Yoshikami: Investing in Infrastructure --  Now or Later?

China, the United States and many other countries have, in the past few months unveiled a slew of stimulus packages aimed at reviving their economies. These proposals will see a huge bump up in infrastructure spending -- more highways, more schools, more power plants, etc.

If that's the case, why are many of these companies doing so poorly in the stock markets? Why doesn't the news match current earnings? What's going on?

First, remember that current news and future expectations are two very different things. While future hopes often get great press coverage, they don't change the reality of current earnings. They are related, but not necessarily, directly tied to each other on a current basis.

Construction Highway
Construction Highway

While it's true that stimulus packages will provide opportunities, it can't counter the impact of the downturn on world economies. In many cases, stocks such as Fluor and Siemens, were already laced with hopeful expectations that the spending packages would provide a chance for huge revenue growth.

Yet the ultimate infrastructure company, Caterpillar, announced disappointing earnings and outlined a grim economic picture where they will likely layoff 20,000 employees. Other infrastructure companies have announced similar results. What's going on?

It's simple -- expectations must come back to reality. Valuations matter. Expectations must be grounded in prudent assessment, and euphoria must be tempered. Ahh, the bubble trend continues. Hope beyond reason.

So, how do you analyze these companies and their investment opportunities? Here's a start. Assess the following:

  1. What are current realities in terms of earnings? Solid? Do you trust the outlook the company gives?
  2. How will the downturn in the economy negatively affect revenue? Subtract economic headwinds.
  3. What positive impact will the spending tailwind from stimulus packages impact results? Add stimulus benefits.
  4. Does the current share price factor in these three issues? If not, why the fear or euphoria?

You can't look at these issues in isolation. You have to examine all of them when making a determination if these companies make sense as an investment.

And look at the usual issues: management, locked in contracts and business efficiency. Stop and really look.

Don't invest based on news headlines. Don't invest on panic. Or euphoria. Just because infrastructure spending is coming doesn't necessarily make infrastructure stocks the right investments right now.



Michael A. Yoshikami, Ph.D., CFP®, is Founder, President, and Chief Investment Strategist of YCMNET Advisors, Inc., a registered investment advisory firm (www.ycmnet.com). Michael oversees all investment and research activities of the firm and has over 20 years investment and financial planning experience. Michael is a respected lecturer speaking frequently on tactical asset allocation theory and appears regularly on CNBC and CNBC Asia. Michael can be reached directly at m@ycmnet.com.