Profiting from the Coming Building Boom

A guide to the construction, water, energy, and other shares poised to gain from infrastructure spending

By Aaron Pressman

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Darrell Eager

President-elect Barack Obama is promising to spend record amounts on public-works projects to stimulate the economy. With the U.S. expected to shell out as much as $700 billion, following similar giant programs already announced in China, Europe, and elsewhere, investors are racing to cash in on the coming boom in infrastructure spending.

Amid all the excitement, shares of Irving (Tex.)-based Fluor (FLR), a leading construction company for the energy industry, soared 44% in the three weeks after Obama and his advisers began outlining his plans in late November. Pasadena (Calif.)-based Jacobs Engineering Group (JEC), which helps manage big public projects, saw its shares double over the same period, as did URS (URS), a San Francisco engineering firm. URS "is a stock some people thought was going out of business five weeks ago," marvels Will Gabrielski, infrastructure analyst for American Technology Research, an equity research firm.

But in bidding up shares across the industry, investors haven't been particularly selective in assessing which firms are most likely to gain from the global infrastructure boom, analysts say. "All this talk about building tunnels and bridges sounds great from a jobs perspective," says Shaun Hong, co-manager of the Jennison Utility Fund. "But it's difficult for investors to make a lot of money from all of it."

AVOIDING HIGHFLIERS

Hong and other fund managers and analysts say opportunities remain to invest in infrastructure companies whose stocks are likely to do best over the long haul. But the pros say investors shouldn't chase any of the recent highfliers such as Fluor or Shaw Group (SGR), many of which, they warn, won't hold their gains. That's because some recent market darlings already have so much work lined up for the next few years that they won't be able to take on more projects from the expected spending boom. Others are grappling with internal challenges or carrying excessive debt loads that could overwhelm them before the stimulus dollars eventually arrive.

The first step for investors is to identify the types of projects that are likely to see the largest spending boosts. Hundreds of billions of dollars had been earmarked in prior years for repairing roads and bridges, so companies with those specialties aren't going to get as big an immediate boost as others. The coming wave of spending will likely benefit companies involved in less traditional infrastructure work such as improving the electrical grid, waterworks, and the environment.

Obama has said he plans to make the production of renewable energy a top priority, but the share prices of companies that make solar and wind-power generating gear are notoriously volatile. That makes it harder to pick winners. The better play lies with companies that will help expand and improve the U.S. electricity grid, says Gabrielski. The current grid doesn't have the capacity to carry electricity to big cities from the regions with the best sites for wind and solar farms. His top pick is Houston-based Quanta Services (PWR), which makes so-called smart electric meters that are attached to homes and businesses and help utilities run their grids more efficiently.

GREEN ROAD BUILDERS

Dollars may start flowing first in the water arena because Congress approved a package of about 900 projects at the end of 2007. Tetra Tech (TTEK) is a likely beneficiary, says John Quealy, an analyst in the Boston office of Canaccord Adams, a top Canadian brokerage firm. Pasadena (Calif.)-based Tetra Tech performs scientific and engineering studies on water projects for the Environmental Protection Agency and other government bodies. "They don't put any shovels in the ground—they're on the front end of all this spending," says Quealy. That means they'll likely receive some of the first stimulus cash doled out.