View Full Version : The Next National Crisis Is Looming -- Here's How To Profit

Joshua Brown
Winston Churchill once said "You can always count on Americans to do the right thing -- after they've tried everything else."

Updated for today's era of governmental gridlock, you could modify that phrase to say that "Americans will do the right thing -- when they have no other choice."

Considering that the nation's Highway Trust Fund (which has relied upon revenues from a tax of $0.184 a gallon since 1993) is expected to run out of funds within the next few months, inaction is not an option. "The moment is dire -- the trust fund is quickly running toward insolvency," Transportation Secretary Anthony Foxx told Bloomberg News (http://www.bloomberg.com/news/2014-05-13/senators-unveil-six-year-u-s-highway-legislation.html).

Thankfully, Congress has begun to search for a fix, not only for our nation's highways, but many other core parts of our infrastructure, which barely get a passing grade, according to the American Society of Civil Engineers (http://www.infrastructurereportcard.org/).

The Senate has just issued a new bipartisan blueprint for infrastructure spending (http://www.epw.senate.gov/public/index.cfm?FuseAction=Files.View&FileStore_id=f331a434-eec7-41f2-8cc6-5bbc34c49b3d), which will boost aid to states while also providing greater spending transparency.

The challenge is to find the right revenue-raising formula. The Obama administration is siding with some leading Republicans in pursuit of a tax code overhaul that allows for foreign-earned profits to be brought back home (and taxed at an unspecified lower rate) while other corporate loopholes get closed. Leading Democrats would prefer to see the highway gas tax raised, along with other excise taxes.

One way or another, this issue will get addressed. The nation's clogged highways and crumbling bridges are starting to foment a consumer backlash (http://www.bafuture.org/imstuck) that could become an issue at the ballot box this fall.

To give you a sense of how the lack of infrastructure funds has hurt the construction industry, check out the share price moves of Sterling Construction (Nasdaq: STRL (http://www.streetauthority.com/stocks/STRL)), which builds and repairs roads and bridges.


John Rodgers, who covers construction stocks for D.A. Davidson, boosted his rating on Sterling to "buy" on May 12, after the company has cycled through a series of contracts that were bid too low and led to losses. Citing a rising backlog as stalled projects get the green light, Rodgers says, "Sterling appears poised to recover profitability over the next several years, and eventually approach previous peak operating EPS in excess of $1.50 per share."

Another pure play on infrastructure maintenance and construction is Granite Construction (NYSE: GVA (http://www.streetauthority.com/stocks/GVA)), which is positioned to "grow earnings substantially into 2015 and sustain these higher levels beyond," according to Rodgers. He adds that "much of this growth is likely to be tied to higher work activity associated with additional transportation infrastructure, including work on previously awarded large projects which drove backlog growth in recent years."

The Privatization Option
To address the perennial funding problems regarding infrastructure investment, Congress may look to emulate an increasingly popular global option: privatization. Billions are now being spent by private firms in exchange for revenues such as tolls or port fees for decades to come. And few have been as adept in this field as Brookfield Infrastructure Partners (NYSE: BIP (http://www.streetauthority.com/stocks/BIP)).

Structured as a master limited partnership (MLP), BIP has direct and indirect stakes in toll roads, electricity-transmission grids, ports and railroads spread across five continents.

As an example, the company has a 31% stake in Brazilian toll road operator Arteris Management, and also helps Australian coal miners get their product to sea ports. Thanks to a combination of strong organic cash flow and a series of financings, BIP now manages more than $20 billion in global infrastructure assets, up from $6 billion in 2009.

It's challenging to identify mutual funds or exchange-traded funds (ETFs) that focus squarely on the U.S., as many key funds have global exposure. Ones to consider include:

? Morgan Stanley Global Infrastructure (Nasdaq: UTLAX (http://www.streetauthority.com/stocks/UTLAX))
? Cohen & Steers Global Infrastructure (Nasdaq: CSUAX (http://www.streetauthority.com/stocks/CSUAX))
? iShares S&P Global Infrastructure Index (NYSE: IGF (http://www.streetauthority.com/stocks/IGF))
? SPDR FTSE/Macquarie Global Infra 100 (NYSE: GII (http://www.streetauthority.com/stocks/GII))

Risks to Consider: Just because Congress needs to take action on this important issue doesn't mean lawmakers will. Yet if they fail to act, look for this issue to emerge as one of the key dramas playing out in Washington in this coming election season.

Action to Take --> Notably, corporations have been neglecting their infrastructure as well. As this infographic from Bloomberg shows (http://www.bloomberg.com/image/iETvkR1ts5zw.png), the structure and equipment in place at many factories has not been refurbished or replaced in quite some time. That could set the stage for an upgrade in investment -- and as more resources are deployed on our nation's infrastructure, that could greatly boost American competitiveness. Keep an eye on this topic, as clear winners will emerge as the spending gridlock gets untangled.