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Stalled Infrastructure Projects: What it Means for Investors

David Fessler — Mon, 06 Jul 2009 20:43:53 +0000

Make no mistake: Government and privately funded investment in public works projects – not bubble inducing, debt-financed consumer spending – will be the guiding light that leads the way out of this recession. The American Recovery and Reinvestment Act – otherwise known as the “Stimulus Bill” – provides $120 billion to begin to address our nation’s crumbling infrastructure.

It’s the largest infrastructure investment since Eisenhower’s Federal-Aid Highway Act of 1956, which created the U.S. interstate highway system.

Infrastructure investment – under-funded since the 1960s – will be unprecedented over the next three to five years, and let’s face it: the need is huge.

According to the National Surface Transportation Policy Review Study Commission, $225 billion needs to be spent annually for the next 50 years… that’s over $11 trillion, and that’s just for the transportation sector.

Of course, public infrastructure projects such as roads, bridges and water and sewer systems are by their very nature huge, expensive undertakings, requiring massive amounts of capital and manpower.

But very little actual construction activity is getting underway. Here’s why, and what you can do about it in the meantime.

What’s Going on in Big Infrastructure Project Financing?

So, why is little construction happening? Simple.

The current economic environment has upset the applecart with regards to funding these capital-intensive projects. As tax revenue continue to plummet, over 30 states have serious budget shortfalls, and most have shutdown funding for large capital projects. Most municipalities aren’t in any better shape.

At the Federal level, Congress is transfusing the Highway Trust Fund every year – last year it was $8 billion – as consumers drive less and switch to more fuel-efficient cars and trucks.

Clearly, new and innovative ways to fund infrastructure projects are needed. Last week, the fourth annual U.S. Infrastructure Investment Summit was held in New York to address this issue, and I was delighted to be in attendance at this important two-day event.

This high-level gathering annually brings together a small, but influential group of individuals in the world of infrastructure finance and investing.

In addition to yours truly, attendees included directors and managers of a number of infrastructure investment funds, together with those from Barclays Capital, UBS, the Blackstone Group, Jolene Molitoris (Ohio DOT). Several managers of large pension funds rounded out the group.

This year, the discussions and panel sessions focused on several key areas. Below are a few of the highlights:

The Federal Infrastructure Spending Bill

Besides the $120 billion earmarked for infrastructure in the stimulus bill, the Federal Transportation Authorization bill provides for an additional $450 billion of funding over six years, in the form of a national infrastructure bank.

It accomplishes two things: It relies on bonds to provide the necessary funding for major infrastructure projects and it eliminates the huge, upfront payments. Clearly, there will be plenty of capital available from the government for infrastructure projects.

The Impact of the Global Financial Crisis on Infrastructure Spending

The global financial crisis has changed the financial landscape for the foreseeable future. Retail lenders are far more conservative, warning potential homebuyers that they will need “serious skin in the game” in order to qualify for a mortgage.

The same thing is happening with infrastructure, according to Ben Heap, Executive Director of Infrastructure Asset Management at UBS, and Stephen Howard, a Director at Barclays Capital.

Most of the deals being done right now are more like partnerships with other investors and pension funds. And they have much more equity in them today as opposed to those done several years ago. The reason is that traditional debt financing is hard to come by with state budgets in crisis mode.

As a result, political acceptance of private funding deals is warming fast (money talks) – especially at the municipal level – where partisan politics is often non-existent. At the local level, most deals are small, bottom-up deals involving a few million dollars.

The Current Lending Environment and Infrastructure Valuation

“Not all infrastructure is the same… many perform differently from an investment standpoint”, says Michael Dorrell, Senior Managing Director of Blackstone Group. Toll roads have very low earnings volatility, airports are higher and seaports are the highest.

According to Dorrell, earnings for infrastructure are off only 3% to -5%, versus the S&P index that’s off nearly 85%. Even infrastructure stocks are off 35% to 40% from their highs. His main criteria for valuing good infrastructure assets?

Making sure the capital structure of the underlying asset is durable and robust. In the past, over-enthusiasm on the capital structure side has had a significant impact on asset valuation.

