Travel through any urban area and you will see and feel the need to improve our crumbling roads, bridges and tunnels. Take a wandering drive in rural or remote regions and you will “enjoy” the forced quietude of digital disconnection from the networked world. All can agree that the entire infrastructure of the United States is in dire shape and needs repairs, improvements and new construction. Unfortunately, as with all deferred maintenance, this massive renovation will be awfully expensive. And as it will require federal spending, any infrastructure legislation must be passed by Congress. When the Infrastructure Bill does pass, we identified the stocks that stand to benefit the most.
The Senate is deadlocked along party lines with 50 Democrats and 50 Republicans in office after the 2020 elections. Much discussed in the media, and with the majority of senators marching along strict party and ideological lines, this current Congress sits in gridlock, impeding the passage of laws. While political impasses and stalemates have become more frequent over the last few decades, the current Congress is on pace – albeit in a small sample size – to be one of the least effective collection of legislators in a long time:
Decade Average Laws Passed Per Year
2020’s 89* (projected)
Since 2005, Congress has averaged a dismal 21% approval rating, although this “soared” back to the historical norm of only 30% in March due to the passage of the $1.9 trillion Stimulus Bill. Our politicians clearly need to accomplish something soon to prove to voters their worth and – more importantly to each member of Congress – to stay in office.
The Biden administration also desires to demonstrate to the American public their ability to govern. While credited with enacting the Stimulus Bill, that was a reaction to the pandemic emergency and not the transformative legislation the President or Democratic leadership are seeking. The potential Infrastructure Bill appears to be the best chance for both the administration and Congress to attain their goals.
Presently, there are two versions of possible infrastructure legislation: a $1.2 trillion bipartisan sponsored plan and a $3.5 trillion Democratic plan. The bipartisan plan primarily focuses upon tangible components: roads, bridges, railways, airports, power grids and broadband.
The Democrat plan concentrates mostly upon intangible factors, such as Medicare, climate change, immigration, and childcare policies and expansions. There remain concerns regarding how the expenditure increases in both plans will be funded, especially with government debt already at historic levels with recent spending after the 2008 Financial Crisis and the recent pandemic.
Government Debt (in $millions)
Neither plan’s sponsors have yet to announce enough specific revenue methods or agreeable tax increases to pay for these programs. But the members of Congress (actually their staffs) are adept at finding funds when needed. And it those fiscal details that will enable the necessary compromises required to enact law.
Besides each plan’s internal framework and priorities, these two also differ by the path they are following to become law. The bipartisan bill would require the usual minimum 60 votes in the Senate to pass, which may be difficult in the current deadlocked Senate. The Democrat sponsored bill will be attempted to pass through a procedure known as reconciliation. This can be accomplished by a simple one vote majority (assuming 50-50 vote along party lines, Vice President Harris would be the deciding vote). There can be no defections of centrist Democrats, which also poses a problem.
Reconciliation is a congressional budgetary process that bypasses the 60-vote majority usually necessary to enact laws. It allows Congress to add specific laws to an existing budget within certain guidelines. The new laws must only consider spending, revenues or debt limit changes. This was created in 1974 to ensure that the federal government would not withhold obligated funds or payments, and to try and reduce deficits. Yet, reconciliation has recently – like all of government – become increasingly politicized and utilized to promote the policies of the majority party. However, with a 50-50 Senate, even reconciliation can be difficult.
Under reconciliation, each specific congressional committee (Transportation, HEW, Finance, Homeland Security, Intelligence, etc.) are provided with a revised budget total and must reverse engineer (cut costs and/or increase revenues) their budget to meet the new monetary target. This requires detailed line-item accounting, with defined sources of revenue and implementation policies. Once submitted, the new budget resolution will be reviewed by the Parliamentarian of the Senate. The Parliamentarian is appointed to decide what can and can not be included in the new budget. The position was created to ensure that only fiscal expenditures with clear and reasonable funding sources and spending guidelines are included.
The thought process behind this procedure is to assure that 1) the yearly task of running the government is not interrupted by political maneuvering, and 2) non-fiscal, society-impacting legislation follows the full and necessary process to become law.
As stated earlier, both Congress and the Biden administration want to demonstrate to the American public – their voters – that they can govern. They must accomplish something. And as their focus has been a sweeping infrastructure bill, to not pass a semblance of one would be considered by the public and the media as a massive failure. Due to the precarious deadlock situation in the Senate and the problematic nature (expenditure size and potentially over-reaching scope considered by the Parliamentarian) of the $3.5 trillion Democrat sponsored legislation, a version of the $1.2 trillion bipartisan plan seems most likely to pass.
Investors should concentrate on those sectors and companies that will see actual government spending increases: renewable energy, domestic semiconductor manufacturers, plus the engineering, construction, heavy machinery and electricity transmission sectors necessary to build roads, bridges, railroads, seaports, airports, tunnels and transmission lines.
As the world tries to wean itself off fossil fuels, renewable energy sectors will continue to be emphasized by all governments. Hydrogen stocks, solar stocks, and nuclear energy stocks are poised to thrive. Market leaders in these sectors are NextEra (NEE), Sunrun (RUN), Sunnova (NOVA), Fluor (FLR), Southern (SO) and BWX Technologies (BWXT).
As the current supply chain disruptions have shown, a vast number of industries are reliant upon semiconductors imbedded within their products. Due to the impact on production, as well as the military and strategic implications, there will be government sponsored initiatives to increase domestic semiconductor chip production. Three U.S. based companies with broad and specialized capabilities that should benefit are Intel (INTC), Nvidia (NVDA) and Micron Technologies (MU).
The obvious play in any infrastructure legislation are those companies that build and restore the nations roads, railroads and transmission lines. There are a number of quality companies in the engineering and construction, heavy machinery and transmission sectors that offer attractive valuation, solid earnings history, and strong balance sheets.
E & C stocks that investors should consider are Sterling Construction (STRL), Primoris Services (PRIM) and Tutor Perini (TPC). Roads and bridges can not be built without Heavy Machinery. Two market leading stocks are Caterpillar (CAT) and Oshkosh Corporation (OSK). And broadband can not reach the rural area without an increase in the quantity and quality of electricity transmission lines. The largest manufacturer in that sector is Quanta Services (PWR). Investment in a basket of these quality companies should benefit from the eventual passage of the Infrastructure Bill.
Passage of infrastructure legislation is inevitable. Despite numerous media reports and political grandstanding by various politicians, the majority of Congress and the administration are aware of the ramifications – especially their potential loss of job security – of failure to compromise.
The bipartisan plan, already endorsed by the President, will be the approximate framework for any bill. And the stocks that will benefit most from the increased spending will be in the engineering and construction, heavy machinery, renewable energy, domestic semiconductor and electric transmission sectors.