U.S. Voters Lean Toward Government Intervention. Here's How to Invest for It

I'm not sure whether John Maynard Keynes, the father of Keynesian economics and an ardent proponent of government interventionism during hard economic times, and Rachel Carson, the mother of modern environmentalism and the author whose work is credited for the eventual creation of the EPA, ever met during their lifetimes. But if current voter sentiment holds until November 4, their ideas could soon converge and form the basis of government policy for at least the next four years. Let me explain.

First, John Maynard Keynes. There is no doubt that the deliberate and coordinated nationalization of financial services institutions across the West marks a new low for neoconservative economic thinking. This line of thinking holds that government should play as small a role as possible in the economy, and leave spending decisions to individuals and firms. Proponents of this philosophy argue that the best fiscal move a government can ever make is to return money to its citizens and corporations through tax cuts, who will then spend that money most efficiently. The Keynesian approach, on the other hand, is premised on the idea that it is not only OK but even desirable for governments to step in and directly incur large expenditures in difficult times to jump-start the economy.

Until the credit crisis hit, the Keynesian view had all but disappeared from Washington, and small and unobtrusive government was all the rage. However, in the wake of the economic and financial havoc wreaked by what many view as too much withdrawal of government from the economy, it appears as though it has become politically-acceptable for American lawmakers to overtly push for a more activist state. What form will this take, according to proponents? In old Keynesian fashion, large-scale infrastructure investments to create jobs and kick-start aggregate demand.

While it is not especially surprising to hear academics argue for this form of government intervention, it's quite something to see Democratic politicians so emboldened by recent polls that they feel they can safely write about it in op-eds. The current crisis, it appears, has cast serious doubts in the minds of a growing number of voters on the ability of the free market to deliver wealth and well being for everyone, thus setting the political stage for a return to a more interventionist state in America.

Second, Rachel Carson. Obama's environmental credentials are strong to be sure. He has remained steadfast in his support of clean energy as a cornerstone of his broader energy policy, even in the face of overwhelming public support for domestic drilling and falling fossil fuel prices. It is therefore no wonder that in cleantech-addicted Silicon Valley, generally a place where big government is seen as a break on innovation and entrepreneurship, a number of high-profile VCs and their employees are supporting Obama.

AltEnergyStocks.com officially endorsed Obama last week specifically for his credentials on alternative energy and energy efficiency. While some of Obama's motivations for being in favor of clean energy have to do with energy independence and economic development, it is fair to say that he is also strongly motivated by his own environmental values and his belief that climate change must be addressed.

What does this all mean for investors? As the macro-economic consequences of the credit crisis continue to spread, I expect an Obama victory to result in some form of an activist government strategy to boost employment and the economy. This activist program will revolve around massive expenditures in large-scale infrastructure projects, and if Obama can help it there will likely be an environmental angle to the program. If what politicians are currently saying is a true indication of what they intend to do, rail transportation is likely to be a major beneficiary. In the first of this two-part series on how investors can play the build-out in clean infrastructure, I present four stocks I came across while doing research on this.

Besides rail transport, the other major area of infrastructure alt energy investors care about is electricity transmission. Given Obama's promises on clean energy and the environment, the amount of press the Pickens Plan is receiving, and the state of America's transmission system, it is not unreasonable to expect that Washington could seize this opportunity to direct massive investments into this area as well. In the second part of this series, I will discuss potential plays on transmission.

Stocks For The Clean Infrastructure Build-out, Part 1 - Rail Transport

When doing research on this topic, I looked for companies that would benefit from investments in the rail infrastructure network, rather than companies linked to running or manufacturing/maintaining trains and cars. A severe economic downturn coupled with lower gasoline prices would reduce demand for rail transport, so this is not an area I'm particularly bullish on for the next year or so. In the long run, however, I believe that the renaissance of North American rail driven by high energy prices, tighter environmental regulation and an increasingly clogged highway network that's running out of space to expand, will be a strong theme to watch for alt energy investors.

I did not run any numbers or do an extensive amount of due diligence on the firms below, so if you have any information to share please go ahead.

Koppers Holdings (KOP). Financial statements here. At upwards of 45%, Koppers holds the largest market share in the North American railway tie business. Railway ties are the wooden beams that support the rails. Koppers also makes utility poles, and could thus benefit from investments in electricity transmission. One interesting thing about Koppers is that it runs a biomass power plant that burns recycled railway ties and utility poles (I found that out while checking the website. They have a video about it). At a P/E of around 6.3x last year's earnings, this stock is trading in cheap territory.

LB Foster (FSTR). Financial statements here. LB Foster's rail division sells rail and other related products to a range of industries including passenger and freight railroads, rail transit, ports and others. One interesting feature of this company is that it also recycles and re-sells used rail. This stock is currently trading at a trailing 12-month P/E of around 2.2x, which is very cheap by most measures. I haven't looked closely into this firm so I'm not sure why it would be trading at such a discount to its peers, even in difficult market conditions.

