Build a Better System

 | Aug 29, 2011 | 3:30 PM EDT
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Today I am writing from a chair wedged between the self-help books and the graphic novels sections of the Barnes & Noble (BKS) in Annapolis. In the aftermath of Hurricane Irene, every Starbucks (SBUX) and other establishment is jammed with folks trying to recharge and get online. Although the storm did not live up to the hype, electrical outages are widespread in Maryland, so electricity and connectivity are at a premium.

I am, of course, relieved the storm was not the wide-spread disaster that was predicted and I am definitely not among those who think we should not have taken extreme precautions last week. I would rather see every storm overhyped and run out of steam than have one be ignored by a major city and lead to a Katrina situation again.

However, this storm does cast light onto a glaring problem in the U.S. that is going to cost a lot of money and be very profitable for companies that work on the solutions. Irene has left us with stark reminders that our infrastructure in this country needs an upgrade and needs it now. I am told that my power will not be back on Wednesday. I live 45 minutes form the nation's capital in a fairly well populated area. People in parts of New Jersey are being told it will be sometime next week before they can expect power to be restored. The truth is this was not a 100-year storm and electrical and water systems should not be seeing the type of strain they are currently enduring in the storms aftermath.

In addition, the way our homes and businesses connect to the grid has developed over decades and is at best a patchwork system. Somehow, I ended up in a grid cell that has just 55 homes connecting it to the main grid. I live on a 5 by 8-mile island and there are dozens of cells of varying sizes connecting to the main power grid. That's a little ridiculous. In addition to the inconvenience caused by storms, a patchwork electrical grid strikes me as a potential national security problem.

Nor should we have seen the concerns going into the storm for our roads and bridges. The Chesapeake Bay Bridge was closed when winds exceeded 55 miles per hour. Bridges in New York were closed with wind speeds far lower than that. While I understand the safety concerns and keeping folks off the roads, the concerns about the structural integrity of the bridges is a little disturbing. We get nor'easters in the winter than blow at 50 miles an hour for days at a time, so bridges should be rebuilt or repaired to handle inclement weather that occurs in the area.

The small bank Trade of the Decade is still my favorite investing theme for the years ahead. Rebuilding America, a "have to", not a "want to" is now my second favorite. It has taken three years for small banks to begin to get to levels where you could do more than tiptoe into the trade and infrastructures tocks may take as long to develop. The economy is still weak and most states and municipalities do not have the money to spend on the enormous t projects that were done. I wish we had spent the bailout money on an Eisenhower level rebuild of the electrical grid and highways instead of propping up the big banks. That could still happen in the near future. Eventually, we will simply have no choice. The companies that do this type of work will eventually be a bubble group as the money pours in their direction. Those who buy them when they are on sale will make enormous amounts of money over the next ten years.

Many of the stocks have already traded to levels where long-term buyers might be interested in starting to accumulate them. I bought share of Granite Construction (GVA) during the selloff earlier this month as the stock traded below tangible books value. The firm's concentration on large scale civil infrastructure projects hurts it right now but should turn it into a growth powerhouse in the future. I think long-term investors can also start to buy Mueller Water (MWA) here as well.

Investors should be developing a list of infrastructure stocks and calculating the level where they become safe and cheap. As economic difficulties continue to pressure revenues and earnings, many of these companies will get cheap enough to buy their shares. The time to accumulate them is when they are out of favor and before municipal finances begin to recover and allow the necessary dollars to flow into infrastructure projects.



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