What it Takes to Create Public-Private Partnerships (P3s)

People don’t want to pay twice for infrastructure. They think it should be free, given that they’ve already paid taxes. The federal gas tax – due to its fixed nature – has lost much of its value as a proxy for the use of roads and bridges.

Paying for use is coming as a result of all of this. Proper tolling is a way for people to understand the value of the asset they are using. Expect toll roads to proliferate across the country.

States and municipalities will partner with private equity funds and pension funds as a means of raising capital and reducing annual budgets. These P3s will proliferate at the local level, where partisan politics is relatively absent. Some state deals will happen, particularly in those states with budgetary crises, where raising capital by any means is paramount.

What it All Means for Investors

The bottom line is this: The funding issues are being solved, albeit slower than initial expectations.

Dorrell said it best: “Now is a terrific time to buy infrastructure assets. They are extremely undervalued.” Of course infrastructure stocks are good buys as well… and for all the same reasons: nobody likes them.

Jacobs Engineering Group, Inc. (NYSE: JEC), Fluor (NYSE: FLR) and Foster Wheeler AG (Nasdaq: FWLT) are three great examples of companies that stand to benefit as the infrastructure cash gets deployed this year and next.

As credit markets loosen, it will begin to free up billions in capital that will be put to work on infrastructure projects all across America, creating hundreds of thousands of jobs in the process.

As most of you know, I’ve been following the energy and infrastructure sectors for some time now for both Investment U and The Oxford Club – I believe that in the next three to five years there will be incredible investment opportunities in these two sectors.

And the prospects are exciting enough that we’re looking to devote an entire service to profiting from them. So stay tuned for more information as things unfold.

Source: Stalled Infrastructure Projects: What it Means for Investors

Bullies Rule: Buy Them

Andrew Gordon — Tue, 23 Jun 2009 18:25:21 +0000

Native Tennessean John Templeton saw Hitler’s army roll up one Central European country after another and then take aim at Western Europe. Companies left and right were falling into bankruptcy. Stocks were nose-diving, many going for under historic lows. So what did John do at the height of this nightmarish freefall?

He was so sure that what he was doing couldn’t fail that in 1939 he borrowed $10,000 from his boss. He then carefully selected 104 stocks on the New York Stock Exchange to invest in.

By the time the war was over, 100 of the 104 stocks had zoomed up in the post-war market surge.

Templeton made a 500 percent profit in four years. He repaid his boss and had $40,000 left over.

By striking when the iron was hot, Templeton went on to become one of America’s most successful and rich investors.

And he wasn’t the only one…

At the same time that John was seeing his bets pay off, a WWII-bomber borrowed money from the Seagram’s family to buy a struggling charter airline for $60,000. The Air Force vet, by the name of Kirk Kerkorian, built the fleet on the cheap with surplus Air Force bombers which began carrying freight back and forth between America and Europe. The small nearly worthless charter airline grew as trade between America and Europe exploded.

Kerkorian eventually sold his company for $104 million and went on to become a billionaire – investing in everything from autos to gambling, including majority shares in MGM.

At the same time, high-school dropout David Murdoch was seeing the same historic opportunity in this rock-bottom market and borrowed $1,800 to buy a diner. He flipped it for a small gain and bought another property at a huge discount. He made a bigger gain. The gains kept getting bigger and bigger until David parlayed them into a $4.4 billion fortune.

Three men. Three fortunes. But what does this mean to you?

Let’s now fast-forward to the present. They don’t call this rally a “sucker’s rally” for nothing. It rose on fumes. It certainly didn’t rise on earnings. Take a look at the S&P’s earnings in the past 20 months. They’ve nosedived from $80 to $7 – the biggest drop ever recorded.

Market-Earnings Have Dropped Like a Rock

The S&P’ earnings performance in the 1940’s was bad. Today the S&P is doing even worse.

We saw a severe bear market in the 1940s and we’re seeing one today that is just as serious.

The same thing also happened in the 1920s. By 1921, the stock market had fallen by 45.6 percent. While many people were standing around wondering what to do with their money, some individuals were busy making a fortune off of the stock market.

The market climbed 495 percent over the next decade.

In the early 1940s – when Templeton, Kerkorian and Murdoch were taking advantage of ridiculous low-prices – the market climbed 170 percent over the next decade.

