Trading the US Infrastructure Bill: the stocks to watch

Equities

After years of partisan negotiation, the US has finally passed a new $1 trillion Infrastructure Bill. Some stocks could be poised to make big gains now on this Bill’s approval. Here are some equities to watch.

The US Infrastructure Bill

What is the Infrastructure Bill?

America’s infrastructure is ageing. There hasn’t really been a concerted push to upgrade the country’s roads, bridges, water systems, or power grids for decades. The cost is a hefty one, but this $1 trillion investment is sorely needed.

President Biden’s Infrastructure Bill has laid out the plan for a country-wide overhaul of key infrastructure as part of an overall $3.5 trillion budget resolution that incorporates job creation, house building and more.

The Bill was passed by the Senate on Tuesday as both Republican and Democratic parties reached a compromise. Originally, planned spending was over double the final amount, estimated at $2.3 trillion. It now goes to the House of Representatives.

There are shades of FDR’s New Deal, in which massive construction and infrastructure projects were introduced as a way of combatting the US’ economic slump in the wake of the Wall Street Crash.

But with aging national power and water supply systems and transportation links, the US really could use an infrastructure overhaul. It’s finally getting one.

Of the total $1 trillion, over half ($550bn) has been apportioned for Federal roads, bridges, airports, waterways, broadband, water systems and the power grid. This will be split over a five-year period.

Infrastructure Bill stocks to watch

The Bank of America has laid out five stocks it believes can benefit greatly from upcoming US infrastructure spending.

As to be expected, they are mostly engineering and construction firms.

Jacobs and AECOM are two stocks BofA has in its sights. It believes both engineering companies could play a key role in numerous projects the Bill necessitates, including new road and bridge construction developments, as well as power supply upgrades, ports, and further transit projects.

In projects like this, it can also be beneficial to check out equipment and machinery manufacturers too. Bank of America has flagged Deere and Caterpillar as infrastructure stocks with high potentials.

Deere is perhaps the highest quality large cap Machinery name with both cyclical and structural tailwinds,” BofA analyst Ross Gilardi said.

Engine and generator maker Cummins has also been flagged as an infrastructure Bill winner by the Bank of America. The bank has a 12-month price target of $325 on the stock, about 39% higher than the stock’s Tuesday closing price of $233.77.

Ex-divis hold back FTSE, European stocks steady

Morning Note

Take your pick: Talk down US shale, discourage investment in the oil sector, close key pipelines and virtue signal about climate change, pump vast amounts of cash to stimulate demand and then call on OPEC and its allies to pump more oil because inflation is biting in your country. Or you could be a billionaire who virtue signals about green things but backs a mining operation to dig up one of the last pristine areas of land on the planet to find essential elements to make electric cars. Welcome to the new green agenda. It’s not consistent but it’s dogma so you just better go along with it.

After KoBold Metals, which is backed Jeff Bezos and Bill Gates, signed an agreement with London-listed Bluejay Mining to dig up Greenland for critical materials used in electric vehicles, the White House has come out with another blinder: telling OPEC it needs to pump more oil to keep US consumer prices down. It came ahead of the latest CPI inflation report, which showed energy prices accelerating. The energy index increased 1.6% in July after rising 1.5% in June. President Biden, the White House proclaimed in a statement, “has made it clear that he wants Americans to have access to affordable and reliable energy, including at the pump”. I thought the new administration was all green and cuddly and definitely not pro Big Oil. Or maybe it’s only pro Big Oil when it’s Aramco and not Chevron or Exxon who stand to gain…? Senator John Cornyn summed it up: “If the president is suddenly worried about rising gas prices, he needs to stop killing our own energy production”. He could also have a word with Jay Powell…but there is definitely a point here about countries offshoring their carbon emissions to meet targets.

