Denis Lovrovic / AFP via Getty Images
The infrastructure play isn’t played out yet.
Investors are wary of investing alongside the government. Policy changes take years to become official and even longer to implement. Head fakes—initiatives that bear no fruit—can lead to disappointment and losses, depending on an investor’s timing.
President Joe Biden‘s infrastructure spending plan, however, might be the exception. It could be the rare piece of big U.S. legislation that helps deliver lasting gains for stocks, partly because it comes at a time when things are already going right—in a broader sense—for industrial companies.
Back in 2016, investors bid up infrastructure-related stocks after Donald Trump won the presidency. He modeled himself as a builder, with his background in real estate. Stock in aggregate producers such as
(ticker: MLM),
(VMC) and
(EXP) rose almost 20% on average from October to December 2016. Shares of
(X) rose almost 60%.
Comprehensive infrastructure legislation wasn’t passed, and the gains faded. U.S. Steel shares dropped almost 30% over the following two years. The aggregate producers produced negative returns as well.
A U.S.-focused infrastructure exchange-traded fund—
Global X US Infrastructure Development
(PAVE)—eked out about 2% annual returns for the two years after it launched in March 2017. The S&P 500 returned about 14% a year on average over the same span. Infrastructure as a theme just didn’t pan out.
Now Biden is proposing infrastructure legislation via his roughly $2.3 trillion American Jobs Plan, and investors are excited again. The Global X ETF is up about 44% since the end of October, more than twice the returns of the S&P 500 and the Dow Jones Industrial Average.
Some investors are concerned that the big gains might be over. “Industrial investors are wondering how to gauge what has already been priced into the sharply elevated prices of industrial stocks,” William Blair analyst Nicholas Heymann wrote on Wednesday.
But this time really may be different. Heymann notes that there are three opportunities now. New infrastructure spending is the obvious one, but there are two other areas that may be stronger—and longer-lasting—than government spending. The first is the long-term shift to renewable energy, which could result in new businesses and jobs that replace ones lost in the oil and gas industry.
Then there is the strength of the economy. This is “the strongest U.S. and global economic recovery in almost 50 years,” Heymann writes. That, more than hopes for an infrastructure bill, is the reason the industrial components of the S&P 500 are up about 30% over the past six months, beating the returns of even the Nasdaq Composite, home to many highflying tech stocks.
Heymann cited a few Buy-rated stocks covered by Blair that should continue to benefit from government spending, including the infrastructure plan, the secular shift in energy, and the overall economic recovery. First on the list is
(J), a large engineering and construction company rated a Buy by Blair analyst Louie DiPalma. Jacobs shares, at $135.11, are up about 24% year to date.
Ritchie Bros. Auctioneers (RBA), an auctioneer of used construction equipment, has a Buy rating from Blair analyst Larry De Maria. At $62.43, the stock is down about 11% year to date.
Two industrial-technology stocks rated Buys by Blair analyst Brian Drab—generator maker
(GNRC) and battery maker EnerSys (ENS)—help round out Heymann’s list. At $330.41 and $93.94, respectively, they have gained about 45% and 13% year to date.
The report didn’t include targets for the stock prices, which is typical for Blair, but Buy ratings generally mean brokers expect shares to outperform their peers. Blair believes all four stocks have upside.
Infrastructure spending alone isn’t behind any of the Buy ratings: The American Jobs Plan is the cherry on top of an attractive industrial sundae.
Write to Al Root at allen.root@dowjones.com