And like the 1920s and 1940s, stock prices will be dropping to irresistible bargain prices once again.

The two main takeaways here are that…
1. You should buy when assets are priced as if the world is about to end.
2. Our current “Great Recession” has given you a gift of a lifetime.

I’ve Waited 30 Years for This Moment

Finally, the opportunity to capture oversized profits is resurfacing again…

John Templeton bought into a few companies that washed out of the market. You should do it a little differently. The market has been beating up companies indiscriminatingly – the big with the small … the strong with the weak. You don’t have to buy small and risky stocks, not with some of the market’s biggest companies going for 40-50 cents on the dollar.

If these “best of the best” companies just go back up with the market, you’ll pocket over four times your investment in the next two years. But they should do much better than merely track the market.

This recession in not only a gift to us, it’s also a gift of a lifetime for these big “global industrial merchants” for these three reasons…
1.    They can take advantage of the dollar’s weakness by selling their products overseas cheaper than usual.
2.    They have the flexibility to pick and choose what markets to target from dozens of countries around the world. The world’s economies may have fallen in lockstep, but they’re rebounding at various rates. For example, Korea, Brazil, and China are showing a little more bounce in their step than many countries.
3.    This is the biggest reason: These companies have turned into bullies.

In times like these, I love big companies that ruthlessly take customers away from weaker companies cutting back…

I love big companies that are coming out with newer and better products (the iPhone 3G S, for example) while other companies are reducing R&D…

And I love big companies that scoop up their small nearly broke rivals for pennies on the dollar.

Investing in the market bullies makes sense, especially when the market has beaten up so many of the smaller companies to a pulp. It makes it easy for these bullies to finish them off.

Of course, these companies aren’t immune to the effects of a bad economy. Their sales are off. Plus they’re watching how they spend money.

But a bully losing 10 pounds is not the same as a 95-pound weakling losing 10 pounds. These companies are big and strong. Many of them have no cash worries and have actually increased dividends into the teeth of this recession.

Dividend hikers used to outnumber slashers 15-1. Now the slashers rule. They outnumber hikers by a 4:3 margin.

These corporate bullies are using this period as a launching pad to increase market share and dominate the competition in the future. Investors should be pouring into these companies. But they’re not. And, for the most part, their prices are way down.

THIS IS THE PERFECT SET-UP.

As the market goes down and pushes prices to lows not seen in decades, you should be adding these big companies to your portfolio.

Bullies may not be likable. But they make great long-term investments. In a horrible global market, they’re the ones getting bigger and stronger.

Source: Bullies Rule: Buy Them

How You can Profit from Equity Investing

Mike Caggeso — Fri, 13 Feb 2009 13:16:11 +0000

Investing your money and keeping it safe and sound is crucial, especially during a recession. Money Morning’s Mike Cagesso shows you a few DRIP companies to keep your eye on.

This from Mike:

If the global financial crisis has taught investors one thing, it’s that now is not the time to gamble with your money or your prosperity.

More companies have been bought, bailed out or bankrupted since this financial crisis began than most of us have seen in our lifetimes. And even as Wall Street’s dominoes keep falling, no one can be sure if the worst is over.

From here on – recession or not – targeting dividend stocks is one of the few strategies that will deliver income safely and efficiently.

In theory, dividends should prop up an investor’s portfolio during uncertain periods, or in market downturns. That’s because even if a company’s stock price falls, executives do all they can to maintain the firm’s dividend payout. That’s part of the reason that, over time, dividends have accounted for a major portion of investors’ total returns.

“Dividends are a nice anchor in a turbulent market,” said Judith Saryan, manager of Eaton Vance Dividend Builder Fund (EVTMX), FoxBusiness last year.

Or anytime. In fact, over the last 100 years, 40% of a stock’s total return is from dividends. That’s not surprising. According to a study by Ned Davis Research Inc., dividend-paying Standard & Poor’s 500 stocks rose by an average of 9.4% a year between 1972 and June of last year, well ahead of non-dividend-paying stocks, which rose by only 1.8% annually during the same period.

“Dividends are a sign of quality,” said Todd Ahlsten, manager of Parnassus Equity Income (PRBLX), said in an interview last year. “They force management to look at cash flow and how it invests in its business.”

