7 Small Cap Water Infrastructure Plays for the Stimulus Package

One of the major themes of 2009 to this point has been investor speculation on global infrastructure. With the recent $787 U.S. stimulus package signed into law by President Barack Obama, analysts are at a crossroads in looking where to invest to get the best exposure to bailout money. But where exactly is the money going to be? After digging into the stimulus, it seems to me that all signs are pointing to the road and water infrastructure as leading areas of the package.

If you want the “pure play” on this plan, one needs to look beyond the larger companies and focus on the smaller market cap, more niche, investments in infrastructure. Having a look into the “water” space can yield some big winners as the global water shortage scare starts to take effect in the face of huge capital injections into deserving companies. Small market cap companies in the stock market could have big advantages as money starts to pour into the system.

The Problem with Large Cap Companies

When most investors consider stocks that will be “plays on the stimulus package,” they often mis-represent the relative exposure that is obtainable. In most recommendations, we find companies like Caterpillar (CAT). Caterpillar is a fantastic construction giant… and they do indeed have exposure to highway infrastructure among other infrastructure building projects. The downside to investing in a larger company like Caterpillar is that you need to deal with all of the excessive business segments of the company… areas that build cranes and erect commercial buildings, for example. More than likely, if you are looking for a “pure play” stimulus stock you want to be able to focus on a specific niche area of the plan. Now I’m not saying that big construction companies like Caterpillar, or safer engineering and construction companies like Jacobs Engineering (JEC) and Fluor (FLR), aren’t worth your while. However, if you want to bet big, you better have a specialist!

Plays on Water Infrastructure

You may have heard recent “doomsday” forecasts of a global water shortage. The global demand for water has tripled over the past 50 years, and the U.S. government has projected that 36 states will run into water shortages in less than five years. Indeed, the way that we distribute water in the United States and around the globe leaves much to be desired. In fact, the amount of money that it would take to repair the U.S. piping infrastructure is actually less than the cost of leaving things as they are. Pipes break, and the water waste has already wreaked havoc on our agriculture and plumbing efficiency. Because problems will likely only accelerate, the stimulus package makes it a no-brainer… and a play on water infrastructure is a fantastic play on the stimulus.

Infrastructure and Fluidics

One of the top water infrastructure plays for the year comes from a leader in “fluidics” systems and components for everything from medical to fire & rescue. I’m talking, of course, about IDEX Corp. (IEX). IDEX is a company with a solid 9% growth in orders over 2008, and one of the few not laden with bad news. They trade at a premium 13x multiple, but may be worth your while. Dipping down into the even smaller market cap companies, we find Layne Christensen (LAYN), who produces water infrastructure as 75% of their business. One thing that is a net positive about Layne is that they have about 85% of their sales coming from the U.S., where stimulus packages are plentiful. The problem here is that Layne faces huge pressures from falling state and local budgets for water infrastructure in the face of the stimulus package that could weigh on earnings.

Fluid control has been an interesting niche area inside of water infrastructure. Since we waste so much of our water, companies specializing in pressure and control can really help us thwart a drought. Have a look at companies like Gorman-Rupp (GRC) and Mueller Water Products (MWA) for a little taste of the control equipment business. This is a space where there have been significant headwinds thus far, as temporary plant shut downs and pay cuts at Mueller echo throughout the industry. If you have an appetite for risk, have a look in this niche.

Profits Buried in Your Backyard

One of the more positively viewed areas in water (in my opinion) is investing in the companies making the actual pipe. Northwest Pipe Co. (NWPX) and Ameron (AMN) have been solid performers for the year, and now command valuations sometimes 2x the industry P/E (in the case of Northwest Pipe). This high-pressured steel infrastructure can be used for many practical purposes, such as drinking water, and have high prospects with a dire need for a domestic re-haul. In fact, a new “trenchless replacement technology” may advance these names even higher. Essentially, we don’t need to dig up the actual pipe any longer. With trenchless replacement, you simply dig through to the start and finish of the pipe, and fit a smaller pipe inside of the old one for a seamless repair. Great ideas build great investments, so keep these companies on your watch list for a more attractive buying point if the valuations scare you.

