Watch These 3 Stocks if Europe Raises Infrastructure Spending

 | Aug 22, 2016 | 10:00 AM EDT
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A German, a Frenchman and an Italian walk into a bar ... no, actually they meet on an isolated island to discuss the departure of another isolated island from the world's biggest trading bloc.

German chancellor Angela Merkel, French president Francois Hollande and Italian Prime Minister Matteo Renzi are meeting today on the small Italian island of Ventotene to talk about the fate of the European Union after the vote by the U.K. to leave.

Both Hollande and Renzi will probably try to persuade Merkel to open the purse strings on the fiscal front, as it looks like the European Central Bank's bazooka is beginning to misfire. The ECB is buying government and corporate bonds and has pushed interest rates on money that banks deposit with it into negative territory, but more is needed to boost the eurozone's economy.

In the second quarter, economic growth in the single currency area slowed down. According to data released at the end of last month, growth halved to just 0.3% from the first quarter's 0.6% expansion. The slowdown was pretty much expected, but it still means that more stimulus is necessary.

Hollande and Renzi are likely to argue that because of prolonged unemployment and depressed growth, extremist parties are gaining ground in Europe. Right on the heels of the U.K.'s vote to leave, this is dangerous, and government spending could counteract this danger by creating jobs in the public sector.

For this, rigid EU rules on government spending should be relaxed. This could be achieved if Merkel gets on board, as governments could justify increased spending on infrastructure as a necessary investment for the future (and they would not be wide of the mark).

Slowly, like everything in Europe, opinions seem to be converging towards such a decision. And if EU governments, scared by the Brexit vote, decide to increase spending on infrastructure, investors should begin looking at companies that could benefit from this.

ABB (ABB) -- the Swedish-Swiss company is one of the largest engineering conglomerates in the world. In Europe, you rarely walk past an infrastructure construction site (either rail or road) without seeing its logo. Its stock is traded on the Zűrich and Stockholm stock exchanges as well as having ADRs on the New York Stock Exchange.

It certainly isn't cheap, trading at a PE of around 29x. Earnings beat expectations, coming in at $0.35 per share in the second quarter vs. forecasts of $0.26. However, its revenue fell by 5% year on year to $8.68 billion. This was below analyst estimates of $8.83 billion.

CEO Ulrich Spiesshofer said the company achieved bottom line performance by cutting costs and that it improved operational margin for the seventh consecutive quarter and significantly increased cash flow. Investors could take heart from the company's revamping process, as it means it would be in very good position if spending on infrastructure by European governments were to pick up.

ThyssenKrupp (TYEKF) -- Germany's steelmaker is in talks with India's Tata Steel to merge their European operations to make them more efficient. This, combined with a revival of Europe's infrastructure spending that would boost demand for steel, bodes well for ThyseenKrupp's shares.

Year to date, the stock has gained more than 24% as commodity prices recovered and the European economy seemed to rise out of the doldrums. Although some analysts are skeptical on the prospect of its shares going forward, any decision by governments to invest in infrastructure would help the company. That's because besides steel-making, ThyssenKrupp also manufactures and supplies components for the construction and engineering sectors.

Luxfer (LXFR) -- This is a tricky one -- risky but tempting. Year to date, the stock of this U.K.-based materials technology company is up 8%, but it is trading on a trailing 12 months PE of under 10x, which is a rare bargain valuation these days. It is true that its revenue was 9.6% lower year on year in the second quarter, at $111 million, but it managed to more than double its net income to $6.7 million.

One word of caution on this one would be the fact that it is based in the U.K. While the weakness of the pound could help it in the shorter term by making its exports more competitive, in the longer term the way it will take advantage of increased European infrastructure spending will depend on negotiations. However, for the next two years at least, it has a fighting chance, as the British government has still to make the official request to leave the EU.

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