But not all dividends are created equal. As losses mount, Standard & Poor’s 500 heavyweights have been putting their dividends on the chopping block, cutting or outright eliminating them for an indefinite time period.

And these aren’t fringe companies and chump change we’re talking about…

General Motors Corp. (GM), Ford Motor Corp. (F), Sprint Nextel Corp. (S), MBIA Inc. (MBI) – their dividends are gone.

And Citigroup Inc. (C), Bank of America Corp. (BAC), Fifth Third Bancorp (FITB) reduced their dividends to a mere penny. Fannie Mae (FNM) lowered its to 5 cents in August and hasn’t paid one since.

Nor does the list end there.

Just yesterday (Thursday), in fact, motorcycle icon Harley Davidson Inc. (HOG) slashed its dividend 70%, the first such reduction since 1993. The move was aimed at conserving cash, but sent Harley’s shares down 8%. in a move that was aimed at conserving cash. And the Dow Chemical Co. (DOW)– facing credit-market uncertainty, lower product demand and legal problems related to a failed joint venture – yesterday cut its dividend 64%, the first such move in the company’s 112-year history.

But there are still hundreds of companies holding their ground in the global financial crisis.

These firms understand that continued growth and success depends on a large body of investors. And to keep them on board the companies must maintain – and hopefully increase – their dividend payouts.

DRIPS Aren’t Dropping

With the stock market’s wrenching decline, many company’s shares are trading at bargain levels. A company that’s been able to maintain its dividend usually represents a better value to its shareholders.

In the reverse situation, where stock values soar, dividend yields fall, meaning income investors have to settle for lower returns.

So, with stocks down and yields high, income investors should consider starting or stepping up dividend reinvestment plans (DRIPS).

In DRIPS, the dividends investors would normally receive as cash are reinvested back into the stock under their name. To start, investors often don’t even need as much as the price of a full company share.

For example, if you invest $20 in a stock that trades for $100 per share, the DRIP will buy you one-fifth of a share of that stock. The dividend is reinvested accordingly, as well.

Over time, money is reinvested back into the stock, giving you more shares. And with more shares, the more dividend income you’ll receive.

Among other advantages, although there is usually a nominal transaction cost involved, the DRIPS’ automatic reinvestments allow investors to skip full-blown brokerage fees, which aren’t conducive to such small purchases.

Among the cons, most DRIPs require investors to be registered shareholders, which entails a little more paperwork than being a regular, or beneficial, shareholder. To enroll in a DRIP plan, investors must buy shares through a transfer agent. The process can take up to eight weeks before your account is opened and fully registered.

Some DRIP companies also have maximum amounts you can invest and hold in their stock. And they vary by time periods – monthly, quarterly, annually and lifetime.

For the public companies that offer the dividend plans, DRIPs provide a stable base of long-term shareholders. And often, these value-minded investors tend to buy more when share prices are down, as opposed to short-term traders, who are apt to bail out on a price decline.

For example, 71% of chemical company RPM Inc.’s (RPM) shareholders are enrolled in its DRIP. And more than 64% of Aflac Inc.’s (AFL) shareholders are enrolled in its DRIP, according to DRIP Central.

More than 1,600 public companies and American Depository Receipts (ADRs) have DRIPs, offering a wide choice of industry and market preference to potential investors.

But with so many to choose from, targeting the best ones can be a challenge without a broker helping you.

The Best DRIPs are…

The best DRIPs are from companies that have a high-yield and a track record of increasing their dividends.

In addition to RPM and Aflac, here are a few DRIP companies to keep your eye on. Not only have they hung onto their dividends in the worst financial crisis since the Great Depression, some have increased their payouts.

Coca-Cola Co. (KO): There’s a reason “Coke” is the second most recognizable word in the world. The world’s biggest beverage-maker recently beat fourth-quarter earnings expectations, largely due to its ability to cut costs and promote demand with a rotating file of products. The company kicks out a 38-cent dividend every quarter. At its current share price of around $44.30, that’s a 3.45% yield. If that’s not enough, know that Warren Buffet owns 8.6% of the company.

Intel Corp. (INTL): Intel is the market leader among chipmakers, dominating its competition by continually being the first to the market with the best product. It pays a 14-cent dividend every quarter, which at its current stock price represents a 4.07% yield.

