Infrastructure and Investment: Another New Deal

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. Since ZachStocks usually focuses on emerging names with smaller market caps, this should come as no surprise. But this time around, the opportunity seems especially suited toward smaller cap names. This flies in the face of conventional wisdom as the large contractors will get the majority of the government business.

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. Plus, many of the larger companies actually have significant operations outside the US that tend to dilute the effects of this particular stimulus package. ZachStocks recently mentioned AECOM Technology Corporation (ACM) as a potential infrastructure play, but there are other ideas that interest me as well.

There is a relatively smaller company that I am looking at as a possible recommendation for the Taipan Online publication that I write for. The company fits the bill when it comes to a smaller infrastructure play, but also has an interesting twist. In addition to the normal “project management” type business, the firm also provides a consulting function that deals with litigation support, expert witnesses, construction claims etc.

This additional business line is especially important because it gives the company two very profitable ways to make money on potentially the same individual projects. Essentially you could think of these two business lines as the “bulldozer team” and the “lawyer team.” Justice Litle and I discussed this phenomenon earlier in the week as part of the free newsletter Taipan Daily. Ironically, the consulting arm has higher margins and better profitability than the actual project management side. Investors should make out well as this company is set up to collect profits both coming and going.

There are many ways to play macro trends like the coming infrastructure initiative. The most important thing is to look behind the headlines and seek to find the more unconventional less-followed ideas for profits. Categories include alternative energy, construction and engineering, and even natural gas plays. We have outlined several plays in the past few months and will continue to search for the investments that make the most sense in this ever changing environment.