- While the massive economic stimulus plan proposed by President-elect Obama should be a boon to engineering and construction stocks, how big of a boon won't be known until more details are trotted out -- or, for that matter, any details. (details, schmetails - we have a thesis! that's all that matters in the casino) That uncertainty hasn't prevented Wall Street from hitching its wagon to E&C firms as investors look for potential bright spots wherever they can find them. (boo yah)
- Obama sparked a huge rally in the sector following his Sunday appearance on NBC's "Meet the Press," where he hinted at the largest U.S. public works spending program since the interstate highway system was established in the 1950s. (although he has said as much for 2 months... )A day later, the 25 stocks in IBD's heavy construction group rose more than 11%. They spent much of Tuesday pushing higher before finishing lower amid a broader market sell-off. The group is up 59% since hitting a 31/2-year closing low on Nov. 20.
- Engineering and construction firms should reap many of the early rewards amid a government-led effort to create jobs and invigorate the economy by improving the nation's roads, bridges, schools and public buildings.
- "Obama has made it clear he's going to spend considerable sums building up infrastructure, so that obviously plays into the strengths of companies like Fluor (NYSE:FLR - News), Jacobs (Engineering) (NYSE:JEC - News) and Caterpillar (NYSE:CAT - News)," said Dan Greenhaus, senior analyst in the Equity Strategy Group at Miller Tabak.
- Gains have also occurred at international firms such as Japan's Komatsu, the world's No. 2 maker of construction machinery; and Tata Motors, India's top truck maker. (this guy is powerful - he moves markets the world over)
- States face combined budget shortfalls of between $140 billion and $180 billion over the next two fiscal years, the National Governors Association estimates. While much of that money is needed to help fund Medicaid and other cash-strapped programs, a good chunk is also needed for infrastructure improvements. (ah don't worry about funding shortfalls - we have bridges to build!)
- Obama, who hopes to pass the plan shortly after he takes office on Jan. 20, has said he wants nationwide programs to improve roads and bridges and make public buildings more energy-efficient. Spending will likely run into the hundreds of billions of dollars.
- Putting the money to immediate use shouldn't be a problem, considering how many transportation projects are "shovel ready." (the pork should be fun to watch - we can only dream how many Butterfly Museums errr... I mean bridges will be built)
- The bigger question is whether work doled out via a government stimulus program will translate into a big earnings boost for the companies that do it. That's no sure thing. Presumably, firms will have to engage in competitive bidding to win contracts. (that's not how things work under the current administration?) The lowest bidder might find itself with tighter-than-normal margins. (hey, we're trying to run the market up on a thesis - will you please stop with the factual content?)
- And as Channel Capital's Roberts says, the goal is to provide jobs and boost the economy -- not jack up profits at corporations. "These are going to be government contracts, the kind that produce jobs but not necessarily profits," (shhh! thesis!) he said. "Since so much emphasis is put on job creation, there will be less emphasis on doing the work in the most cost-efficient and profitable manner." (truer words - never said)
- Citigroup analyst Brian Chin said the stimulus package is not likely to be a "game changer" for most of the E&C firms under his coverage, which includes Fluor, Chicago Bridge & Iron (NYSE:CBI - News), Shaw Group (NYSE:SGR - News), Foster Wheeler (NasdaqGS:FWLT - News) and McDermott International (NYSE:MDR - News). "Shaw and Fluor are the only E&Cs in our group that have a significant presence in the infrastructure end markets likely to be affected by the plan," Chin wrote. "The vast majority of projects undertaken by the other E&Cs are involved in end markets" -- including defense, chemical, and oil and gas -- "with no likely stimulus package benefit." (Mr Chin - again, are you trying to kill this market rally with your sense? Listen buddy - money will flow from Obama's fingertips into every end market in the world, causing the heavens to part and gold coins to fall - this is how we all get rich. Enough with your doom and gloom "facts")
Long thesis; short reality
6 comments:
TM: I had made the observation yesterday about the divergence between copper and the infrastructure stocks. If infrastructure plays are the new leaders of the "bull market" one would expect confirmation from copper. But this isn't the case. Copper continues to underperform and shows no sign of stabilizing and I believe there could be 20-30%more downside on Copper until support is found. The divergence is noteworthy, and continues to put in question a rally led by past market leaders.
The same goes for emerging markets which are hot today.
And as they say, copper is the only economist in the room who is usually correct :)
my point!! I try to use the tools available to me
agree that the play is more likely the equip makers and the commodity companies versus the actual construction companies. Then again, who knows maybe the govt will ensure huge profits for the E&C companies to ensure they hire more people. Thats the problem though. Nobody knows the rules going forward.
Still I think most of the global growth stocks will be good buys on dips going forward. Too much money being thrown and the markets and the prices are so depressed.
Are we now saying that copper isn't controlled by speculators? lol
have you checked out the water plays? PHO - looks at likes building an inverse head/shoulder. obviously part of obama's infrastructure play, but its not as glam as the others -hence less of a crowded trade maybe.
Hey "goin back to Cali" (LL COOL J)
I like water as a theme for the long run but finding good investments is a moot point. Water will eventually be oil - the thing in shortage and of ultimate need. I believe the wars of the next 50 years will be over water. But this is a REAL long term trend and PHO upon analysis is not anything special. "Pure plays" on water are not really there and even if they are you are again talking about a 20-30 year investment. I'd rather be like T Boone Pickens who is buying up land rights (with water tables underneath) in southern USA. Then he or whoever is running his trust in the next few decades will sell water for profit to the rest of us.
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