3 Infrastructure Stocks for Growth Investors

Remember when deficits were a focus for Washington? Well, you’re the only one. 

The United States has spent lavishly during the coronavirus pandemic to avoid economic ruin. All told, the federal government has spent nearly $5 trillion in COVID-19 relief spending. 

This spending has been a lifeline for unemployed citizens and allowed the economy to escape certain ruin but had the added effect of turbocharging stock returns. 

So naturally, you’d expect a return to fiscal discipline after the spending binge… and you’d be mostly wrong. The Biden administration is following up on its $1.9 trillion COVID relief bill by pushing an infrastructure bill slated to cost $2.25 trillion. 

America Needs Infrastructure Spending

Never has the need for government spending on infrastructure been more acute. You’ve likely heard financial analysts fault companies for “delayed maintenance”—failing to invest in growth or in the critical equipment needed to produce cutting-edge products. The result is that these companies become less efficient and often lose their competitive positioning and market leadership. 

Now imagine the company is the United States of America and the need becomes more apparent. The results of our collective delayed maintenance are not pretty, as we’ve ceded ground to other countries (mainly China) on a host of economic fronts. 

According to the American Society of Civil Engineers, we face a massive investment gap of nearly $2.6 trillion for our infrastructure and now have a grade of C-minus. Furthermore, they predict this underinvestment will cost more than 3 million jobs and cut $10 trillion off the GDP by 2039.  

Infrastructure is a rare bipartisan point of agreement with both liberal and conservative economists agreeing on the need to invest in America. And that’s often because infrastructure spending packs a powerful one-two punch for the economy. 

Initially, increased spending will directly benefit the economy from a demand perspective as the bulk of it finds its way to blue-collar workers who often struggle disproportionally during a recession. Infrastructure spending allows them to remain employed, develop job skills, and has a multiplier effect as they spend on rent, food, and entertainment. 

However, even after construction is complete, infrastructure investments continue to benefit the economy through an increased capacity for productivity. Think about the benefits of cheaper electricity, less road congestion, and faster internet.  

3 Stocks for Biden’s Infrastructure Plan 

President Biden has hailed his infrastructure plan as a “once in a generation” opportunity. The proposed plan would include spending on categories like:

  • $620 billion for transportation infrastructure like railways, bridges, highways, and ports.
  • $300 billion to support small businesses and domestic manufacturing.
  • $200 billion for affordable and sustainable housing support.
  • $337 billion for national broadband, the electrical grid, clean drinking water, and educational facilities. 
  • $50 billion to boost semiconductor chip manufacturing.

Clearly, that’s a lot of money spent across a number of industries. If you’re looking for companies that could see strong tailwinds from infrastructure spending in the years ahead, we’ve compiled three of our favorites below.

NV5 Global (Nasdaq: NVEE): A small-cap stock with big-time potential

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  • Market Cap: $1.4 billion
  • Forward P/E: 24 times

It’s an open secret in Washington and various other state governments that many internal hires lack the ability and know-how to complete large infrastructure projects. As a result, government contracting has become an essential function for infrastructure buildout and many in the private sector will be tasked with critical engineering, surveying, and construction functions. 

NV5 Global might be classified as a small-cap stock, but the company is well-known within the industry due to its work on electrical infrastructure and will benefit from a federal push to secure our electrical grid. 

The company has been winning deals despite the pandemic, most notably with California after the recent wildfires and a new contract with an unnamed electrical utility to use its geospatial analytics to protect electrical infrastructure. 

The company boasts of its track record of consistently exceeding growth targets. In 2017, NV5 exceeded its revenue target of $300 million by 10% and in 2020 it beat its $600 million target by 8%. The company expects to exceed a $1 billion revenue run rate by 2024 and to increase margin improvement from higher-value services.  

Despite the record of accomplishments, NV5 is reasonably cheap, trading at 24.4 times forward earnings and for two times last year’s revenue. Both figures are only slightly above market multiples.  

The risk for NV5 Global is its business model of acquiring companies. In the last three years the company has engaged in approximately 12 transactions to round out its capabilities. Financial history is rife with companies that overpaid for acquisitions and have been forced to write down the asset’s goodwill in future quarters.  

NV5 Global has approximately $345 million in goodwill on the books, a significant amount for a company with a $1.4 billion market cap. That said, I’m not that concerned on account of the company having a strong history of making acquisitions work and being primed to outperform from increased infrastructure spending. 

American Tower (NYSE: AMT): A 5G gem

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  • Market Cap: $106 billion
  • Dividend Yield: 2.1%

President Biden’s infrastructure bill is notable because it includes significant spending for 5G and broadband internet. Increasingly, the federal government is including the internet as a critical component of infrastructure due to the increased digitization of our economy. 

President Trump briefly considered nationalizing the 5G grid to better compete with China for AI, IoT, and autonomous vehicle leadership. The idea was quickly shot down, but the importance of 5G and broadband internet service cannot be understated, and we need huge investments to ensure we don’t fall behind.

Currently, the United States has placed the entire rollout of 5G technology and internet in the hands of a few companies. Specifically, 5G development is essentially dominated by three providers: T-Mobile, AT&T, and Verizon. 

These companies are locked in a fierce war to build out nationwide networks and are looking to do so in the most cost-efficient manner available.

American Tower supports these companies by owning the physical towers and supporting land the telcos use for their equipment and charging these companies rent. Think of American Tower as a landlord for telco antennae and equipment. 

