The best infrastructure stocks offer a compelling mix of value and technical upside opportunities
Caterpillar (CAT) valuation is back in line, and is at support
Deere’s (DE) is on solid foundation and is integral to farming and beyond
Cummins (CMI) is essential to build-outs and distribution
U.S. Steel (X) because we can’t build much without steel
Honeywell (HON) offers other perspective than just infrastructure build out
Sempra Energy (SRE) stock position relative to the pandemic is interesting
Industrial Select Sector SPDR Fund (XLI) is the blanket bet on the whole lot
The world has changed quite a bit in the past 15 years. Back then there was a massive growth wave mainly behind the build-out of china. It boasted double digit trends, which fed the thesis for buying industry stocks. The current global situation is less certain, but the world superpowers are still going for it. The percentages are smaller but, there are still opportunities to profit from the best infrastructure stocks now.
The recent correction hit the hottest themes the hardest including this sector. China has recently rekindled its efforts, and the U.S. White House is also trying its best. So in theory this should spruce the equities, but even the best infrastructure stocks are swimming upstream. The problem comes from the Fed’s intent to destroy consumption demand. The outlook still looks favorable, especially from a stock perspective.
After a correction stocks of good companies usually find buyers, so it is worth the effort to compile a list. Ours today has 7 interesting infrastructure stocks, but we must be realistic with our expectations. The CBOE Volatility Index (VIX) is 40% above it s average. This is an indication that even the market makers are uneasy about the immediate future for equities.
Therefore we too must be humble with our conviction levels. Investors would do well only taking partial positions to start. Also a positive opinion on a stock doesn’t mean it’s okay to add to current risk.
Industrial Select Sector SPDR Fund
Source: astudio / Shutterstock.com
Caterpillar (NYSE:CAT) could serve as the poster child for the posse. It deserves to be atop of the list of best infrastructure stocks to own.
Wall Street investors love to trade it very actively, even though its fundamentals are pretty consistent. Its financial metrics are solid, with no flagrant alarming signs. Its growth rate though not exceptional is adequate. It price-to-earnings ratio normalized back into line after this harsh correction. The ‘it’s cheap’ argument is back on the table.
In addition, the sharp drop in the stock price created a rebound opportunities. The last two such corrections resulted in long rebounds of at least 20%. This time could be different, but in the absence of a new problem I can assume it repeats performance. Last year, management even delivered $8 billion in cash from operations. Their balance sheet is healthy enough to not cause a worry even in this rate hike cycle.
According to Yahoo Finance, the experts are mostly in a holding pattern or better. Their average price target is still too high, about 20% above current. This increases the odds of potential negative downgrade headlines. This is avoidable if CAT stock rallies back, as is my thesis. Technically the stock is back into its pivot that has been important since 2018. It is likely to bring out potential buyers.
Source: Deere & Company
If we consider CAT for a list of best infrastructure stocks, then we muse include Deere (NYSE:DE). They both have similar solid financial metrics, so there are no potential internal risks here either. If the world doesn’t stumble, DE stock will do well. My only concern here is its altitude versus the pre-pandemic levels. CAT is closer to its level from 2020, whereas DE is still aloft.
DE stock even after this 30% correction is still 70% above the February 2020 levels. That is a concern but not a deal-breaker. Apple (NASDAQ:AAPL) and Tesla (NASDAQ:TSLA) are almost exactly in similar pickles, so DE is is good company. Luckily the technicals do suggest temporary support going into $300 and $280 per share. If the bulls lose those, they risk falling to $220 per share.
Stock price altitude doesn’t mean worse value. DE’s price-to-earnings ratio is very similar to CAT. Technical setups don’t necessarily tell of an over-value situation. Furthermore, CAT pays a much healthier dividend, which seals its deal of outranking DE on my list. In the end, if the markets are higher then so are these two.
Source: Jonathan Weiss / Shutterstock.com
Cummins (NYSE:CMI) stock like CAT has fallen back into very pivotal zones. CMI after this 33% slide, is finding footing near the 2018 high. This $185 per share level also played an important role in 2019 twice.
Clearly, investors like it so they are likely to defend it one more time. This renders the trade here a technical one. But it has the backing of similarly stable financial metrics as the first two best infrastructure stocks.