Stella Jones (STLJF.PK). Financial statements here. At about 20%, this company has the second largest market share in the North American railway tie market after Koppers, and it has been an aggressive consolidator of the fragmented treated wood market. The company also has a 70% market share of the Canadian railway tie market, another jurisdiction where the government is weighing the merits of infrastructure spending as a counter-cyclical measure.

Stella Jones is also active in wooden utility poles and could benefit from spending programs in electricity transmission. One of the major negatives with this stock is illiquidity: the largest shareholder owns about 62% of shares outstanding, and volumes tend to be extremely light. At a trailing 12-month P/E of around 9.8x, Stella Jones is reasonably priced, although increased debt levels recently on the back of five acquisitions in five years could be a concern.

Global Railway Industries Limited (GRWIF.PK). Financial statements here. Most of the company's business is in the sale of locomotive and other train components. However, it also sells a range of railway track and signal products. This stock is currently trading at around 10x last year's earnings, so it is the most expensive of the four.

DISCLOSURE: Charles Morand does not have a position in any of the stocks listed above.

Comments

[fg144331:]

I really don't know much about this subject other than what I have seen is that
rail ties are being replaced with concrete ties........who makes them I don't know

2008 Oct 20 08:17 AM

[john s. gordon:]

reconstruction/rehabil... of our infrastructure (neglected since 1981) cannot begin a moment too soon.
amtrak performance is currently limited by poor roadbed. the europeans do it a lot better. let's take lessons.
if you travel around france you see that telephone poles are made of prestressed concrete. an interesting altermative, replacement needed less often.
> jack

2008 Oct 20 08:22 AM

[Paul Killinger:]

"Too much government WITHDRAWAL from the economy." That's a joke, isn't it?

Following the precepts of Keynes and Carson will see us BROKE, if we're not there already. The Amtrak and EPA models you cite are PERFECT examples.

Keynesian economics were completely discredited after the financial debacle of 1980. As you point out, the new Administration will be intent on turning the clock back to 1976.

As Bob Dylan so aptly put it, "How much do you have to pay not to go through these things twice?"

2008 Oct 20 09:36 AM

[Paul Killinger:]

P.S. One of the first steps the new Congress will take will be to reinstitute the OCS exploration moratorium. It's a natural. After all, why worry about boosting INCOME when you can simply issue more new DEBT instead.

2008 Oct 20 09:42 AM

[Paul Killinger:]

P.P.S. 2012 can't come soon enough. The mess Reagan and Volcker inherited will look like a picnic compared to that.

2008 Oct 20 09:48 AM

[Joshua Lacey:]

Electric Rail systems in Europe and Japan are used extensively.They are effective and efficient. I believe as our country moves toward becoming more energy independent the infrastructure of our rail system will be a top priority for revamping. We as a nation have to promote and facilitate the production and everyday use of electric cars. The energy crisis has had a devastating effect on our economy. We are finally waking up as a society and realizing our overwhelming need to promote every aspect of weaning ourselves off fossil fuels and utilizing clean renewable energy sources. It is estimated the move toward clean energy will produce 1 million new jobs. Jeff Wilson has a great new book out called The Manhattan Project of 2009 that thoroughly and realistically addresses every aspect of us becoming energy independent.

2008 Oct 20 10:07 AM

[CHICAGAWAUKEE:]

Look at the following companies that manufacture concrete, and other composite mix rail ties, also known as sleepers.
They are: L.B. Foster (FSTR), Steel Dynamics (STLD), and Primix (PMXX.PK).
There are also recycled plastic composite rail ties that are being used by the NY Transit, and Chicago's Transit Authority, but currrently those companies are privately owned.

2008 Oct 20 10:19 AM

[sumosama:]

Uh, name one environmental action Obama has had implemented? There is a world of difference between political positions pre election and "credentials".

BTW, which banks exactly have been "nationalized"??? Check the definition of that term.

Sorry, I think you are a loon.

2008 Oct 20 11:18 AM

[User 279279:]

go don't have to go to France to see concrete telephone poles as they are common in Florida

now as for Obama not my cup of tea NO Sir No Thanks

2008 Oct 20 11:35 AM

[carey_jim:]

Turning the huge American ship of state around while it is filled with so much pork and moving it in the opposite direction will be a feat of the captain and crew's imaginations only.

"Iceberg ahead captain."

"Aye, aye sir. Full speed backwards botswain."

"Is that a whale or an iceberg, Starbuck?"

"Neither captain, it's Joe Wurtzelbacher."

