Why buy US infrastructure stocks?
new york — Volatility awaits shares of US construction, engineering, building materials and other companies tied to infrastructure spending, but steel-nerved investors could be poised for gains if they weather a few bumps.
The stocks are set to be in focus in the coming weeks as President Donald Trump seeks legislation geared at overhauling the country’s ageing roads, bridges and other infrastructure, fresh off passage of a tax reform bill by his Republican party.
A bipartisan group of US senators met with administration officials last week to discuss legislation to spend $1 trillion to improve infrastructure.
An infusion of federal spending is expected to boost infrastructure-sensitive companies, but the stocks could see a rocky performance as a bill manoeuvres through Congress and details of any legislation emerge.
Improving the country’s infrastructure, which last year was given a failing grade by the American Society of Civil Engineers, has broad appeal. Still, while some Democrats want such a bill, political differences may undermine the effort and affect the amount of private sector investment.
Regardless of federal legislation, however, investors and analysts see a favourable climate for such stocks, including the need for an upgrade of national infrastructure, an expected spike in earnings for many companies this year and positive economic trends that support investment in big projects.
“There is money flowing in this area even if you don’t get the big federal one,” said Walter Todd, chief investment officer at Greenwood Capital Associates in Greenwood, South Carolina. “That would just be icing on the cake if that happened and would really flow through to these stocks.”
Todd says his firm is overweight infrastructure-related names, including owning civil contractor Granite Construction, building materials companies Eagle Materials and US Concrete and steel company Nucor Corp.
Those shares and other construction-related
There is money flowing in this area even if you don’t get the big federal one. That would just be icing on the cake and would flow through to these stocks Walter Todd, chief investment officer at Greenwood Capital Associates
names soared in the immediate aftermath of Trump’s November 2016 election, spurred by his campaign vow to spend on infrastructure.
But while the benchmark S&P 500 stock index has been on a steady ascent since Trump’s election, construction-related stocks in particular have endured a rollercoaster ride, whipsawed in part last year by uncertainty over Trump’s agenda.
Even with outsized gains over the past two months, the infrastructure trade has posted lukewarm returns since just after Trump’s win.
For example, since early December 2016, while the S&P 500 has surged more than 22 per cent, the S&P 1500 construction and engineering index has climbed nine per cent, and the S&P 1500 steel index and the S&P 1500 construction materials group have each climbsed about five per cent.
“From a year-over-year standpoint, a lot of these names have not really done anything,” Todd said.
At this relatively late point in the economic recovery, customers should be more comfortable making capital spending decisions on projects, according to analysts.
Engineering and construction companies “are a late-cycle industrial play, so we have just started to see the juice kick in for a lot of them,” said Tahira Afzal, managing director at KeyBanc Capital Markets.
“Even without an infrastructure stimulus or infrastructure bill, the next two years should be years in which the sector outperforms.”
Earnings for S&P 1500 engineering and construction (E&C) companies overall are projected to grow 27 per cent in 2018, while construction materials companies could see a 32 per cent jump, according to Thomson Reuters data. That compares to a estimated 13.9 per cent increase for the S&P 500, according to Thomson Reuters I/B/E/S. — Reuters