Infrastructure Has a Shaky Foundation

 | May 21, 2017 | 10:00 AM EDT
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(This commentary originally appeared on Real Money Pro on Friday. Click here to learn about this dynamic market information service for active traders.)

Wednesday saw the biggest market declines so far in 2017, as the evolving mess and kabuki theatre between Washington and the media seriously eroded the chances that any of the President's agenda gets enacted.

Stocks sold off as investors lowered their views on the likelihood that tax and regulatory reforms moving through congress would turn into actual legislation in 2017 -- or at all. Infrastructure stocks like United Rentals (URI) and Vulcan Materials (VMC) took some big hits on Wednesday, as it now seems extremely unlikely that an anticipated infrastructure bill will see the light of day this year.

I have been writing throughout 2017 on how the 'yuge' post-election rallies in many of these stocks, which took many names up 50% or 60% after the November election, would turn out to be vastly overdone. Investors have started to realize this -- and United Rentals, for one, is down some 20% so far in the second quarter.

I continue to underweight this sector -- with some exceptions. One is Great Lake Dredge & Dock (GLDD) , which is down 10% this week as it has been lumped in with the other infrastructure stocks. This is unwarranted. First, the stock really never got much of a post-election bounce. More importantly, this is more of a turnaround story based improving margins and expanding EBITDA once its massive new dredge ship "Ellis Island" comes on line, which should happen soon. This means it will stop being a cost center and will start contributing significantly to increasing EBITDA. The company is also well positioned to take advantage of expanding dredging opportunities, thanks to the recent renovations of the Panama Canal that now let much bigger ships through that commercial artery. Myriad U.S. ports need to be expanded as a result. I added a few shares to this dredging company on this week's downturn.

What is happening in D.C. also does not affect my view of the home builders, which have done well in 2017 to date, but still are the second largest allocation in my portfolio. Housing starts have been under long-term trend for a decade, so should continue the long, slow recovery that began in recent years. Job growth remains solid -- and despite the rally in mortgage rates since the election, they remain historically low.

Bank of America's (BAC) CEO came out this week in favor of lowering standard down payments on new homes from 20% to 10%. This would not increase risk much, but would boost the home-buying market significantly. We will see if this trial balloon gets any air.

I continue to hold stakes in the major home builders, like Toll Brothers (TOL) and Lennar (LEN) , which sport reasonable valuations, given that I think the housing market will be on the mend for years. I also continue to hold and like the small home builders. Names I have mentioned often on these pages, like LGI Homes (LGIH) , Taylor Morrison Home  (TMHC) and William Lyon Homes (WLH) , remain well-positioned to benefit from the housing market incrementally moving back to its long-term trendline.

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