A dreadful storm comes on, the ship
is like to break. But now when the boatswain calls all hands to
lighten her; when boxes, bales, and jars are clattering overboard;
when the wind is shrieking, and the men are yelling, and every plank
thunders with trampling feet right over Jonah's head; in all this
raging tumult, Jonah sleeps his hideous sleep. He sees no black sky
and raging sea, feels not the reeling timbers, and little hears he
or heeds he the far rush of the mighty whale, which even now with open
mouth is cleaving the seas after him.

Moby Dick

2008 Oct 20 11:58 AM

[BerkeleyBob:]

Keynesian thought has been out of fashion for some time. Friedman and his followers were so seduced by the hypothetical beauty of pure competition that it was mis-applied without understanding its premises. What we have had politically is socialism for the rich and capitalism for the poor. Make no mistake, the policy, not the words, of our political leadership resulted in a massive transfer of wealth and recently, destruction of value albeit housing prices were inflated. Keynes had nothing to do with the S&L collapse of the 80's. The causes were government subsidization of risk and bad appraisal/underwriting practices in the under-regulated industry, compounded by high inflation and interest rates to finance a military adventure that did not turn out well. Now, we don't have high interest rates but deficit financing of yet another military adventure which however it turns out will carry considerable public cost in the future. Interesting premise as to investment in infrastructure; we need bridges that don't collapse and upgraded electric and ng transmission.

2008 Oct 20 03:52 PM

[robert.b.fe...:]

SEN Obama's programs of "Spreading the wealth around" are untenable as stated. However it is accomplished spreading existing wealth around does nothing to expand economic progress. This robing hood concept has never worked any where it has been tried. When will we learn that you can't sustain loaning nonexistant money to people who can't or won't pay it back is bad business. Creating new wealth by hard work and industriuosnes is the only way to sutain economic growth.

2008 Oct 20 05:09 PM

[katec:]

Sometimes, we have to go through things twice and I am a huge Bob Dylan fan!! We just do not get it!! We need a rail system like Europe and go back to building our infrastructure soon! I am not impressed with either candidate......but we live in a Republic that the electoral college chooses our President!! I am not sure that we need a stimulus package with money from China again!

2008 Oct 20 09:09 PM

[Eye Forget:]

He will do what he did in Congress, nothing. Which means Congress will pork its way to a greater deficit. You want to invest in our illustrious Congress?

2008 Oct 21 07:26 PM

[LeoT:]

Hm.

Let's think for a moment about what genuine wealth is in an economy.

One proxy for what genuine economic wealth is might be the following: how much value can the median worker (let's assume it's a he) get for a week's pay, assuming he stays in-country (and the country is normal, not some petro-state)?

With oil cheap, this worker can do a lot. He can probably fill the tank many times over, making it possible to afford to go to work. He can probably buy groceries for the month, since the cheap oil makes the groceries cheap. Etc. The wealthy economy makes it possible for the median worker to do _more_.

So, when times are bad, i.e., the median worker can do much less (expensive oil, no jobs) what can society do?

Well, one thing it could continue to do would be "business as usual". It could just keep providng the bare necessities (at this point) -- things like food and entertainment, which have negligible lasting value. The minority of wealthy people (which capital it could invest) won't be interested in changing things much, since a whole bunch of desperate workers makes _their_ effective wealth much higher (the price of a personal chef goes down with the price of all labor).

The way out is to create things of enduring value for the economy. If oil is no longer cheap, how do you make it possible for the median worker to visit his friends in other cities? You could hope that private investment might step in, take advantage of the cheap labor, and build a bunch of high speed rail lines. Or the government could take on debt, borrowing money it will have to pay back later (but which it will be able to pay back, assuming any of the programs work) so that it can create wealth _now_.

This is not much different from spending the time needed to clean up a messy office. Except the mess is now the entire economy.

2008 Oct 23 03:51 AM

[Allen_83:]

Ridiculous. Rail systems work well in countries with extremely high population concentrations (which is not necessarily population density). If you ever go to Japan, you'll notice that it's impossible to tell where a city ends and a suburb begins, because there's really no such thing. Japan and Europe do not remotely resemble the landscape of the US.

Aside from that, betting on rail is like betting on a return to the Pony Express. Sure, it could happen. . . if all else fails. The future of transportation will not be a return to the past; it will be in the advancement of technology in two sectors: electric cars and renewable energy.

The main hurdle in the first industry is the development of batteries with increased energy density. We're still in the relative stone age as far as battery technology goes, but there's no reason to believe the situation won't improve, and many reasons to believe it will.

As for solar/wind/tidal power generation (or harnessing), that's a simple matter of will. If we want to do it, the technology is there, and improving rapidly. Government incentives can help things along, and I fully expect to see such incentives and investments from the next administration.

By the way, hydrogen is necessarily an extremely inefficient storage and distribution platform, so don't even waste your breath on that, let alone your dollars.

2008 Oct 23 04:28 PM