With unemployment above pre-pandemic levels, infrastructure is in focus.
In March, President Joe Biden unveiled a roughly $2 billion infrastructure plan. The following month Republican lawmakers proposed their own plan with a much smaller price tag. The debate is ongoing, but because both sides of the aisle are interested in revamping the nation’s infrastructure, it seems likely that at least something may happen to upgrade roads, bridges, airports and broadband. An infrastructure revamp has been talked about for some time — but in this political environment, it feels like lawmakers will be able to get over the hump of figuring out how to pay for it, says Matt Arnold, industrials and materials equity analyst with Edward Jones. Even though the economy has made strides in recovering, unemployment remains above pre-pandemic levels, and stimulating the economy is a political imperative. Here’s a look at expert picks for the best infrastructure stocks to buy now.
Jacobs Engineering Group (ticker: J)
This Dallas-based engineering and construction company is Arnold’s top pick when it comes to potential beneficiaries of an infrastructure bill. The company would be a logical choice for a general contractor for work on airports, roads and bridges, and it’s also involved in 5G network deployment. Of course, Jacobs would have to compete with a variety of other construction companies, but with $14 billion in yearly revenue, roughly 55,000 employees and experience with projects in both private and government sectors, it seems that Jacobs would be able to get a piece of the infrastructure-expansion pie.
Deere & Co. (DE)
When you think of the John Deere brand, the first thing to come to mind may be green tractors on farms. While agriculture is the company’s bread and butter, its construction and forestry segment in its most recent quarter brought in $2.47 billion in revenue, or more than 27% of its total sales of $9.11 billion. Its construction equipment business provides dump trucks, backhoes and excavators, among other equipment needed for revamping the nation’s infrastructure — and it’s not just an infrastructure bill that would benefit Deere and other industrial companies. Regardless of an infrastructure bill, investors are thinking that there is pent-up demand for new equipment after companies deferred purchases because of the pandemic and the trade dispute between the U.S. and China that escalated in 2019, Arnold says. Adding an infrastructure bill would “supercharge the cycle,” he says.
Union Pacific Corp. (UNP)
A derivative way to play the infrastructure story is to invest in railroads because construction projects will rely on the transportation of materials, Arnold says, pointing to Union Pacific. The company’s continuing push into “precision scheduled railroading” to streamline its operations stands to improve profitability, he says. While Arnold says Union Pacific is a solid alternative way to invest for a national infrastructure overhaul, he likes the stock even if an infrastructure bill doesn’t happen. That’s because of precision scheduled railroading improving profitability even as volumes are expected to rise as the economy recovers.
Probably no list of influential infrastructure-related companies would be complete without listing this large manufacturer of heavy construction equipment. “While they are not the only name to manufacture such equipment, they are one of the few American ones, which will help them win contracts backed by government funds,” says Dan Ushman, CEO of TrendSpider. Arnold also likes Caterpillar, but he has a “hold” rating on the stock instead of a “buy” because he says a lot of positives have already been priced into the stock amid a bullish outlook for construction, mining and the oil industry. For him to rate the stock as a buy, he would want to see a more attractive valuation. Ushman says that point may come soon. “The historical seasonality profile suggests that May might be a weaker month for the name, which may provide buying opportunities for those looking for a longer-term investment,” he says.
Another derivative infrastructure play worth considering is mining giant Freeport-McMoRan, one of the world’s biggest copper producers. “Copper is critical for construction,” Ushman says. “This means copper will continue to be in high demand, which should continue to bode well for FCX.” Beyond traditional construction, copper is also expected to be in high demand as the nation attempts to shift to greener energy sources, which are copper intensive. From a technical analysis perspective, Freeport-McMoRan stock “is forming an ascending triangle, which is a commonly known and well understood continuation pattern that suggests higher prices are on the horizon,” Ushman adds.
Cement is another material needed in construction, and, as Ushman puts it, “cement manufacturing powerhouse Cemex has been on a tear all year.” Shares of the Mexico-headquartered company, which also produces other construction materials including concrete, were up roughly 50% year to date as of the end of April. “This suggests that the prospects of increased growth due to infrastructure spending is already priced in,” Ushman says. “Yet the name continues to make new highs.” Although Cemex sells its products globally, the U.S. is an important market, representing more than 30% of the roughly $13 billion in total net sales in 2020.
American Tower Corp. (AMT)
Both Democrat and Republican infrastructure plans call for increasing the nation’s broadband infrastructure. “Broadband internet is the new electricity,” the White House says. “It is necessary for Americans to do their jobs, to participate equally in school learning, health care, and to stay connected.” Biden’s infrastructure plan calls for broadband infrastructure buildout in rural areas and tribal lands. American Tower — a real estate investment trust, or REIT — is one of the companies that, according to Josh Duitz, senior portfolio manager at Aberdeen Standard Investments, is well-positioned to benefit from the ongoing trend to expand broadband, even if an infrastructure bill doesn’t materialize. The company has more than 40,000 tower sites across the U.S. And with more than 60% of the company’s towers located in rural and suburban areas, it seems that American Tower is primed to capitalize on any push to expand broadband service to rural areas.
Seven infrastructure stocks to buy:
— Jacobs Engineering Group (J)
— Deere & Co. (DE)
— Union Pacific Corp. (UNP)
— Caterpillar (CAT)
— Freeport-McMoRan (FCX)
— Cemex (CX)
— American Tower Corp. (AMT)
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