Profiting from the Coming Building Boom

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Even in the area of road building, investors can benefit from Obama's pledge to emphasize environmentally friendly, "green" resources. Headwaters (HW), a South Jordan (Utah) company, recycles a residue from coal-burning power plants known as fly ash and sells it as a low-cost filler for road paving. California already requires fly ash to be used in all road projects, and Obama could institute a national mandate, says Quealy. Headwaters is trading at just 12 times its 2009 expected profit, below the average ratio of 15 for similar companies, he says.

Sometimes the best investment decisions are those stocks you don't buy, and analysts say there are several sectors to avoid. Domestic steel companies have rallied but may not benefit from Obama's infrastructure push as much as some investors believe. Steel produced for cars provides higher profit margins than the lower-grade steel used in bridges, notes Thomas Melendez, an international equity manager at MFS Investment Management in Boston. With auto sales plummeting, new revenues from infrastructure spending won't be enough to bolster profits, he says. And many steelmakers have heavy debt loads that could be a drag, though companies such as AK Steel (AKS) are stockpiling cash in case the credit crunch worsens.

Despite the 75% runup since late November in shares of Shaw Group, it's hard to see how the Baton Rouge (La.) builder, best known for erecting coal-fired plants, will benefit given Obama's disdain for coal. And while Fluor could qualify for many of the new projects, it has a $36.5 billion backlog, about double its annual revenue.

Investors should be wary of companies that used borrowed funds to buy and manage infrastructure projects such as toll roads after they're built. Highly leveraged infrastructure owners, as well as sponsors such as Macquarie Group that arrange the deals and related financings, have seen their stocks tumble on fears they won't be able to roll over loans in the current credit freeze. "Too much leverage is bad, very bad," says Jennison manager Hong.

Some investors are even going against the flow to sell short stocks that have rallied on the infrastructure hype, in hopes they can profit if these highfliers tumble back to earth. Adrian Bachman, manager of the Arrow Alternative Solutions Fund, is shorting Shaw, Fluor, and a handful of other construction outfits. The stocks, he says, look weak based on fundamentals such as earnings growth, while whatever business comes from Obama's stimulus plan is years away. "There's nothing right now that makes a compelling argument for buying these companies," says Bachman. He's sticking with more defensive sectors, such as health care and consumer staples. That's helped him keep losses to 13% in 2008, less than the market's 32% dive.

Investors who don't want to pick stocks can choose from among a handful of exchange-traded funds that focus on infrastructure companies. Each holds stocks from a particular index of companies that participate in some element of infrastructure—engineering, construction—or hold a portfolio of utilities. But the indexes, and therefore the funds, vary significantly. Utilities that own and operate big infrastructure projects make up almost 90% of the SPDR/FTSE Macquarie Global Infrastructure 100 Fund (GII), for example. And many of the fund's top holdings, including GDF Suez, E.ON, and Tokyo Electric Power, aren't based in the U.S. so they won't benefit much from Obama's plans.

The First Trust ISE Global Engineering & Construction Index Fund (FLM), by contrast, consists entirely of companies that build things. Top holdings include Foster Wheeler (FWLT), Granite Construction (GVA), and VINCI, companies that are well-positioned to benefit from a massive stimulus program. The iShares S&P Global Infrastructure ETF (IGF) is more a combination, with just 40% invested in utilities. The recent runup in infrastructure shares boosted all three ETFs, but investors shouldn't expect the rally to continue once the hoopla dies down. Even if the road to recovery is paved with good intentions, profiting from the coming infrastructure boom will require good research—and patience.

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Pressman is a correspondent in BusinessWeek's Boston bureau.