Marcial: Building a Case for Infrastructure Stocks

Obama's public works program will enable governors to activate billions of dollars' worth of projects right away, and construction stocks are twitching

By Gene Marcial

The long-depressed infrastructure and construction-related companies—the suppliers of sand and gravel, stone and cement, as well as makers of boom trucks, forklifts, and cranes—are suddenly getting a big boost. Wall Street's disdain for anything that's somehow related to housing has pulverized this sector. Enter President-elect Barack Obama and his job-creating, massive public works program.

The incoming chief executive's promise to make it his top priority to create 2.5 million jobs through a gigantic infrastructure and public works program lit a fire under some infrastructure stocks. In what he bills as the biggest such program since the construction of the interstate highway system in the 1950s, Obama vows to quickly rebuild and rehabilitate the nation's roads, highways, bridges, and schools, with the effort starting as soon as he is sworn in on Jan. 20.

Wall Street analysts have been slow to react to the significance of this kind of spending on road-building and construction stocks. In fact, some of them haven't changed their cautious ratings of "neutral/hold" or sell on some of these downtrodden stocks.

But some investment management advisers have started turning bullish on the group, trying to persuade clients to get ahead of the crowd in snapping up infrastructure shares.

"Equity portfolios should be positioned to take advantage of owning beneficiaries of the massive infrastructure spending from the domestic and global stimulus programs," says Arnold Schmeidler, CEO of investment management firm A.R. Schmeidler in New York.

an opportunity "not to be missed"

The greatest challenge for professional investors, he says, is to position their portfolios for the downside risks existing today, "while at the same time being able to participate in the rapid moves that will inevitably come with the return to a more normal functioning of the financial markets." The gargantuan government spending that's coming for infrastructure projects is one of those opportunities not to be missed, advises Schmeidler.

At a meeting in early December between President-elect Obama and U.S. state governors, $136 billion worth of infrastructure projects were identified by the governors as "ready to go" and put in place within 180 days. Some 70% of the spending is designated for highway and bridge construction projects. Each year, total public construction spending amounts to roughly $316 billion, with street and highway projects eating up $82 billion of that amount, says Dan McGoey, building materials analyst at Deutsche Bank (DB).

As a result of Obama's discussions with the governors, shares of some infrastructure stocks have started creeping up, among them Texas Industries (TX), a major maker of structural steel and specialty steel bar products, cement, and concrete products; Martin Marietta Materials (MLM), the second-largest U.S. producer of construction aggregates; Vulcan Materials (VHM), the largest producer of construction aggregates in the U.S., and producer of asphalt and concrete; Cemex (CX), Mexico's largest cement producer whose stock trades on the Big board; and Manitex (MNTX), a builder of boom truck cranes, rough terrain forklifts, and vehicles.

Shares of Caterpillar (CAT), the world's largest producer of earth-moving equipment, have also turned up, as well as those of Terex (TEX), which makes a broad range of heavy-duty trucks and cranes. Shares of Manitowoc (MTW), also a maker of heavy cranes, have climbed as well.