Over the weekend, I talked to a lot of people about markets and the economy and what their thoughts were as we approached year end. I spoke to a lot of people who were planning get all in on infrastructure stocks because of the new administration's plan to spend $1 billion on rebuilding roads, bridges, airports, water and electrical system and other parts of our nation's backbone. The thing that has me concerned is that most of these infrastructure investors were just beginning to buy the engineering and construction stocks that might benefit from the badly needed spending, and are planning to put more money to work in the near future. The media has been pushing the idea of buying some of these companies as well, and I have to wonder just what they are all thinking.
I have talked about infrastructure stocks many time in the past, and I believe that this sector could well deliver some 100 to 1 winners over the very long run. I have owned many of them in years past and hoped to own a bunch of them again in the future. However, buying them at today's valuations makes very little sense. The time to have been a buyer of these companies was several years ago, when they were trading with single-digit EV/EBIT ratios and everyone had decided that there would never again be enough economic growth or political will to spend the money on even badly needed upgrades. Buying them today looks like a recipe for long-term disaster, in my opinion.
I like Mr. Trump's plan. I wish we had initiated it back in 2009 instead of instituting the bailout plan our wise leaders eventually chose. We do need to upgrade our infrastructure, and the type of public-private partnerships he is suggesting would indeed create millions of jobs. However, he is going to face stiff opposition from Democrats and perhaps even some in his party, as the majority of the funding is in tax breaks for contractors and not a direct investment in projects. Opponents are already saying that one big drawback are projects that do not produce revenue like road and bridge repair or municipal water system upgrades will get little help from his proposal, as they do not create the type of income that will attract private investors. He cannot wave a magic wand to pass the program, and I do not think this proposal will be one of those that gets done in the first 100, or even 365 days of the new administration.
The stocks are trading like the money will start flowing by the close of business today. Look at Granite Construction (GVA) , a major highway road and bridges construction company. In the past month, the stock has appreciated by 32% and currently has an EV/EBIT ratio of almost 16. I like this company and have owned it in the past, but I bought the stock when it traded below book value and had an EV/EBIT ratio of last than 7x. That worked out pretty well for me, but at the current optimistic valuation, I would not have high expectations for those who were buyers at this level.
Take a look at Tutor Perini (TPC) , another infrastructure engineering and construction company that works on big projects. At the end of September, the company had an EV/EBIT ratio of less than 8x and might be considered a bargain stock. Over the past month, the stock has risen by about 37%, and the ratio is now about 11x. That's not as ridiculous as some of its competitors, but it is not a bargain either.
It was just about six weeks ago that Carson Block of Muddy Waters told the Ira Sohn Conference in New York to short the stock at prices lower than what it trades today because of the expected financing problems. He told the attendees at the event that "We really question how much more runway the banks are willing to give Tutor Perini. We think there is a real risk the banks pull their revolver. This is a business that has so little liquidity it doesn't really take much to push it over the edge."
This month, investors are buying as fast as they can, because of a proposal they think the new administration might be able to ram through Congress.
Before you join the infrastructure party, check the valuation of the companies you are buying. You can overpay for the very best ideas. I plan to sit back and wait for the first big legislative stumble that sends the stocks down to a reasonable valuation, and then be a very picky buyer of those that are bargains.