Agriculture Irrigation

Lindsay Corporation (LNN) puts through a self-propelled irrigation system infrastructure, primarily used in agriculture. Irrigation can be a big theme going forward, and I wouldn’t be surprised if the next scare is properly feeding our nation’s crops with water. Problems with the agriculture space include the commodity price collapse of late, but an increasing need for bio-fuels could send Lindsay higher with the ag. companies.

Bottom Line: The Barack Obama stimulus package has investors speculating like mad on companies even remotely tied to bailout spending. However, most analysts are missing the “big picture” in my opinion. What does this mean? You can capitalize on these small cap names if you can stomach the volatility because they are proportionally quite a bit more involved in all of the right spaces. At any rate, many of these water infrastructure plays make a serious case for premium P/E trading multiples.

-Jim Regan

Disclosure: None

Comments

[Conan the B...:]

MWA: suggest you take a more in depth look Muellar.

This is a spinoff. They make Ductile Iron Pipes and valves in addition to the Flow control you Do mention.

I see you do not mention MLI at all.

Any reason?

Feb 22 09:51 AM

[Wolfhounds:]

Very good info in your article. I'm surprised you didn't mention Sun Hydraulics (SNHY) among your small caps. The company designs and manufactures screw-in hydraulic valves and minifolds, which control force, speed, and motion as integral components in fluid power systems. This past October they started shipping valves that are computer adjusted. In addition, the company has no debt, pays a .36 dividend (2.2%) and has increased market share in past recessions.

Feb 22 10:04 AM

[Mad Hedge F...:]

Water may be the ultimate consumer staple, and investment in fresh water infrastructure is going to be a good long term investment theme. Although Earth is often referred to as the water planet, only 2.5% is fresh, and three quarters of that is locked up in ice at the North and South poles. Some 18% of the world population lacks access to potable water, and demand is expected to rise by 40% in the next 20 years. The UN says that $11 billion a year is needed for water infrastructure investment, and $15 billion of the US stimulus package will be similarly spent. An easy way to participate is to buy the Claymore S&P Global Water Index ETF (CGW), or buy the individual stocks Geberit AG (GEBN) and Veolia Environment (VIE).

Feb 22 12:23 PM

[Conan the B...:]

I have my own Option. It is literally an option because of its very low price. It's about a buck now was around $3 12 months ago.

Due Dilligence, Please. Hyflux, Chinese based builder of water purification and desalinization Plants. HYFXF on the Pinks.

It has been on Bloomberg 2-3 times in the past couple of years, which is where I first heard about it. Barron's mentioned it.

I bought it around $2. Just sitting and waiting to see if they get the permitting to build the worlds biggest Desalnization Plant in the Middle East. If they do, Kathy Bar the Door. IMHO

Feb 22 01:42 PM

[Hiyield007:]

Making money off the Obama infrastructure buzz has come and gone. These stocks ran up over 50% and more off their October/November lows and now have collasped off their most recent highs. If you want a water infrastructure play about the only viable one is TTEK.

Feb 22 04:21 PM

[Jim Regan:]

Thanks, and yeah... I had taken a look at Muellar. Unfortunately, if we are going to go small cap these guys are anything but a pure play. Muellar is more of a basic materials company than an industrial company... and their refrigeration unit is a real drag on upside. Other than that, sure they have some plumbing business... but I am going to stick with my original recommendation here. Thanks for your comments though!


On Feb 22 09:51 AM paultaut wrote:

> MWA: suggest you take a more in depth look Muellar.
>
> This is a spinoff. They make Ductile Iron Pipes and valves in addition
> to the Flow control you Do mention.
>
> I see you do not mention MLI at all.
>
> Any reason?

Feb 22 04:58 PM

[Jim Regan:]

I hadn't analyzed TTEK, thanks for bringing them up. I agree, the consulting side of E&C is still very profitable and in demand. Let's not count out the infrastructure buzz... as the contracts haven't even been let out for the work. The hype came and went... which is why I am writing this now and not back in November. The thing is that most of these companies are back at square one regardless... so the "Obama hype" is really no longer an integral factor.

