Friday, January 2, 2009

I like Zach's Idea on AECOM Technology (ACM); Perini (PCR) Might Also be Back from the Dead

A reader sent me some small water infrastructure stocks (read: Obama thesis) that are absolutely flying earlier in the week, so I am preparing a piece on those. It's all about thesis in 2009 since the facts are going to be so poor. I've owned Flowserve (FLS) in the past which is more of an international play on the whole water infrastructure - but these small caps flying got me thinking further on the whole infrastructure play. My "mocking" of the thesis has been due to how little many of the companies investors are flocking to would actually be affected. [Dec 19: Citi Analysts Frowns on Obamamania; ABB Provides Reality Check] It is like buying General Electric (GE) for its wind business - yes you get the 0.5% of the business that is dealing with wind but you are stuck with the other 99.5% of the business.

The same goes for infrastructure - yes in a few of the names you might get SOME Obama dollars but as a % of their total business it doesn't mean much. But there is a huge irony here. 1 year ago at this time you wanted to buy internationally focused infrastructure stocks because the sexy thesis of the day was "decoupling" (foreign markets will run run run, while the U.S. will "slow" - remember, they denied there would be a recession in the U.S. a year ago - they just said we'll "slow"). So you wanted infrastructure stocks that focused on the world; and avoided the U.S.. I had a bevy of those stocks because on a RELATIVE scale, I still believe foreign markets will do better than the U.S.

But the irony is now you want to do the EXACT opposite... you want companies who have most of their business here because (trumpets blaring) President Elect Midas is coming. This is why I find all these predictions of what to buy for a 1-2-3 year basis so useless. Think about all the "must have" stocks of a year ago, and how different the group is now. And that's in 12 months (heck 6 months), not to mention a 3 year basis. Because the market is all about playbooks and thesis, and those thesis change by the day around here in the casino; so you have to change direction with the hedge fund computers.

One name we owned in fall of 2007 was AECOM Technology (ACM) - we had a brief affair - she was too US focused (you know, the country that lets it infrastructure rot over multi decades) and once Cramer found her, the Cramer lemmings ran her up and down like a... well you know. She lost her innocence and was tossed around like a rag doll - this was fall 2007 remember, when the markets were 40% higher and all was well in the world because the Federal Reserve had cut rates and was going to save us (wait, that sounds vaguely familiar...I guess we never really learn - hope never dies!). We had a basket of infrastructure stocks but these were the larger, more international based names. The ones, ironically - which will be helped least by Obamamania (i.e. your tax dollars).

I was reading an article by Zach and for once he made sense (kidding...kidding) We both like smaller stocks for the same reasons, the growth you can receive is far greater than say a Honeywell (HON) or United Technologies (UTX) - granted the risks are also higher in the smaller and mid cap arena. As Zach says...

Much has been written over the past week regarding Obama’s infrastructure stimulus proposal. Naturally, investors are flocking to well known construction companies like Fluor Corporation (FLR) and Chicago Bridge & Iron Company N.V. (CBI) or to engineering firms like Jacobs Engineering Group Inc. (JEC). After all, the President-Elect is expected to spend hundreds of billions as part of this initiative, which will likely funnel down through these top tier firms.

Although large plays like the above mentioned names will likely get their share of business, I’m shying away from them in exchange for smaller companies that have the potential for much larger gains. But as a Corvette accelerates faster than an 18 wheeler on the new Obama highways, smaller project management companies will likely see more in the way of percentage increases. A company with a market cap of $300 million and annual revenue near $380 million will likely see its stock climb much more quickly than FLR with a market cap of $8.2 billion and sales of more than $20 billion.

Perini (PCR) is another name we dated for a short while in 2007 and early 2008 that is US based and was getting trashed since it was building casinos, schools, and that sort of US centric nonsense. But this is a new era - it's Obama-time. USA! USA! USA! The more U.S. exposure you have - the better. Again the irony here is great - 1 year ago to almost the day this stock was hated [Jan 17: Perini Shows Collateral Damage of Tightening Credit + Slowing Economy] - now it could be the comeback kid of the year - thesis baby! 100% gain in just over a month - simply from soothing words of President Elect Midas.

There are a few other names I'm poking around in such as Sterling Construction (STRL) - you can see all of these have caught Obama fever. Almost up 100% in just over a month. There are about 6-7 other "Sterlings" out there with the exact same bull rush once Obama whispered sweet nothings about "infrastructure" on Meet the Press.

Even companies who have 40% of their business in California are overpowered by the healing touch of Obama. 100% gain in just over a month, even in Cali.

Which of these will truly benefit from New Deal 2.0? I don't know. And frankly in the stock market it won't matter because we won't know for 1-2 years. Until then its going to be institutions running in and pushing them up (as they have already) on thesis. What the reality is in October 2010 won't really matter.

As I said above, with the news flow in 2009 "reality" will matter less than a typical year in the stock market (and even in a typical year, reality often means little)- thesis/sentiment and the new wildcard (government) will mean much more. By the time the reality of who is getting business and who is not is figured out, it will be time to sell and move onto the next thesis.

Long Jacobs Engineering Group in fund and personal account

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