CMI stock price-to-earnings ratio is under 14, which is cheap even in absolute term. The income statement shows a healthy net income line, and almost $2.3 billion in cash from operations. Meanwhile and according to Yahoo Finance, most analysts don’t give it the appropriate respect. Only seven of them out of 24 rate it as a BUY. This is potential upside source of upgrade headlines.
While investors wait, they will enjoy a nice 3% dividend. Demand on its products will not be an issue. They make simple machines that are workhorses powering many industries. I own one already and it has never failed me. Diesel motors still drive the world from build-out to distribution of all goods and services. In addition they have the natural gas business side to further expand their scope.
U.S. Steel (X)
Unlike the others so far, U.S. Steel (NYSE:X) is 80% below its all time highs. So this best infrastructure stock hasn’t come close to recovering from that disaster. Arguably this is a new world so looking back that far is useless.
The current technical situation is on more solid footing. This last correction brought X stock to its 2022 low. Below that, it has back up support from last year’s base. So the bulls can have a legitimate shot at stabilizing the slide now.
If the indices continue their rally this week, X stock could start its own ascent. Depending on the breadth of this bullish wave, the X stock has about 25% of potential upside. The experts that were screaming disaster two weeks ago, suddenly are talking of upside market potential.
I suggest we ignore them and trade the stock levels at hand. This one here has support at $18 per share, and more $2 lower. Zacks Equity Research ranks the steel sector 60th of 250.
Source: josefkubes / Shutterstock.com
Honeywell’s (NYSE:HON) 25 price-to-earnings ratio may seem a bit expensive. But this is not enough to knock it off my list best infrastructure stocks.
The other metrics are just as bullet-proof as the best of them. They too created $6 billion in cash from operations and continue to run a profit. They have survived extremely tough conditions these last few years, so management has proven its worth.
Moreover, they continue to move forward with the current trends. They are even serving what’s coming next like with the ESG investment theme. They recently announced Carbon and energy management solutions. Saving the planet is an important global goal and every bit helps.
Honeywell also pays a dividend to rewards its owners through thick and thin. They have increased the payout amount for at least 12 years. This is an important nuance during increasing rate environments.
Sempra Energy (SRE)
Source: Michael Vi / Shutterstock.com
Sempra Energy (NYSE:SRE) has an enormous price-to-earnings ratio, so value is not its best asset. But at least it pays a hefty 3% dividend. Also its stock shows a relative strength to other members of this best list of infrastructure stocks. So what it lacks in affordability it makes up for it with stock friskiness.
If we were to consider value from the perspective of pre and post pandemic levels, SRE could be cheap. It is below the 2020 levels so it has less downside potential from excessive fat. It has strong support levels starting at $135 per share. And more of it through $125 and below. This should give the fans of SRE stock the courage to defend it during this correction.
Although there is nothing terribly exciting about the company, its stock is in the hands of the bulls. Long term it has been setting a series of higher highs and higher lows without interruptions. The only major dip happened from the global shut down, but that hit everyone as hard. There are no apparent intrinsic problems, so it will follow the indices.
Industrial Select Sector SPDR Fund (XLI)
Source: Eviart / Shutterstock.com
There are other companies worthy of pointing out like Crown Castle (NYSE:CCI) for communication. But some investors prefer to not deploy risk into single stocks. For them a good choice would be the Industrial Select Sector SPDR Fund (NYSEARCA:XLI). With that, they could then place a blanket bet on a whole bunch of this sector’s giants.
The top 10 of the XLI make up 40% of the total, and it includes several of our picks today. Even thought the ETF is for ‘industrials,’ many of its members belong on the list of best infrastructure stocks. There is enough of them in its make up to warrant consideration here. And the XLI offers a side benefit of diversification.
Regardless of which ones we pick, most likely they will move in tandem. There occasional are single stock headlines, but for the large part they rise and fall together. Last week the XLI stock bounced off its 2020 crash sight, so it is likely to start finding footing.
However, there is a small gap that extends to $82 per share. Although not every gap fills, this one is close enough to potentially become a magnet. A bit of caution for this week from that perspective would be smart.
XLI inherits its fundamentals from its components. These are strong enough stocks that the ETF also pays a 1.6% dividend.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.