than 50% next year.
Maybe that doesn’t come to fruition — perhaps Cleveland-Cliffs proves the analysts wrong. But regardless, there is risk that it doesn’t.
On the date of publication, Bret Kenwell did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.