Infrastructure investors like Biden's deal, even though it's smaller than hoped. How to trade it

Published Fri, Jun 25 20217:10 AM EDTUpdated Fri, Jun 25 202111:39 AM EDT

The infrastructure deal is smaller than many wanted, but it will still make a difference, according to investors in the space. President Joe Biden said he has reached agreement on a "hard" infrastructure bill that would involve $579 billion in new investments in road construction, waterways, electric utilities and broadband internet. While much smaller than the initial, broader $2.2 trillion American Jobs Plan proposal, investors said it nonetheless represented a significant down payment on rebuilding America's infrastructure. "It's not really a slimmed-down bill, it's just more narrow in focus," Jay Jacobs, head of research and strategies at Global X, who runs the Global X U.S. Infrastructure Development ETF (PAVE) , a basket of U.S.-based companies that derive the majority of their revenue from infrastructure development. "This is the 'hard infrastructure' part of his plan, that part that deals with construction and transportation, and the electric grid. Biden got most of what he wanted in this part of his proposal." (PAVE is up 4% this week, bringing its year-to-date gains to 21%.) The amount agreed upon "Is a large amount of money for this part of the economy," Jacobs said. How large? Jacobs says that roughly 1.5% of GDP (about $300 billion a year) is spent on public construction each year, so $579 billion (spread out over several years) is more than enough to move the needle. "This is going to give a big boost to companies in steel, construction, engineering and roadbuilding," he told me, as well as broadband expansion, which is very popular among rural (Republican) constituents. While most infrastructure stocks are off of their highs, this week has seen significant moves in those stocks: Work platforms, cranes: Terex up 14% Manitowoc up 9% Equipment rental: Herc Holdings up 14% United Rentals up 10% Construction equipment: Deere up 7% Construction services: Summit Materials up 13% MRC Global up 9% Materials/metals: Alcoa up 14% Century Aluminum up 13% Ryerson Holding up 9% Steel: Cleveland Cliffs up 8% US Steel up 7% Allegheny Technologies up 7% Road construction Granite Construction up 11% Martin Marietta up 7% Vulcan Materials up 7% Engineering: Dycom Industries up 9% AECOM up 7% Jacobs Engineering up 5% Jacobs noted that engineering firms are particularly well positioned to benefit from U.S. infrastructure development. Jacobs Engineering , for example, generates 33% of all revenues from U.S. government contracts, or 44% of U.S. revenues. On its second-quarter 2021 earnings call, CEO Steven Demetriou said, "[A]s far as the U.S. infrastructure stimulus opportunity, I think we're extremely well positioned with the organic capability we have today." Smart strategy? Jay Rhame of Reaves Asset Management, which specializes in infrastructure-related industries such as utilities, energy and communications, said Biden was smart to split the infrastructure proposals from the American Jobs Plan into two different pieces, a "hard" and "soft" infrastructure package. "This is what Biden ran on, that he can reach across the aisle and make a deal," he told me. "It wasn't worth it to hold the hard infrastructure part up over the softer infrastructure issues. Let's put people back to work, and not get hung up over a debate on things like carbon emissions." Other pieces that could qualify as "infrastructure" are also advancing. The U.S. Innovation and Competition Act passed the Senate two weeks ago, which would provide $252 billion for funding for scientific research, as well as subsidies for chipmakers and robot makers in an effort to compete with China. The next part — the so-called soft infrastructure segment — will address clean tech, elderly care, money for schools and hospitals. That will be far more controversial, and may be the part Democrats will attempt to push through using the reconciliation process. "That will be the next big fight," Rhame said.

A Caterpillar (Cat) Excavator is seen working at a construction site near the New York Harbor in Brooklyn, New York, March 4, 2021.

Brendan McDermid | Reuters

The infrastructure deal is smaller than many wanted, but it will still make a difference, according to investors in the space.

President Joe Biden said he has reached agreement on a "hard" infrastructure bill that would involve $579 billion in new investments in road construction, waterways, electric utilities and broadband internet.

While much smaller than the initial, broader $2.2 trillion American Jobs Plan proposal, investors said it nonetheless represented a significant down payment on rebuilding America's infrastructure.