Yes, it’s a boring business. But it’s highly stable. American Tower’s leases are long-term, with high renewal rates and negotiated rent escalation clauses. 

Like all stocks, American Tower has risks. First is customer concentration. Due to the unique nature of its product, a high percentage of its revenue comes from only a handful of companies, which could lead to declining revenue if one of the telcos chooses not to use its service. 

To date this has not been a concern. Major telcos were planning to spend $35 billion in capital expenditures (CAPEX) before Biden’s infrastructure push, with much going to 5G capability. 5G is also a net positive for American Tower, as it requires more revenue-producing cell sites be installed to ensure a strong signal (called densification). It does not appear that customer power is a risk at this point. 

American Tower did not participate during the pandemic market frenzy. As a result, the current yield of 2% is high based on its historic trading range. We understand that a 2.1% yielding REIT might not raise your attention, but consider American Tower’s generous dividend increases, which the company has done every quarter since 2012. 

Last year the company increased its collective dividend payout by 20% during a pandemic that slowed planned telco capital expenditures. Regardless of what Washington decides, American Tower is well-situated for long-term returns from the growth of 5G connectivity and increased broadband internet coverage.

Applied Materials (Nasdaq: AMAT): Chips are the new infrastructure

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  • Market Cap: $123 billion
  • Forward P/E: 21 times

Eagle-eyed readers might have noticed we covered Applied Materials last week in our 3 Value Stocks Poised for Growth article, but the story has only become more compelling due to Biden’s infrastructure plans. 

See, tucked into the expansive infrastructure proposal is $50 billion earmarked to boost chip manufacturing in the United States. You might not think of chips as infrastructure, but that’s twentieth-century thinking. Semiconductors are slated to be the steel and plastics of yesteryear as very few products will be made without chips going forward.

Case in point: the chip shortage is now threatening American jobs in the automotive industry. Due to a lack of chips, Ford recently cut F-150 production from three shifts a week to one in its Dearborn plant and General Motors cut production at three plants.  

Like many industries, including pharmaceuticals and personal protective equipment, America chose to outsource chip manufacturing to cheaper countries. Increasingly, we’re understanding that bringing back this production has become an urgent matter of national security. Intel shocked investors when it announced it would spend $20 billion to build two new chip facilities in the United States.

That said, building chips isn’t easy. In fact, it’s a complex process often requiring hundreds of steps using highly specific equipment and machinery to undertake the etching, printing, and packaging processes. It’s this equipment that Applied Materials provides chipmakers. 

The story keeps getting better for Applied Materials. Shares continue to march higher on short-term demand from the auto industry chip shortage, but the company was already well-positioned from long-term drivers like artificial intelligence and autonomous vehicles. Now that the United States government is finally prioritizing the importance of owning your chip production processes, look for future orders to pick up in a major way. 

Last week we noted that Applied Materials isn’t as cheap as it once was and shares have advanced another 6% since then. However, the company is still valued below the greater S&P 500’s forward earnings multiple and still has a shareholder-friendly approach consisting of dividends and a $7.5 billion stock buyback program. 

Chipmakers might applaud Biden’s announcement but know they need to build in the United States, and Applied Materials is situated well to benefit from increased spending in the chip manufacturing industry. 

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Will Biden’s Infrastructure Bill Succeed?

Despite the universal agreement on the need for infrastructure, success hasn’t come easy in recent years even with single-party rule. Despite President Trump’s insistence on a major infrastructure package and single-party rule for the first two years of his administration, a bill was not brought to the floor and the phrase “infrastructure week,” unfortunately became a punchline. 

President Obama had even stronger majorities earlier in his term and did not fare much better. His administration was focused on a recession and did not put forth a major infrastructure bill. The “shovel-ready” projects pushed during the American Recovery and Reinvestment Act traded efficacy for speed and made very few long-term impacts on productive capability. 

Against that background, President Biden’s infrastructure push is by no means a fait accompli. Despite the large price tag, the Biden Administration aims to offset costs by including pay-fors in the form of increased taxes on corporations and high-income earners, with a 28% rate being bandied on the corporate side. 

All told, Biden expects the price tag will be paid by these changes within 15 years.

Any tax increases will likely lose any support from the other side of the aisle, which is committed to defending the Tax Cuts and Jobs Act of 2017. 

However, the biggest risk comes from fellow Democrats: the 28% corporate tax rate is getting pushback from moderates focused on a 25% rate and from the liberal wing pushing to reinstate the old 35% rate. 

Even if Biden succeeds in passing this massive package, stocks might not respond like a COVID-19 stimulus. 

  • Inflation risk: After decades of tame inflation, investors are increasingly worried about government spending driving up prices. Former Obama-era economist Larry Summers has been outspoken that he expects an overheated economy from infrastructure spending.  
  • Higher tax rates: Unlike with COVID relief, Biden is proposing pay-fors in the form of higher corporate and income tax rates. Lower after-tax earnings will impact multiples and increased taxes on high wage earners will impact investable dollars, although the extent of its effects on the stock market are unknown.  

We’ve said it often here at Millennial Money: The key to successful investing is to buy great companies and hold them for the long term. As a result, we eschew swing and event trading. That said, we are in favor of finding strong stocks with compelling long-term growth stories that have a growth catalyst. 

In the case of all three of these stocks, while they could experience strong added growth from the passing of an infrastructure spending bill, they’re companies where infrastructure spending merely adds to strong existing growth opportunities. 

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