Yahoo Finance Rocks and Concrete Might Be Good Bets for Investors
When it comes to industrial materials, there isn't much more basic than rocks and concrete. But they might just be a good investment under the Trump administration.
"Infrastructure spending is coming," says Craig Hodges, a portfolio manager with Hodges Funds. "Airports and roads are deplorable -- there needs to be major spending on that."
The phrase "major spending" isn't used lightly. The Trump team wants to spend around $1 trillion on fixing worn-out bridges and airports.
To rebuild the shaky infrastructure in the U.S., rocks and concrete are exactly what is needed. Rocks, also known as road aggregates, are needed to help surface all the highways that need upgrading. Likewise, steel is needed to reinforce structures, and pipes are needed to channel water away from roads or bridges.
[See: 10 Ways to Buy Industrial Stocks.]
Because of all that likely construction, Hodges likes small-capitalization company U.S. Concrete Inc. (ticker: USCR), whose stock price has grown seven-fold since 2012. Many materials businesses saw a drop in price after the commodity boom ran out of steam starting around 2012.
The company is well positioned to keep competition at bay because it is costly to build new concrete manufacturing plants, Hodges says. "After 2009, cement and steel companies had a real narrowing of the business due to regulations and so there are tremendous barriers to entry," he says. "I think we'll see profits skyrocket."
Other companies that should see a boost to revenue are Vulcan Materials ( VMC), the largest U.S. company in the top 10 American-based concrete makers, and steel producers such as U.S. Steel Corp. ( X). Both are financially solid to benefit from a U.S. infrastructure spending, but also leveraged enough to see big gains in earnings from relatively small revenue gains.
A skeptical view. Not everyone in the market is so optimistic that the infrastructure spending plans will come to pass.
"Martin Marietta Materials ( MLM) is up on the dream, but where is the reality?" asks Adam Johnson, New York-based author of the Bullseye Brief newsletter. "Overwhelming resistance to Trump's cabinet picks and immigration policy implies his infrastructure agenda may not move quite as quickly as the market expects."
That could be a problem for anyone owning these infrastructure shares. That's because investors price stocks based on the likelihood that the huge spending program will get approved. But if the proposal dies in Congress or gets delayed for a long period of time, the stocks could take a beating.
[See: 8 Ways to Profit From Donald Trump's Infrastructure Plans.]
Johnson notes that the proposed $1 trillion in spending on highways and bridges will require cash and tax reform. "These critical pieces of the puzzle will take time," he says.
Valuation. There are other problems with the basic materials companies. As Johnson mentioned, there has been a huge rally in stock prices. That means that much of the potential for futures profits may already be reflected in the stock prices.
Martin Marietta Materials is up more than 70 percent over the 12 months through early February versus around 24 percent for the Standard & Poor's 500 index. That means that it may be a little pricey based on potential future earnings. Morningstar suggests that fair value for the stock is $221 a share, according to a recent report. That compares to a recent price of $228.
Another route. There are other areas of infrastructure that could be good -- specifically, the structures that deliver natural gas around the country.
"Natural gas distribution companies are very much a big infrastructure type of investment," says Ryan Kelley, co-portfolio manager Hennessy Gas Utility Fund ( GASFX). The fund focuses primarily on securities of companies that get paid when the energy is moved around the country rather than based on the price of the gas. The more gas that is sent through the tubes of a pipeline system, the more money that the pipeline company would make. And it doesn't typically matter what price is paid for the energy moved.
One of the positives about natural gas is that it is far less polluting of the environment than traditional coal powered electricity-generating plants. It is relatively cheap, thanks to the revolution in horizontal hydraulic fracturing gas extraction.
"We need to replace, modernize, and expand much of the natural gas infrastructure in the U.S.," Kelley says. But that's the good news because there are now ways for the utilities involved in the natural gas system to be able to pay for the much-needed upgrades.
Kelley points out that over the last six years, 40 states have allowed certain cost recovery of infrastructure replacements. Utilities may be able to pass on the cost of improvements to the end consumer.
Plus, there is the opportunity for companies to borrow money at what are historically very low borrowing costs.
[See: The 7 Best Stocks to Buy for 2017.]
The net result is that there is likely to be more spending on structures related to moving natural gas around the country.
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