The Hershey Co. (HSY): The Pennsylvania-based candy and food maker has been a recession stalwart. It began paying dividends in 1930 – meaning it’s been making the quarterly payouts longer than most companies have even been around – and has been increasing them for 32 consecutive years, according to The Money Paper. Right now, its 30-cent quarterly dividend represents a yield of 3.32%. With its stock hovering a few dollars above its 52-week low, many of its DRIP investors are probably loaded up on Hershey shares like Halloween candy.

Microsoft Corp. (MSFT): Microsoft is the largest software producer in the world, and has a firm grip on that title. The slowing demand for computers and computer software has taken a toll on Microsoft, but the projection of the industry and Microsoft’s dominance makes it one of the most stable tech stocks out there. Its current dividend yield is 2.72% on its shares, which kick out a 13-cent dividend every quarter.

Exxon Mobil Corp. (XOM): Like the above companies, Exxon doesn’t need much of an introduction. The oil giant is one of the world’s largest companies, having paid investors dividends since 1882. Its 2.13% yield isn’t the highest in this small group of companies, but Exxon’s share price is one of the most stable.

If that’s not enough, here’s an extensive list of DRIP companies, and their minimum and maximum investment requirement.

It also details how much dividend income a company pays, how often, how long its paid dividends and whether it increased its dividend over time.

Editor’s Note: This is the latest installment of a new series that will explore ways for investors to recover from the U.S. financial crisis.

Source: For Dividend-Seekers, Financial Crisis Means it’s Time to Dip Into DRIPs

Be Prepared for Horrid Quarterly Reports

Andrew Snyder — Mon, 12 Jan 2009 13:20:50 +0000

Investors need to be ready for a downright nasty earnings season. Already, we are seeing some companies cut their earnings estimates by drastic proportions. If you are not prepared, it could get painful.

My day did not get off to a good start. After rolling out of bed, my first stop is always the coffee pot. Then, I grab the newspaper and flick on the TV.

As usual, my newspaper (at least I hoped it was my newspaper) was tossed on my neighbor’s driveway, but when I tried to tune into the local news, the screen was black. Instead of waking up to my favorite weather girl, I was forced to listen to the pre-dawn silence.

While my troubles were trivial and caused by an overnight ice storm, the problems throughout the cable that provides my morning media fix industry continue to brew. For proof, just look at the nation’s largest media conglomerate, Time Warner (NYSE:TWX). Its share price is down by over 6% today.

Thanks in part to a $15 billion write-down of its cable spin-off, Time Warner Cable (NYSE:TWC), the company is expected to post a loss for all of 2008. It is just the first of what is sure to be many signs of an ugly earnings season for the industry.

One of the company’s larger competitors took the opportunity to leak some of its own bad news in the hopes investors would be distracted by the news from Time Warner.

A Comcast (NYSE:CMCSA) insider said the company would have to cut its balance sheet to reflect the losses in its Clearwire stake, which is down by as much as 60% over the past 12 months. Fortunately, losing out on the wireless Internet venture is far from a surprise. But the information reinforces the notion the upcoming earnings season is going to hurt.

Trouble ahead

Of course, the media industry is not alone. Intel (NASDAQ:INTC) is also dragging on the equities market today as it tells investors to expect worse-than-expected fourth-quarter results. The chipmaker now expects revenues to show a 23% drop from this time last year, to about $8.2 billion.

The news from economic-bellwether Alcoa (NYSE:AA) is just as bleak, especially if you are one of the 15,000 employees about to get a pink slip. By cutting its capital spending in half, the company’s problems are certain to spread across the broad economy.

So why I am writing about this collection of bad news? I do it in hopes that you realize the switching of our calendar did not suddenly fix the nation’s dire economic situation.

The last few trading sessions have been filled with exuberant trades. Stocks that investors dumped like mad only two weeks ago were surging in value. The turnaround allowed smart traders to bag some sizeable gains, but I caution you to do your homework before entering new positions with the Dow above 9,000.

