By Philip van Doorn, MarketWatch
Plenty of state spending goes to these industries, even if the federal government doesn't increase its contribution
A broad review of stocks ahead of the 2020 election points to several industries that are poised for good long-term performance regardless of who wins.
This led to a screen of the Russell 3000 Index to help narrow those industries to a handful of players that are already growing quickly.
In an in-depth article in Barron's (), Avi Salzman shares opinions of several money managers. A main area of concern is health care, with Sen. Elizabeth Warren of Massachusetts and other candidates for the Democratic presidential nomination proposing "Medicare for All." Warren also has said she would try to ban ( ) hydraulic fracturing -- the controversial oil-extraction method that has helped the U.S. become the world's largest oil producer.
Read:No slowdown in sight: Investors are swapping defensive stocks for cyclicals ()
Warren's plans help explain why energy has been the worst performer among the 11 sectors of the S&P 500 this year, despite a 22% increase in the price of West Texas crude oil . Health care has been this year's second-worst performer:
S&P 500 sector Total return - 2019 through Oct. 29 Total return - 12 months
Information Technology 35.8% 26.4%
Real Estate 29.2% 26.8%
Industrials 24.9% 19.1%
Communications Services 24.8% 20.3%
Financials 23.3% 15.9%
Utilities 22.8% 21.0%
Consumer Staples 22.8% 15.0%
Consumer Discretionary 22.7% 18.9%
Materials 18.5% 18.9%
Health Care 10.3% 9.3%
Energy 6.3% -6.0%
S&P 500 Index US:SPX 23.1% 17.3%
Dow Jones Industrial Average US:DJIA 18.3% 13.5%
What about infrastructure?
It might be tempting to focus on the possibility of increased federal spending on rebuilding crumbling roads, bridges and water systems across the country, but President Trump and Congress have not managed to pass the needed legislation. Even if they did, the "shovel-ready projects" that politicians bandy about are never anything of the sort -- it can take many years for even a repair project to gain all the regulatory approvals it needs, not to mention the complicated process of timing multiple funding sources.
Then again, as Barron's Salzman pointed out, states have already increased their own infrastructure spending considerably. He cited three companies benefiting from this trend: Evoqua Water Technologies (AQUA), Construction Partners (ROAD) and Granite (GVA). These are relatively small companies, with market capitalizations ranging from $558 million (GVA) to $2 billion (AQUA).
So rather than hope for a big federal spending bill, which, arguably, wouldn't filter down to actual projects (and become revenue for infrastructure companies) for many years, it is more useful to look back to see which infrastructure companies have already been growing quickly.
Investors looking to play infrastructure companies as a group have several exchange traded funds to consider, but all of the large ones have a global focus, including the iShares Global Infrastructure ETF (IGF), the FlexShares STOXX Global Broad Infrastructure Index Fund (NFRA) and the SPDR S&P Global Infrastructure ETF (GII). For exposure to infrastructure companies only in the U.S., the iShares U.S. Infrastructure ETF (IFRA) is available. However, it is tiny, with only $7 million in assets. It was established in April 2018.
For investors looking to identify individual companies that can benefit from the infrastructure trend, we screened the Russell 3000 (a broad index that covers roughly 98% of the U.S. stock market) to make sure the three infrastructure stocks mentioned by Salzman were included. We narrowed the screen to three industry groups as defined by FactSet: construction materials, engineering and construction, and environmental services.
Within the construction materials group, we then excluded companies whose sole business was providing sand and other materials for fracking, or whose products were limited to residential or other building construction.
This reduced the list to 42 companies ranging from a market cap of $62 million all the way up to Vulcan Materials, which has a market cap of $19.1 billion.
We then compared sales results for the past 12 months to those of the previous 12-month period.
Construction Partners (ROAD), one of the three infrastructure companies mentioned by Salzman, completed its initial public offering in May 2018, so we don't have 24 months of public sales reports to compare. For its fiscal third quarter ended June 30, the company reported a 16.5% increase in quarterly revenue from a year earlier, with net income increasing 28%. The five sell-side analysts polled by FactSet who cover Construction Partners rate the shares a "buy" or the equivalent. The consensus 12-month price target is $16.96 and the stock closed at $17.12 on Oct. 29.
We also excluded Covia Holdings (CVIA), which was formed through the merger of Unimin and Fairmount Santrol in June 2018.
Among the 40 remaining companies, 16 have achieved double-digit increases in revenue over the past 12 reported months through Oct. 29 from the previous 12-month period:
Company Ticker Industry Market cap ($ millions) 12-month sales change 12-month sales growth
Great Lakes Dredge & Dock Corp. US:GLDD Engineering & Construction $684 47% 12%
Primoris Services Corp. US:PRIM Engineering & Construction $1,082 38% 39%
Jacobs Engineering Group Inc. US:JEC Engineering & Construction $12,776 32% -5%
Matrix Service Co. US:MTRX Engineering & Construction $519 30% 27%
KBR Inc. US:KBR Engineering & Construction $3,697 26% 25%
MYR Group Inc. US:MYRG Engineering & Construction $547 23% 22%
IES Holdings Inc. US:IESC Engineering & Construction $433 21% 22%
Comfort Systems USA Inc. US:FIX Engineering & Construction $1,890 21% 22%
Quanta Services Inc. US:PWR Engineering & Construction $5,950 16% 22%
US Ecology Inc. US:ECOL Environmental Services $1,433 14% 13%
EMCOR Group Inc. US:EME Engineering & Construction $5,083 13% 17%
Vulcan Materials Co. US:VMC Construction Materials $19,085 13% 14%
Dycom Industries Inc. US:DY Engineering & Construction $1,542 13% 14%
Casella Waste Systems Inc. Class A US:CWST Environmental Services $1,995 12% 6%
MasTec Inc. US:MTZ Engineering & Construction $5,017 12% 19%
Martin Marietta Materials Inc. US:MLM Construction Materials $16,744 10% 10%
You can click on the tickers for more about each company.
The table shows not only sales growth, but changes in sales per share. The per-share figures show the effect of changes in the share count. A company might issue shares as part of an acquisition, which will raise the count and lower sales (and earnings) per share. Net share buybacks will lower the share count and raise sales per share and EPS.
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