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All Eyes on Infrastructure Stocks as Biden Proposes an Unprecedented $2tn Plan

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Infrastructure has been a sticky subject for the major US parties over the past few years. Textbooks tell us that it is a bipartisan policy that receives cheers from both sides of the aisle. But, in reality, the most ambitious bills have historically stalled, while traditional American infrastructure is in a state of disrepair.

Market Commentary

By Acuity | May 11, 2021

Just to get a sense of what we mean here, the Volker Institute’s 2019 estimate of deferred repairs to US infrastructure stood at over $1 trillion. Infrastructure is an important pillar on which economic output stands, and the US cannot afford to falter on spending on this while China catapults past.

Emphasising this, the Biden administration proposed a $2 trillion investment plan at the end of March 2021. The plan has stretched the definition of infrastructure to include spending on sectors like housing, elderly care, and electric vehicles. This expanded definition has been the subject of much consternation for the Republicans, who proposed their own $568 billion plan that increases road and bridge construction and maintenance allocation. The GOP plan guts funding for EVs, housing and elderly care.

The Biden bill also plans on rolling back the Trump era corporate tax cuts, which Republicans vehemently oppose. President Biden, however, has been a skilled bipartisan negotiator in the past and the final bill is likely to lie in the middle ground.

 

GOP vs Biden Infrastructure Plan: Allocation in Billions

Category Republican Biden
Roads and Bridges $299 $115
Broadband $65 $100
Airports $44 $25
Public Transit $61 $85
Rail $20 $80
Water Projects $49 $111
Housing and Elderly Care $0 $400
Electric Vehicles $0 $174

 

To examine the possible effects on infrastructure stocks, we examine the physical infrastructure aspects of the plans and the stocks that could benefit.

Transport Infrastructure

Roads, Bridges, Railroads and Airports

The Biden package aims to modernise over 20,000 roads and restore over 10,00 bridges. The GOP plan is even more ambitious in this traditional infrastructure sector, with it being the main focus (highest spend). So, wherever a middle ground bill lies, construction companies will see an increase in demand and an appreciation in their valuations. Stocks that are likely to record the most gains are the ones with cross-sectoral demand and economies of scale. Vulcan Materials (NYSE: VMC) is a case in point, being the largest US producer of construction aggregate mixes used in cement and asphalt. The same logic applies to steel demand, and steel producers could benefit. We’d keep our eyes on companies like Nucor (NYSE: NUE), the largest steel producer in North America.

As can be seen from the Acuity Trading Dashboard, market sentiment seems to be in a wait-and-watch mode, much like the analyst recommendations for infrastructure stocks.

Similarly, construction equipment manufacturers, such as Caterpillar (NYSE: CAT) and Oshkosh (NYSE: OSK), are well positioned for an increase in orders. Oshkosh also sells many of their construction vehicle in electric models, fitting in with Biden’s plan of electrifying the US fleet and the President’s broader green energy goals. Railroad stocks, like Canadian Pacific Railway (NYSE: CP) could also be interesting, benefiting from logistics for construction material and better connectivity under both plans.

Electric Vehicles

The Biden administration is passionate about promoting EVs through manufacturer subsidies, tax credits, and an ambitious installation of over 500,000 charging stations. By contrast, the Republicans want zero EV funding and propose levying more taxes on these vehicles. This will be a challenging sector for the parties to find a middle ground. If EV funding is approved, we may see a further appreciation in the now household EV name, Tesla (NASDAQ: TSLA). Investors already saw a wild ride in 2020, with the stock gaining more than 740%. With the company poised to take its share in the global EV market, which seems headed for a major inflection in demand, Wall Street analyst ratings mostly range from Buy to Hold.

Funding for charging stations will also help established station builders like ChargePoint Holdings (NYSE: CHPT) and Blink Charging (NASDAQ: BLNK).

Commodity Infrastructure

Water Projects

The Republicans want less than half the funding proposed by the Biden administration for American water infrastructure. This leg of Biden’s plan spans several segments of the utility sector, like water treatment and upgrading drinking, waste, and stormwater lines. Investors could also watch utility ETFs like Invesco Water Resources (NASDAQ: PHO).

Renewable Energy

In the past, the Republicans have not been overly enthusiastic about funding renewable energy initiatives, and they are unlikely to budge on many of Biden’s green energy plans. The big picture for the administration is a 50% reduction in emissions by 2030. The Republicans are especially eager to debate the elimination of billions of dollars of subsidies and tax credits for fossil fuel industries. So, this aspect of Biden’s plan is likely to be highly contentious.

If Biden succeeds, even to a small extent, we could see considerable funds flowing into clean energy. We will keep an eye on Gevo (NASDAQ: GEVO), a small-cap company with commercial renewable chemicals and biofuels. It may also be a good idea to add battery stocks like Tesla and solar energy stocks such as Enphase Energy (NASDAQ: ENPH) and SunPower Corp (NASDAQ: SPWR) to their watchlist.

Data Infrastructure

Broadband

The Biden administration is keen to have a symmetric and high-speed broadband system by replacing existing copper lines with higher speed fibre optic cables. But before you think Comcast (NASDAQ: CMCSA) and AT&T (NYSE: T), remember that these companies are hesitant to take on these initiatives due to the considerable costs involved. This aspect of the plan favours government-tied or non-profit institutions. In fact, leading ISPs may face losses if government funding is approved.

Meanwhile, the sentiment for Comcast remains positive, backed by its internet subscriber growth, which has been buoyed by increased media consumption and work-from-home trends.

Semiconductors

Semiconductors have grown to be strategically important, especially in light of the ongoing supply crisis. Meanwhile, America’s share of global semiconductor manufacturing has shrunk from 37% in the 1990s to just 12%. Hopefully, this will be a no-brainer for both sides of the aisle and the funding will come through. Semiconductor fabricator Intel (NASDAQ: INTC) will be an interesting play, especially with its plans to invest in two foundries in Arizona.

Although market sentiment for Texas Instruments (NASDAQ: TXN) and Applied Materials (NASDAQ: AMAT) is hugely negative right now, as per the Acuity Trading Dashboard, these stocks may attract significant investor interest if the semiconductor funding comes through.

Finally, the extent to which infrastructure stocks appreciate will depend on the shape of the final bill. However, what is certain is that this is likely to be the most impactful and broad infrastructure bill in recent history.



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