Building a Position in Jacobs

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My insider-based system has had me committing more capital to this market over the past two weeks. My commitment is being made grudgingly, however.

It's not just that I don't buy into the concept that any deus ex Obama can save us from more serious fallout from the financial crisis. I'm just not convinced yet that the recent rally is proof that fundamentals are finally starting to matter again. I certainly hope that's the case, but I can't shake the feeling that all the recent bullish price action could just as easily be attributed to stocks merely bouncing technically off of years-old supports.

Still, stocks have traded impressively well recently in the face of the sort of awful economic news that I expect to continue. That's a definite positive. As a result, indices have managed to close just above important technical resistance levels. If this test of resistance proves successful, an additional double-digit percentage surge is technically possible. I certainly wouldn't want to miss that sort of move. But my fear is greater than my greed, and staying nimble is my mantra in any rally we are fortunate enough to muster.

One of the stocks I've bought into recently is Jacobs Engineering. Jacobs specializes in technical, professional and construction services. It's a 60-year-old global firm with $6.4 billion in market capitalization. The firm's shares have been on fire since December, lit up with most other infrastructure-related shares on excitement regarding President-Elect Obama's stimulus plans.

But Jacobs is still at nearly half the price it traded for at its peak. After hitting a high of $98 in mid-May of last year, the stock dropped over 70%, to just $26 in late November. Insiders, who had traded little in the open market during the stock's months of weakness, suddenly pounced. In all, November saw nine vice presidents buying nearly $950,000 worth of Jacobs' shares for between $27.08 and $37.46 each.

Jacobs' recently surging shares have already proven insiders prescient, but I still believe the stock is a worthwhile choice with which to play the present rally. I like the firm's solid balance sheet, geographical diversity and years of solid revenue growth. Over the past four years, sales have increased between 14.2% and 32.8%. The high end of Jacobs' top-line growth came just last fiscal year.

Granted, revenue is expected to increase 16% or so in the coming year. And after earnings per share soared 44% last year, EPS is only expected to increase 10%, to $3.73, this year. But at least it's growth. That's more than many firms can expect in 2009.

After its recent surge, Jacobs Engineering is still just trading at 14 times the average estimate for 2009. That is hardly dirt-cheap compared with other beaten-down firms, but it is historically low for this established firm. Even so, given my concern that this recent rally is just another one of the bear-market variety, I'll be paying more attention than usual to how JEC acts if and when it trades up to its next logical level of resistance, at around $65. If I'm fortunate enough to get such a short-term gain, I'd be hard pressed not to bank it.

Shares of Jacobs are seen as something of an infrastructure play. Although only 8.3% of the firm's revenue was specifically categorized as being from "infrastructure" last year, the U.S. government is Jacobs' biggest customer and was the source of 16.8% of its sales in fiscal 2008.

So new stimulus plans from the government involving infrastructure certainly can't hurt Jacobs' prospects. Any government incentives to build out energy infrastructure (perhaps as a way to move the U.S. more to domestic natural gas instead of foreign oil where possible) would be particularly welcome for Jacobs. Nearly 43% of the firm's business comes from projects relating to oil and gas.

But despite the present bullish sentiment on all infrastructure plays, I don't believe it's smart to rely too much on stimulus packages to keep infrastructure stocks soaring.

"It seems like a lot of the engineering and construction stocks have run up on the infrastructure potential," points out Richard S. Paget, an industry analyst with Morgan Joseph. "But I think many investors are overestimating the impact. Federal spending usually ends up being less than people assume, and it takes longer to get spent than they expect."

Well put. It's a point that doesn't seem lost on industry insiders either. I originally found Jacobs as I was screening for insider activity in infrastructure-related industries. Much to my surprise, Jacobs was one of the few firms with an obviously bullish insider profile in the group.

Despite also having shares that were crushed in recent months, insiders at other infrastructure plays like Fluor, Trinity Industries, Granite Construction and Sterling Construction chose to sit on their wallets for the most part as their stock's cratered. Worse, insiders at Granite and Sterling are actually already selling into their shares' surges.

This isn't the sort of insider action I'd expect if the economic reality for infrastructure plays was going to live up to the present hype. It does, however, back my opinion that Jacobs Engineering will likely end up being more of a trade than longer-term position right now. It also indicates the potential for a long-short pairing.

This article was written by Jonathan Moreland, whose newsletter, "TheStreet.com InsiderInsights," parses mounds of data on insider trades to find investable ideas.

Know what you own: Other infrastructure stocks include Foster Wheeler and ABB.