Thanks for the recommendation on Tetra, but I do think you are wrong in assuming that just because infrastructure isn't the "hot word" on the Street, the area is no longer worth your while. Have a look!

On Feb 22 04:21 PM Hiyield007 wrote:

> Making money off the Obama infrastructure buzz has come and gone.
> These stocks ran up over 50% and more off their October/November
> lows and now have collasped off their most recent highs. If you
> want a water infrastructure play about the only viable one is TTEK.

Feb 22 05:01 PM

[PainfullyAware:]

Wise Words About Water.

If Growth is parabolic and assumed to be endless hard reality will show to the contrary; That Growth Can Not Be Endless.

Demand For Water Will Become Of Utmost Priority; and thus those companies dealing with its distribution and sales will most benefit.

I Appreciate The Authors Insight.

Feb 22 05:23 PM

[Hiyield007:]

>>>Thanks for the recommendation on Tetra, but I do think you are wrong in assuming that just because infrastructure isn't the "hot word" on the Street, the area is no longer worth your while. Have a look!<<<<

Jim, my point is you wanted to be in these things before they became overhyped and that was back in November for most of the infrastructure plays - water or otherwise. Once the hype and buzz began they fell hard from their post November/December highs. That's because in this business you don't want to be a headline trader or investor. Regardless, I hope your plays work out. At this point just about everything is dependent on the overall market and so goes it so goes most of the sectors. It's after we come out of this ugly bear market that the cream will rise to the top and hopefully that will be many of your recommendations. Good luck.

Feb 23 12:02 AM

[Conan the B...:]

Hiyeild: I had forgotten about TTEK too. Someone else brought it to my attention.

Thanks.

Feb 23 01:07 AM

[Hiyield007:]

I don't want to pull rank and even though I have published a couple trading books and have over 40 years of trading experience, I don't have that much more insight into where the market is going than some rank rookie. But in my time I have seen more than my share of what is called a crowded trade. And anything related to infrastructure recently has been a very, very crowded trade. Everywhere you turn you are reading about the love affair with infrastructure. That tends to bring in the public trader aka weak longs. The past few weeks and especially the past two days it has been an absolute bloodbath in anything infrastructure. FWLT, FLR, CBI, TEX, MTW, MWA, NWPX, and the list goes on and on. ACM is an exception primarily because it was added to the S@P midcap index. TTEK has also held fairly well. In the future beware of the buzz, the hype, and the logical.

Feb 25 02:48 PM

[Jim Regan:]

That's a valid argument HiYield, and I definitely agree wholeheartedly. One thing that is important to remember is that equities in general are lousy, and will probably continue to be lousy this year. We don't make "stock picks" here... only ideas for future investments, which is really all I was going for. Nobody here said that anything is a screaming buy, and I would be skeptical of the industrial crew if their leader (almighty GE) can't even hold it's bearings.


On Feb 25 02:48 PM Hiyield007 wrote:

>
> I don't want to pull rank and even though I have published a couple
> trading books and have over 40 years of trading experience, I don't
> have that much more insight into where the market is going than some
> rank rookie. But in my time I have seen more than my share of what
> is called a crowded trade. And anything related to infrastructure
> recently has been a very, very crowded trade. Everywhere you turn
> you are reading about the love affair with infrastructure. That
> tends to bring in the public trader aka weak longs. The past few
> weeks and especially the past two days it has been an absolute bloodbath
> in anything infrastructure. FWLT, FLR, CBI, TEX, MTW, MWA, NWPX,
> and the list goes on and on. ACM is an exception primarily because
> it was added to the S@P midcap index. TTEK has also held fairly
> well. In the future beware of the buzz, the hype, and the logical.

Mar 01 03:21 AM

[Veneratio:]

Why don't you own any of these companies if you see so much potential...? What's holding you back?

Apr 12 08:30 PM