Today's Hot Tip? Infrastructure

Forget plastics. Today the hot new investing tip is infrastructure, thanks in no small part to President Obama’s $789 billion plan to help rebuild the economy through massive spending on construction and repair projects. But for investors, finding the right companies might be tougher than it seems.

Already, savvy stock pickers have gobbled up a few of the obvious names, taking some potential bargains off the table. In the month following Obama’s election, for example, shares of Caterpillar, the world’s largest construction-equipment company, and Jacobs Engineering Group, a consulting and engineering firm, shot up 40 percent and 90 percent, respectively. But a surprising number of strong infrastructure firms have been largely ignored. And even stocks that have seen a run-up could continue to rise, experts say, as spending gets under way throughout the nation. Just one example of what’s to come: Cash-strapped state and local governments have delayed maintaining and upgrading basic infrastructure for years in favor of shorter-term priorities. The National Governors Association estimates that $136 billion in roadwork has been delayed by local governments this year alone.

It’s not just roads and bridges that need fixing: The Environmental Protection Agency estimates the nation needs to spend more than $200 billion over the next 20 years to keep our water clean. Many experts don’t see an end in sight to this spending and say the companies are planning for the long haul. “These companies aren’t thinking about demand now,” says Brian Angerame, manager of Legg Mason’s Mid Cap Core fund. “They’re thinking about demand in 2020.”

And all that’s just in the U.S. Foreign countries are also pouring hundreds of billions of dollars into local infrastructure projects to jump-start local economies. Germany plans to spend up to $70 billion on railways, energy projects and telecommunications this year. The European Union is mapping out projects worth $250 billion on transportation, technology and energy. And while it’s unclear how much of China’s massive $586 billion stimulus is already baked into existing projects, the Chinese government says a lot more money is coming.

Basic infrastructure spending is also on the rise in the developing world because of growing populations. The World Bank estimates it will lend up to $70 billion on global infrastructure over the next four years, nearly double the amount it lent out during the previous four years. Government spending on infrastructure “is a global phenomenon” that’s here to stay, says Paul Ehrlichman, chief investment officer of Global Currents Investment Management.

Of course, not all builders, fixers and suppliers deserve equal attention from investors. Some infrastructure-related companies, such as steel and commodities producers, are still coping with overleveraged balance sheets and overexpansion in the aftermath of the housing boom. Instead, analysts say, investors should look for firms that are working to make trains run faster and electricity and water flows more efficient. “There’s a huge, unmet need to make money on efficiency,” says Ehrlichman. These firms, with good cash flow and strong balance sheets, could be in for years of bountiful growth even in the face of a less-than-stellar economic climate.

These firms are likely to benefit from an increase in construction and repair projects happening around the world.

Watts Water Technologies (WTS)
Market Value: $722.4 million
2009 Price/Earnings: 13.6
2009 Price/Book: .8
Watts manufactures and sells water-safety and flow-control products to improve water quality and conservation. More than a third of its business comes from overseas, including China, where water infrastructure projects
are booming. Morgan Joseph analyst Richard Paget says the firm’s low debt and $130 million in cash bode well for long-term growth.

ABB (ABB)
Market Value: $31.4 billion
2009 Price/Earnings: 10.2
2009 Price/Book: 2.4
This Swiss electricity giant installs electrical distribution and transmission channels for utility companies. It also supplies the environmental technology needed for wind farms to hook into power grids. More than one-third of ABB’s sales come from Asia, Africa and the Middle East, where demand for power infrastructure is high and growing. And with more than $5 billion in cash, the firm is well equipped to pay its 3 percent dividend, analysts say.

Covanta (CVA)
Market Value: $2.9 billion
2009 Price/Earnings: 21.2
2009 Price/Book: 2.6
Covanta turns municipal governments’ waste into renewable energy and could get a leg up this year from Obama’s planned stimulus package. The firm also invested $17 million in its third waste-to-energy project in China last spring, which should prompt more business. At 21 times future earnings, the stock isn’t cheap, but Legg Mason Mid Cap Core fund manager Brian Angerame says Covanta’s long-term contracts should guarantee steady cash flows to ride out the slowing economy.

Data: Bloomberg