During 2010, infrastructure remained a popular theme for investors as the massive global economic stimulus plans took hold. Then the music stopped in 2011, when the extra economic benefit ended. The money stopped flowing and like most of the equities markets, the heavy construction sector fell over the course of the year. However, despite the fact that nearly $3 trillion has already spent on global infrastructure construction during 2009 and 2010, analysts calculate there is still more work to be done. (For related reading, see Build Your Portfolio With Infrastructure Investments.)
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After 2011's recent pause, the new year could again see the construction stocks seeing large gains. The latest jobs package from the Obama administration included $30 billion for modernizing public schools, $27 billion for the highway system, $9 billion for rail systems and $15 billion for the rehabilitation of homes, businesses and communities. The jobs package also creates a $10 billion National Infrastructure Bank that would provide funding for infrastructure projects. While the overall jobs bill is destined for the trash pile, both Republicans and Democrats have expressed concerns towards rebuilding the United State's infrastructure and could salvage that component from the bill.
In addition, China's $410 billion Sovereign Wealth fund (CIC) now plans to invest in the infrastructure of developed countries, starting with the United Kingdom. The CIC is eye-balling toll-road, bridge and alternative energy improvements in the United States. Elsewhere, the rest of the world continues to expand its efforts across the infrastructure arena. The World Bank's Private Participation In Infrastructure Database reports more than 4,300 different projects currently underway in low-to middle-income nations across the globe.
For forward thinking investors, the recent downturn in construction related equities could signal an interesting buying opportunity for 2012. Here are some stocks to watch and consider for the new year.
Slowing Nuclear Ambitions
As Japan suffered the double disaster of earthquake and tsunami, the nuclear power industry took a huge hit this past March. The resulting meltdown at the Fukushima Daiichi nuclear power plant resulted in a variety of developed nations reevaluating their power portfolios. However, nuclear energy continues to gain acceptance across a variety of emerging nations. Both Fluor (NYSE:FLR) and Shaw Group (NYSE:SHAW) as the two leading contractors in the space, suffered in the face of the disaster. But, the two could be a great buy as the emerging world ramps up its plans. Fluor and Shaw trade for forward P/E's of about 13 and 9, respectively. (To learn more, read P/E Ratio: What Is It?)
Natural Gas Grows
The abundance of natural gas drilling in the United States is certainly propelling infrastructure investment in the area forward. According to a study by ICF International, more than $8.2 billion per year of midstream natural gas investment will need to be spent by the United States and Canada until 2035. Construction company MasTec's (NYSE:MTZ) purchase of Fabcor gives it more exposure to pipeline construction services and customers like gas producers such as EnCana (NYSE:ECA). Similarly, investors can look at pipeline specialist Willbros Group (NYSE:WG) and Foster Wheeler (Nasdaq:FWLT), who recently began construction on the 35 billion-cubic-foot Ryckman Creek natural gas capacity storage facility in Wyoming.
Boosting the Grid
Many of our nation's best renewable energy resources are considered location constrained. These resources pertain to certain climatic, geologic or topographic features that are not near major concentrations of electricity consumers. In order to tap into those resources, vast improvements to our aging transmission network are needed. Analysts estimate that total transmission spending will be around $240 billion to $320 billion by 2030. As one of leading firms dedicated to the grid, Quanta Services (NYSE:PWR) recently won a major project for the construction of transmission infrastructure for Edison International (NYSE:EIX). Similarly, MYR Group (Nasdaq:MYRG) offers an interesting transmission play as well.
The Bottom Line
With 2011 bringing the withdrawal of economic stimulus for infrastructure, the heavy construction sector saw its fortunes fade. However as more dollars are spent globally on infrastructure, the sector could see outperformance once again. For long-term investors, there is still plenty to like in the sector. (For related reading, see Add Income To Your Portfolio With Infrastructure.)
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At the time of writing, Aaron Levitt did not own shares in any of the companies mentioned in this article.