These infrastructure stocks could build up your portfolio in 2019

Major infrastructure legislation could be a top goal for Congress, boosting construction-related stocks.

  • By Jeff Reeves,
  • MarketWatch
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Anyone who has observed a potholed-riddled road, a rusty water tower or interminable delays at their local airport can testify that the U.S. needs better infrastructure.

The American Society of Civil Engineers gave America's overall infrastructure a D+ in its last annual infrastructure report card. That's a nationwide grade, and includes a D+ for wastewater infrastructure and a D+ for energy infrastructure among other categories; rails were graded a B, the only grade above C+ across 16 categories, and zero A grades were awarded.

When will we wake up and fix this mess? After the financial crisis, there was a half-hearted attempt at an infrastructure effort via an economic stimulus for "shovel ready" projects under the American Recovery and Reinvestment Act. But as former President Barack Obama himself admitted in 2010, the effort underestimated the red tape and delays inherent in these projects, and big state budget holes, ate through the stimulus and caused it to be diverted away from planned long-term improvements.

There was also rumblings of an infrastructure bill immediately after Election Day in 2016 when President Donald Trump took office. But other legislative efforts including a failed mission to repeal Obamacare and a focus on trade policies and immigration were prioritized. Infrastructure was once again overlooked as a result.

Here’s the good news: the timing may finally be right for a big infrastructure bill in 2019.

With an incoming Democratic majority in the House of Representatives dividing power in Congress, infrastructure is one of those rare "Goldilocks" issues that is neither too left nor too right. In addition to the chance of bipartisan support, there's also a good chance the White House will sign on, given Trump's desire to keep the economy firing on all cylinders as the American political machine is already preparing for hard-fought races in 2020.

All this means investors could profit by banking on a big infrastructure bill in the New Year. Savvy investors who stake out relatively stable positions now before legislation gets underway will have the best chance of enjoying the bump caused by favorable policies, and these picks could weather an otherwise choppy market.

Here are five stocks to consider which should hang tough until a potential stimulus measure is unveiled, and could tap into big profits if any legislation becomes reality.

1. Aecom

Aecom (ACM) is one of several infrastructure investments that has fallen on hard times in 2018, but has a lot of potential both on hopes of stimulus measures out of Washington as well as being a decent value play right now.

Let's start with the stimulus angle first. This engineering and construction company provides design, financing, and other services with a clear specialty on infrastructure. According to the stock's 2017 annual report, almost 22% of total revenue came from the U.S. federal government and another 15% came from local governments. That makes it a great possible beneficiary if any infrastructure stimulus happens. Furthermore, a big $175 million acquisition of Shimmick gives it a big foothold in the lucrative market of California, where growth is hot and government spending is relatively easier to come by.

Bigger picture, ACM stock has declined about 25% in 2018 on flat revenue and challenged growth prospects. But the stock now trades for a forward price-to-earnings ratio of less than 9 — well-below the typical P/E estimate of just over 16 for the S&P 500 (.SPX). With a track record of meeting or exceeding earnings expectations for eight quarters running, you pretty much know what you’re getting from this industrial stock.

There is risk here from a broader downturn that saps ACM business, but a lot of the current negativity is priced in. And unlike some other multinational industrial stocks, a big focus on domestic spending should keep Aecom insulated from overseas trade tensions.

2. Caterpillar

Many investors wrote off Caterpillar Inc. (CAT) earlier in 2018, when trade tensions started to give Wall Street the jitters and then a spring slump caused many investors to go risk-off. That negativity is still priced in, which makes CAT stock a good value play regardless of any infrastructure spending — and a potential breakout investment if the political cards fall right.

With historically strong operating margins and one of the biggest brands in heavy machinery, any substantive infrastructure spending could turn Caterpillar's stock around quickly. It's also important to remember that Caterpillar is not merely a play on the business cycle or a big spending bill, but an established company with an increasingly attractive stock valuation at present.