No stimulus big enough

Even when Obama dumps a trillion dollars of taxpayer money into the economy, all will not be grand. Hundreds of thousands of consumers have recently been fired from their jobs. Consumer spending will not rebound to its historic level anytime soon. Obama may be able to stabilize the system, but a rapid rebound is nothing but a pipe dream.

The equities market will remain range bound through the next earnings season. There will be opportunities to buy on dips and sell on surges, but miss the timing and you could be hurt.

As earnings season unravels, continue to look towards the safer, consumer favorites like McDonalds (NYSE:MCD) and Wal-Mart (NYSE:WMT). Remember, one of the few bright spots today was Family Dollar (NYSE:FDO).

The discounter reported a 14% jump in quarterly earnings and boosted its fiscal-year forecast. Best of all, its shares rose by more than 10%. It is proof that there is still plenty of money to be made if you pay attention.

The next few weeks are going to be critical. Volatility will rise and earnings surprises are going to rule the market. Be prepared for the action and you will survive unscathed.

Source: Be prepared for horrid quarterly reports

Horrid Unemployment and Sweet, Sweet Gains

Andrew Snyder — Mon, 12 Jan 2009 12:58:24 +0000

The unemployment figures are downright depressing. 2008 turned out to be the worst your for jobs since the end of World War II. Will 2009 be even worse? If we continue making triple-digit gains, will any of it even matter?

The equities market has had a less-than-stellar week. With the Dow currently down by triple-digit proportions, the major index has dropped firmly below it final 2008 level. Hopefully that is a comment we cannot make in 51 weeks.

Even with the rather bleak economic news released this week, there is some good news. But let’s get the bad stuff out of the way first.

As you probably heard, the Labor Department announced private firms from across the country shed some 524,000 jobs in December. The losses boost the official unemployment figure to its highest level in 16 years.

While this morning’s number beat most best guesses – even clobbering some of the doomsday estimates – what is most important today is the revised figures released by Washington. It now tells us employers cut 584,000 positions in November and 423,000 in October. Originally, the organization estimated job losses of 533,000 and 320,000, respectively.

While December’s figures took some of the sting off, the revised figures prove the economy was worse off than many folks believed. The equities market is making up the difference today. Increased unemployment will trickle through the economy, creating a strong headwind as we move forward.

But you already know that.

The end of union stupidity?

Let’s move on to some good news… if you consider a 10% wage cut good news.

Even though stocks declining in value outweigh advancers by more than three to one so far today, there is one group of shareholders sitting on some big gains. If you followed my advice, you are one of them.

Last week, I told you about YRC Worldwide (NYSE:YRCW), a national leader in the trucking industry. Shares of the company were creamed over the past year as fuel-price hikes and a slowing economy nearly eliminated the firm’s ability to pay its debt.

The YRC’s management needed all the help it could get to pull itself out of the dire situation. That is why it turned to the Teamsters and asked for wage concessions. It was a controversial and risky move, but as promised, it paid off.

The votes were tallied last night and the union approved a wage cut in exchange for an ownership position. As I write, the folks that followed my advice are sitting on gains of about 130%. Shares are trading for just under our call option strike price of $5, the optimum spot for our covered call strategy.

That trade was just the first in a series of “beta” tests designed to prove the superiority of our “belts and suspenders” strategy. I just told HotStockConfidential subscribers of their second money-making beta play yesterday.

And guess what.

It is already up by double-digit proportions. The play is unfolding just as I envisioned. Even more profit potential is on the way.

This is the perfect time for our “belts and suspenders” strategy. It allows us to take advantage of the market’s volatility while providing us the insurance we need to avoid the kind of losses driving so many investors out of the market.

Over the next few weeks, expect more dreary news from Washington. Be especially careful as Wall Street begins to realize Obama’s stimulus package will do nothing but create false hope.

False hope is still hope, right?

It will be a tough earnings season.

Source: Horrid unemployment and sweet, sweet gains

Recession-Proof Your Portfolio With WW Grainger (GWW)

David Fessler — Wed, 29 Oct 2008 14:49:43 +0000

David Fessler says WW Grainger (NYSE:GWW) is a great way to protect your portfolio by investing in infrastructure. The company literally provides the nuts and bolts for businesses and public institutions throughout America. And its earnings are growing despite the economic downturn. Now GWW is targeting Chinese infrastructure projects with massive potential.