So, the White House sounds worried about inflation, even if the Fed does not seem to be racing to get on top of it. Yesterday’s report showed headline inflation was steady at 5.4% year on year, with prices advancing 0.5% in July vs the +0.9% in June. Core month-on-month was down to +0.3% from the +0.9% in June and a little light of expectations for +0.4%. It was the smallest rise in four months, and showed some degree of cooling, but the headline rate remains at a 13-year high.

Shelter, food, energy, and new vehicles all increased in June, but used vehicles were a lot cooler at +0.2% vs the +10% we have seen in two of the previous three months. According to the BLS, the deceleration in the used cars and trucks index was a major factor in the smaller monthly increase in the index for all items less food and energy. The WH said there were signs inflation in some items was ‘coming off the boil’. There were signs of recovery in pandemic-affected industries and pointing arguably to the kind of staffing and wage pressures felt in the hospitality sector as the food away from home index rose 0.8% in July, its largest monthly increase since February 1981.

Briefly 

  • The FTSE 100 finished Wednesday +0.82% at 7,219.90, a new post-pandemic high– it’s been slower to recover than some peers which is largely reflective of the make-up of the index and propensity to more value and cyclical global growth plays and much less big tech, growth + momentum names. This has held it back, whilst the persistence of cases globally has left investors a little hesitant. It compares less favourably with the more domestically focussed FTSE 250 which has been smashing out record highs because the vaccine-driven recovery in the UK has been strong, whilst it too was coming from an exceptionally low base, which was driven by the harder hit Britain took initially from the pandemic and the lingering discount from Brexit.
  • European stock markets broadly higher in early trade Thursday after Wall Street set fresh record highs, though the FTSE 100 lags with ex-dividend factors clipping 32.74 pts today, sending the index into the red. Insurers led the way higher in Europe as Aegon reported Q2 numbers well ahead of expectations. Asian shares were broadly weaker.
  • Despite the records for the S&P 500 and Dow Jones, the Nasdaq dipped as the rotation back from mega-cap growth/momentum into cyclicals continued.
  • The UK economy grew 4.8% in the second quarter, exceeding expectations.
  • Bitcoin rose to its highest since May, but is weaker this morning
  • There was a small-than-expected draw on oil inventories, with the EIA reporting a draw of about 450k vs –750k expected. However, oil prices have bounced to regain trend support with WTI again north of $69.
  • Southwest Airlines warned on Delta – not its rival, the covid variant – saying that the spread of the disease has hit bookings and increased cancellations. As hospitalisations hit a 6-month in the US, the carrier became the first to trim its guidance for the third quarter and warned it may not be profitable in Q3. Share erased early losses to end up more than 1%.
  • Moderna shares tumbled, down 16% to wipe out the Monday rally and then some. A bearish Bank of America note didn’t help. BioNTech shares also fell as the European Medicines Agency said it was investigating reports about conditions related to the skin and kidneys following vaccinations. BioNTech shares jumped 10% in Frankfurt this morning however, indicating that investors are still arguing over the valuations of these drugmakers.
  • Cineworld said it is considering a US listing – trying to capture some of the AMC stardust perhaps? Shares +5% after also reporting that first half pre-tax losses narrowed to $576.4m from $1.64bn last year. Confidence returning as lockdown era is past.
  • Coming up today – US PPI inflation seen at +0.6%, core at +0.5%.Also US unemployment claims data (fc +375%).

Infrastructure bill – what to own?

We noted that Caterpillar was the big riser on the Dow as the House passed the $1tn infrastructure bill. But Bank of America has come out with some handy plays. The package includes $550 billion over five years for roads, bridges, airports, waterways, broadband, water systems and the power grid. BoA says engineering firms like Jacobs and AECOM are best placed to benefit from spending on core projects like roads. Meanwhile think along the lines of construction equipment makers Caterpillar and Deere, as well as engine and generator maker Cummins, the bank says.

For UK stocks, we look to the likes of Ashtead, the industrial equipment rental business, which rallied over 1% again on Wednesday to take its 5-day gain to +5%. Likewise building materials business CRH rallied more than 2% for a +5% 5-day performance.

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