Over the past few years, Caterpillar has steadily cut back on capital expenditures, from almost $4.5 billion in 2013 to just over $2.3 billion in 2017, and recently announced a new $1.25 billion stock buyback plan in July. The stock’s dividends have more than doubled since 2010, jumping from 42 cents quarterly to 86 cents at present, good for a yield of 2.8%. And to top it off, it now trades for a forward P/E of less than 10 after its trouble in 2018.

Caterpilar stock is down nearly 20% in the last 12 months, with a particularly ugly drop in October as the stock hit a new 52-week low after disappointing earnings. But it seems to be oversold, and could benefit materially from any stimulus efforts in 2019.

3. Nucor

From dams to railroads to pipelines to bridges, it's pretty impossible for any infrastructure efforts to take place without steel. That makes Nucor Corporation (NUE) and obvious infrastructure play, particularly if there are efforts to source materials from U.S.-based companies such as this North Carolina-based steel manufacturer.

In the interim, as investors wait for any infrastructure bill, Nucor should remain stable thanks to rising inflationary pressures lifting the cost of steel and propping up margins. Furthermore, after some volatility in 2018 it appears that Nucor is a decent buy for value investors.

With a 2.8% yield and a forward P/E of about 9, it's fair to say that much of the negativity has already been priced in to Nucor stock during 2018. That sets the stage for a more stable 2019, with breakout potential if a stimulus measure drops as hoped.

Of course, manufacturers are under pressure as fears of trade war escalations are on the horizon. But keep in mind that even analysts reducing their targets because of these factors are bullish on Nucor in the long-term; UBS recently cut its target to $63, projecting "only" 17% upside, while CFRA cut its target to $73 for a projected 35% gain.

That should give investors some peace of mind, and hold Nucor steady regardless of how long a stimulus bill takes to work through Congress.

4. Martin Marietta Materials

A slightly more growth-oriented play on infrastructure spending is aggregates and building materials supplier Martin Marietta Materials, Inc. (MLM). Construction aggregates include crushed stone, sand, and gravel products that are necessary components of bridge- and road projects.

The benefit to MLM from increased spending on infrastructure is clear, but this is not a stock that is dependent on a stimulus package. Martin Marietta is tracking nearly 10% revenue growth this fiscal year and another 10% in fiscal 2019 — and that does not include favorable legislative tailwinds. The company also topped expectations in its most recent quarterly report in November, and the details showed favorable pricing and strong shipping trends for its core products.

Looking forward, in 2018 Martin Marietta cut the ribbon on its largest-ever aggregates project in Texas, known as Medina Rock & Rail. The rail-serviced quarry will ensure a dominant position for the company in the region; it’s producing half a million tons of material monthly. That should help maintain the stock’s current performance and fuel future growth.

Martin Marietta stock is beholden to the business cycle, and any cyclical downturn will sap demand. But all trends are looking up at present, and even a hint of significant infrastructure investment could really cause this construction play to break out in 2019.

5. U.S. Infrastructure ETF

If you'd rather not pick stocks and instead prefer a diversified exchange-traded fund to capture the promise of infrastructure spending, then consider the iShares U.S. Infrastructure ETF (IFRA). The fund is significantly smaller than rival funds in terms of assets under management and daily trading volume, but large funds such as the $2.5 billion iShares Global Infrastructure ETF (IGF) have a much more global approach.

Consider that the top two holdings of IGF are Australia's toll road operator Transurban Group (TRAUF) and Spanish airport operator Aena SME (ANNSF). Those are clearly not what you're looking for if you want to play U.S. infrastructure. Instead, smaller and more focused IFRA holds electric utility Scana Corp. (D) and Middlesex Water (MSEX).

The ETF’s approach isn't perfect, since about half of assets are in electric utilities that will require investment in the power grid to truly pay off. But with a wide array of 155 energy, wastewater and construction stocks, IFRA is a decent one-stop shop for the broad idea of infrastructure spending in America. At 0.40% in annual expenses, or $40 on $10,000 invested, it's a relatively cheap way to get diversification without trading a bunch of individual names.

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