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Heavy Construction Stocks To Watch In '09

Posted: Dec 26, 2008 09:56 AM by Ryan Freund

Tickers in this Article: STRL, MDR, PCR, GVA, FLR

Although 2009 is shaping up to be another terrible year for the stock market, there is one industry that is offering a glimmer of hope to beleaguered investors: heavy construction. With the highest unemployment rate of any industry - 10.9% in October, the construction industry certainly doesn't seem to be on the verge of a breakout, but several important factors suggest otherwise.

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Our Infrastructure Is in Shambles
Our public infrastructure, including roads, bridges, highways, etc., is in a sad state of disrepair and suffers from local, state, and federal government neglect. According to a 2008 study by The Road Information Program (TRIP), 33% of

America

's major roads are in poor or mediocre condition.

25% of America's bridges are structurally deficient or functionally obsolete.
36% of America's major urban highways are congested.
Roadway conditions are a significant factor in approximately one-third of traffic fatalities.

So it's apparent that the need for repairs is there, but need alone doesn't translate into actual work for construction companies. Someone needs to pay for these repairs, and that's where the government comes in.

The New ‘New Deal'
In a move reminiscent of Franklin D. Roosevelt's New Deal, president-elect Barack Obama is contemplating funding more than $136 billion in infrastructure projects submitted by state governors. Such a move would boost employment, raise consumer purchasing power, and, flood the construction market with projects. While it is always a possibility that funding falls through, the fact that the Obama administration is already asking states to have projects ready is certainly a good sign. (To learn more about investments in this sector, read Build Your Portfolio With Infrastructure Investments.)

Heavy Construction Stocks to Watch

Company

Market Capitalization

Fluor Corp
(NYSE:FLR)

$8.15B

McDermott
(NYSE:MDR)

$2.10B

Granite Construction
(NYSE:GVA)

$1.69B

Perini Corp
(NYSE:CR)

$944M

Sterling Construction
(Nasdaq:STRL)

$223M

Even if public-works spending isn't as spectacular as anticipated, these stocks have already had lots of bad news priced in. Fluor is down roughly 40% from its 52-week high. Granite Construction, Perini Corp., McDermott and Sterling Construction are down 41%, 68%, 81%, and 32% from their 52-week highs, respectively.

Several of these stocks are looking extremely good from a balance sheet perspective. Perini Corp., for example, has more than $400 million in cash on hand; nearly 50% of its market capitalization. Add to that a miniscule forward price-to-earnings of about 6, and this stock appears to be quite undervalued. Fluor Corp.'s balance sheet is similarly strong, with a cash position of more than $2 billion, or 25% of its market capitalization. (Be sure to read, Breaking Down The Balance Sheet to learn how analyzing a company's financial statements helps to analyze your investments.)

Opportunity of a Lifetime
The economy is faring incredibly poorly, but the incoming administration seems determined to get people to work on our crumbling infrastructure. The heavy construction industries, and some ancillary industries, will most likely reward investors in 2009. If you are looking to take advantage of this new ‘New Deal', you will want to add some heavy construction stocks to your radar.

By Ryan Freund

Ryan E. Freund is the Founder and Managing Member of Freund Investing, a Professional Investment Advisor firm based in Massachusetts. Freund has been active in the investment field for nearly a decade, and has been featured in a wide variety of online media publications, including: Business Week, Reuters, CBS Marketwatch, The Motley Fool, Yahoo! Finance and, of course, Investopedia.

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