3 Stocks for an Early Election Play
I don’t possess a crystal ball, so at this point I have no idea who the Democrats will even nominate for this year’s election, yet alone whether or not that nominee will beat Donald Trump. What I do know, however, is that whoever it is, their campaign will feature certain themes. I also know that as those themes are publicized, the market will react, so it is worth identifying them early and using that information now, before the flood of news stories begins.
Some are already obvious. We know, for example that the nominee will have a lot to say about healthcare. So far, the market’s take on that seems to be “so what?” The SPDR Healthcare Sector ETF, XLV, is up over eighteen percent since the beginning of October. Some of that is down to a decent chance that Trump wins again, but the feeling is also that if Barack Obama, with Democratic control of both houses, struggled to pass a law as industry-friendly as the Affordable Care Act, the healthcare sector has little to fear this time around either.
But healthcare is old news. More interesting to investors at this point is what potential talking points have yet to be priced in. Infrastructure could be one of those.
As Politico points out, while all of the candidates speak in general terms about the need for infrastructure spending, none have a detailed plan of what that it would actually entail, or more importantly, how to pay for it. Of course, that is nothing unusual for politicians. They don’t often consider cost when making promises, but then neither does the electorate typically ask them to. President Trump is certainly aware of that, as he has on multiple occasions talked about ambitious, multi-trillion dollar infrastructure plans, and has even got buy-in from Democrats at times.
So far though, the reality is somewhat disappointing. In fact, “infrastructure week” has become a joke on the left, and it is unlikely that the Democratic nominee will be able to resist using it when their campaign gets underway. Which means that there will be a focus on infrastructure spending at some point, and a focus is all that is needed to lift stocks in the sector.
The question, as always, is how best to play that likelihood.
There is a U.S. infrastructure ETF from iShares (IFRA) which would be okay, but 45% of that fund consists of utilities. That sector already looks fully valued and may not be the biggest beneficiary of anticipated spending.
I prefer a more targeted approach.
The two big areas that need improvement throughout America are roads and water supply, so I would look for one stock in each with growth potential, and would include one slightly safer, less focused play.
For roads and bridges, an up and coming firm like Construction Partners Inc. (ROAD) fits the bill. Right now, ROAD isn’t really focused on growth and the stock has dropped back after a couple of disappointing earnings reports, but in an environment where infrastructure is the flavor of the month, that won’t matter. If anything, some recent weakness will be an advantage when investors are looking for value plays in the sector.
Still, in essence this is a story about growth perceptions rather than current value, and there is a stock in the water business that fits that bill: Evoqua (AQUA). The stock has doubled over the last year, but still looks to have further to go. They also have the added bonus of being an international company, so they can benefit from the global focus on water issues over the long term.
The more generalized play would be the supplier of aggregates, cement and other construction materials, like Martin Marietta (MLM). That stock is trading lower this morning after an earnings miss, but once again, from a long-term perspective and as a potential beneficiary of spending proposals, that is a good thing. It just means that you can pick up MLM at a bit of a discount.
What politicians do best is talk, and at some point during this year’s campaign, they will talk about infrastructure spending. Based on what has happened over the past four years, that talk will include some big numbers. Those numbers may be unrealistic, and the money may never materialize, but that isn’t the point. The talk itself will drive money into infrastructure stocks, and these three, one material supplier, one builder of roads and bridges, and one water supply and treatment company, will all benefit.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.