The economy is still in recession. The stock market is assuming the worst. Governments the world over are rolling out programs to boost the economy and nothing seems to be working. This maybe the best time to start putting your money to work (as always, do your own due diligence and invest according to your risk appetite)
President elect Barack Obama just announced plans for massive investment in rebuilding country’s infrastructure. Infrastructure upgrades are long overdue in this country and this does appear to be as good a time as any to focus efforts in rebuilding the old infrastructure in US. This spending will have the added benefit of creating new jobs (however short term) and this should help prop up the job market and jump start the economy. Overseas, the Chinese stimulus package is heavy on infrastructure spending. At the same time, many of the businesses in manufacturing sector that are likely to benefit from these programs are on sale today. While the opportunities to invest abound, what follows is a list of few selected names that I feel would perform well in the coming years and where I have already started taking new positions.
Private Businesses
If you own a private business in the manufacturing sector, consider ways of positioning your business to take advantage of the infrastructure spending to come. There are many things that you can do. You could for example get set up to bid on the federal jobs if your business is in a sector that will directly benefit. Or you could redouble your marketing and sales efforts to those companies that are likely to benefit, example being metals processing, construction companies, equipment manufacturers, large project companies like Bechtel and GE (new power plants, nuclear plants, wind energy installations, bridges, schools, etc). If you do not own a business today but are considering investing in a private company, you may wish to keep this in mind while you are picking your investments.
Owning a private business is risky and requires a lot of time commitment but brings with it a potential for great rewards as well as satisfaction of directly helping create new jobs and impacting the growth in the economy.
Public Businesses
Stocks are cheap today, but some well run companies are selling at unimaginable discounts. The following names are some of the few companies I think will benefit from the new public works program and have potential to deliver above average returns in the years to come.
Steel Dynamics (STLD): I know what you are thinking, commodities are cyclical and currently in a downtrend. I do not think this is true. Some of these commodities have sold off due to global demand deterioration and as the demand picks up, these companies will do well. Steel Dynamics is a well run company and is very shareholder friendly as evidenced by their multiple stock repurchases over the last year as the stock price declined. Currently the stock is selling at 3 times trailing earnings and about 4.27 times next year estimated earnings which is quite cheap by any standard. It is also selling at below book value and sports a respectable 4.9% dividend yield. Steel is one of those commodities that is critical to any infrastructure project and the steel prices will firm up in the intermediate term. The recent slump in the steel prices is overdone.
Ingersoll Rand (IR): Ingersoll Rand is a equipment manufacturer currently selling at 1.5 PE (trailing) and 5.8 PE (next year estimate) and is being valued at half of its book value. The company designs, manufactures and sells a range of industrial and commercial products in 3 segments: Climate Control, Industrial Technologies and Security Technologies and sports a 4.7% dividend yield. The company is very cheap due to concerns about whether it will be able to refinance current debt in this credit environment that is coming due shortly. I think the fears are overblown and the credit environment will recover sooner rather than later. One also has added comfort in knowing that Berkshire Hathaway considered the stock cheap at a price twice of what it is selling at today.
If you are willing to take on a little bit more risk you may also want to consider a company like Caterpillar (CAT). While its PE ratio at 7-8 is not as attractive as the companies mentioned above and it is selling at a premium to its book value, it is hard to see any infrastructure projects not using products made by Caterpillar. I do not yet have a position in CAT and would rather put any new money in increasing my current holdings but I would think it is still worth a consider.
Another related stock I own and am consistently increasing my stake is Sterlite (SLT). I have discussed this company before so I will not go into any further detail here.
What moves are you making? Do you have any other investment ideas? Let us continue the discussion via comments
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Wow. It’s a nice blog. Tks for sharing all these topics. Salaam.
jamil’s last blog post..Happy Idul Adha 1429H
Good Post!
I think your right about the Manu sector. Mainly because people are going to be skeptical on anything but this sector.
Ingersol is a great company just not sure how soon the credit markets are going to recover. Certainly, helps that Buffett gives it a thumbs up!
Rick Vaughn’s last blog post..A Long Dark Road
Taking positions in steel and construction seems like a good idea so long as their debt exposure is low. They will definitely benefit from the massive infrastructural spending proposed by Obama.
However, China will also need to boost its construction sector too before steel prices recover from its slump.
jeflin’s last blog post..Treasury Bills Developing Characteristics Of A Bubble
I own both IR and CAT and while I’m in at much higher prices, I agree that they should benefit greatly from infrastructure spending. I have recently been adding to positions.
bartolomo’s last blog post..Top Ten List of U.S. Unemployment
@Rick, jeflin, bartolomo, thanks for the comments. I have taken positions and am steadily adding to them. It might take a while before the sector starts benefiting from the new projects but that is okay as it just gives me more time to accumulate.
As for the construction sector in China, I think it will come back up soon as the Chinese have also indicated that they want to spend their way out of this slump.
Steel prices are volatile but as someone who makes a living out of steel, I fully believe that the long term trend is up.
This is a good information. And the explanation why you choose the manufacturing business is rational. Thank You
Hendro’s last blog post..Debt Consolidation Information, Consolidation Debt Settlement Service May Be Better
great post. learned a thing or two about investing in manufacturing businesses. thanks for sharing.
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Though I like Sterlite as a company, I am little apprehensive about its management.
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Very bright take on the economic situation and what to look for in the months ahead. I especially like the idea to look at companies that may benefit from the public works projects. It makes sense.
In addition to manufacturing, basic consumer products will likely survive as well as companies that serve public sector (eg. emergency services) or need-based services (eg. plumbing). I’m keeping a keen eye on communication, which is often the first tell if a company is heading toward trouble. Too much spin, and they won’t win.
All my best,
Rich
I agree with you in that the manufacturing sector has been grossly undervalued. Even small manufacturing companies like machine shops are under severe duress now considering economic conditions but those that have the staying power and stamina to get through with this recesion will boom in the coming years. I am heavily involved in manufacturing and am very optimistic about the long term future, but very aware of the short term pains. Thank you.