How to invest in the coming infrastructure boom

Among President-elect Donald Trump’s many campaign promises, improving the nation’s infrastructure appears to be one that he’ll make sure to keep. Repairing and rebuilding the nation’s roads, bridges, waterways and other deteriorating public basic structures seems destined to be a defining theme of his administration.

But with infrastructure being such a large, amorphous sector, investors may find it difficult deciding which stocks to bet on. A wide number of companies will certainly benefit from the expected surge in spending, but many may not be suitable for investors seeking decent returns. Nonetheless, it’s an opportunity that could produce attractive rewards. 

“Investors need to get in on the coming infrastructure binge,” advised Stephen Leeb, president of Leeb Asset Management, who said Trump’s populist message points to a pro-growth agenda. Infrastructure, he added, is one big area where “Trump’s campaign rhetoric will translate into action in the U.S.  and around the world.”

One of the leading beneficiaries of infrastructure spending will be Caterpillar (CAT), whose construction tractors and equipment are in service in nearly every country in the world, with 62 percent of its revenues produced outside of North America. Although 2016 revenues and earnings haven’t been as strong as analysts expected, its stock has nevertheless continued to rise, from about $70 a share in June 2016 to $93 now. Some analysts expect the stock to climb above $100 a share this year on expectations that a recovery in sales and earnings are within sight. 

CFRA Research (formerly S&P Global Market Intelligence) rates Caterpillar as a “strong buy.” And Deutsche Bank analyst Nicole DeBlase has maintained her “buy” recommendation, with a price target of $102 a share, partly based on an expected recovery in Caterpillar’s earnings and revenues in 2018 and beyond.

Another attractive infrastructure play that Leeb said has been overlooked is HD Supply Holdings (HDS), a former Home Depot (HD) subsidiary. Recently trading at about $37 a share, the company is one of the best-positioned distributors of products used in infrastructure construction and maintenance, Leeb noted.

Two of its units, waterworks and power solutions, are at the heart of the most compelling infrastructure needs in the U.S., he said. The waterworks division provides water and waste water treatment products, ranging from pipes to smart meters, to contractors and municipalities. And the power solutions unit sells a broad range of maintenance and repair products, whose growth partly reflects America’s deteriorating infrastructure, said Leeb. 

Investors who are averse to investing in particular stocks and prefer to invest in exchange-traded funds (ETFs) could opt to bet on iShares Global Infrastructure (IGF) and iShares Emerging Markets Infrastructure (EMIF). “These ETFs are now ripe for buying as they have underperformed most infrastructure stocks,” noted Leeb. One reason is they include utility stocks that most investors lump with bonds, which have been battered by higher growth and inflation expectations.

But Leeb said the utilities included these two ETFs are mostly deregulated, which he believes makes them more dynamic. So Leeb argued that the recent weakness in both ETFs should prove temporary as their utility holdings, which include some energy stocks, recover on increasing demand for all forms of energy.

In the case of EMIF, it has a much larger position in countries comprising China’s “One Belt, One Road” initiative, which Leeb expects “will be the locus of the world’s most intensive infrastructure development over the next generation and beyond.”  

In fact, Leeb believes infrastructure will be a “defining theme throughout the world, as the spending in the U.S. ramps up to pile on to the even more massive infrastructure spending already underway in the East.”