These 2 stocks could get a big boost from a possible infrastructure proposal.
Stocks surged on Tuesday on reports that the Trump administration is working on a nearly $1 trillion infrastructure spending proposal as part of efforts to reignite the economy following the shutdowns to stem the spread of the coronavirus pandemic.
The plan reportedly includes traditional infrastructure work like roads and bridges, as well as 5G wireless infrastructure and rural broadband. And while it’s unclear how the administration’s proposal would authorize spending or how it would pay for the programs, it’s possible that the infrastructure measures being drafted could be rolled into the next round of pandemic relief spending.
The IFRA iShares U.S. Infrastructure ETF gained as much as 18% on the news, though the ETF —which tracks 135 stocks in the sector—is still down -16.5% year-to-date.
While no official announcements have been made on the plan, “at some point, infrastructure has to get done,” said Federated Hermes strategist Steve Chiavarone.
“It just makes too much sense,” Chiavarone said, adding that it’s “almost impossible to tell” whether a plan would come to fruition before or after the November presidential election.
Still, Chiavarone said watching “domestically-focused industrials” is a smart move now.
“We think that the next great emerging market is the center of the United States,” the strategist said. “We’ve got space. We’ve got an educated workforce. We have low taxes. I think there’s a real push to bring manufacturing back to the United States. You’ve got cheap energy.”
“For those reasons, we think that an infrastructure plan makes all the sense because it makes the United States an even more attractive place to invest, and we expect that policymakers are going to push in that direction” Chiavarone added. “So, we really do like anything that’s domestically focused in terms of their revenue exposure because we think the United States is going to be the place to invest in the years to come.”
As for what stocks to keep an eye on, Ascent Wealth Partners managing director Todd Gordon says there are two stock that look attractive now: Deere & Co (NYSE: DE) and Cummins (NYSE: CMI).
Deere’s “chart has been fairly range-bound,” Gordon noted. “If we can kind of pop through the $180 [level], you might start to get a collision of technicals starting to meet up with a strong fundamental story up.”
Gordon argued that the heavy-duty machinery and industrial equipment manufacturer has some notable strengths and is an essential business amid the pandemic given its exposure to the agricultural sector.
While uncertainty is plaguing U.S. farmers as the pandemic is impacting demand and disrupting supply channels, Deere is seeing strong demand for some of its more technologically advanced products.
The company and its customers are betting on “precision agriculture,” to achieve the next level in efficiency gains in crop production. The new machines come with massive computers that connect with systems that can plant, spray, fertilize, and harvest all at optimal times while keeping waste to a minimum.
“The feature-rich, latest-and-greatest machines do a lot to improve farmers’ revenues, save money, and boost yield,” said Matt Arnold, an analyst with Edward Jones. “There’s so much return on the investment that we’re seeing adoption even though it’s not a good time to give up sizable pieces of capital.”
As for truck engine manufacturer Cummins, Gordon calls it more of “a secondary play on the infrastructure bill.”
“In the world of truck engines, Cummins is like a cult stock,” Gordon said. “It’s a cyclical name. … It’s not a value, low-volatility [stock]. There’s been a lot of ups and downs here.”
However, if the infrastructure plan becomes reality, Cummins should see a boost to its business and its stock.
“They’ve grown market share,” Gordon added. “They have a strong balance sheet, very little debt. It’s a progressive company, to speak to the current times. They’ve got a good reputation as a good social corporate actor.”