Investors looking to take advantage of global construction boom have options.
There has been a lot of buzz around investment opportunities in infrastructure lately – buzz generated by a number of recent news events, including growth in China, India and the Middle East; deteriorating bridges and roadways in Western countries that need upgrades; and suggestions that poor quality construction practices are partly responsible for the breadth of damage following China’s quake.
Stockhouse investors have known for years that a great way to play infrastructure is to invest in base metals – the stuff that infrastructure projects are made of: copper, iron ore, lead, zinc, molybdenum and more. But what about the companies that are contracted to actually carry out the work? The ones that bid on multi-billion dollar transportation projects, pipeline projects, water storage projects and the like?
Institutional investors have participated in the infrastructure sector for a long time – this is nothing new for them, as they are constantly on the lookout for high dividend yield. Large multi-national construction companies represent good ways for them to get that yield.
On the retail side, a number of opportunities are available for those wishing to gain exposure to the global construction boom besides buying into the commodities’ producers directly.
The Market Vectors ETF series from Van Eck Global has a product called Market Vectors Steel ETF (AMEX: SLX, Bullboard). The description of the ETF from the Van Eck website reads:
The Steel ETF seeks to replicate as closely as possible, before fees and expenses, the total return performance of the Amex Steel Index. The Index provides targeted exposure to companies worldwide that are engaged in the steel industry. As such, the Fund is subject to the risks of investing in this sector.
The Invesco PowerShares portfolio of ETFs contains an infrastructure product called Dynamic Building & Construction Portfolio (AMEX: PKB, Bullboard). This ETF tracks the Building & Construction Intellidex Index.
Neither the Market Vectors product nor the PowerShares product has generated any discussion on the relevant Bullboards, but that doesn’t mean Stockhouse investors aren’t already playing the infrastructure game. As always, they’re right in the thick of things, participating as owners of smaller companies that offer high risk and high reward in the sector.
The performance of Quebec-based ADF Group (TSX: T.DRX, Bullboard), a fabricator of large-scale steel products, prompted pawnmate to report:
I have held this stock for some time and will continue to do so but there are some factors that are now coming together and may create a perfect storm.
1. Concentration of contracts
2. Specialization in Private, not Public
3. Increase in costs
4. Reduced bidding activity
The investor went on to address each of these factors one at a time and finally noted, “A lot of this is speculation, but there are enough solid items that if you add them up, they start to form a sizeable concern. I hope I am wrong about most of it.”
Up to this point the stock price of ADF Group has done very well, up from near 50 cents (all prices quoted in US dollars) in late 2005 to near $7.00 in late 2007, a 1300% gain in two years. Since the 2007 highs, however, the stock has been drifting lower and now trades between $4.00 and $5.50.
In mid-April, tradetogloryman offered the opinion that the company conference call went very well and was excited about 2008 prospects for the company. The investor said, “All in all I am raising my sell price from North of ten to around 15 dollars.”
Another company, Empire Industries Ltd. (TSX: V.EIL, Bullboard), describes itself on its website:
Empire Industries Ltd. (Empire) is a public company that has been formed to increase shareholder value by; expanding its market share, growing its profits organically and by targeting acquisitions in the burgeoning industrial, commercial and institutional construction marketplace in Western Canada.
The stock price of Empire has been up and down, to put it mildly. The stock started trading in July, 2006, and reached a closing high of near 80 cents. By January 2007 it was cut in half, and it’s been trading between 40 and 60 cents ever since (lately closer to 40).
On the Bullboard, Stockhouse member snee asked, “how do you go wrong with this stock?” This question followed a discussion on the board about the company’s proposed listing on the TSX this fall in which optimist8 said, “The problem is that many (most?) of them [institutional investors] can't buy if it's not on the TSX. Getting that listing is the most important thing that management could do to boost the stock price.”
lanaar2, who came to the stock in April, expressed concern over Empire’s performance as related to the price of steel and other commodities. boylan offered the following in response: “The price off sreel [sic] can easely [sic] be control [sic] by limiting the inventory = to your backlog bid on a very short time and guaranty [sic] your quote on a 30 days basic [sic] reduces the risk of fluctuation.” The investor then stated that he or she continues “to accumulate.”
A third company, Material Technologies (OTC:BB: MTTG, Bullboard), has tackled a different aspect of the infrastructure business. The California-based company “creates technologies which, when applied, better monitors [sic] metal fatigue to improve public and private safety and to realize maintenance economies in all types of structures and equipment.” (Go to website.)
The share price has seen better days. The volume of shares traded has soared in recent weeks as the stock continues to plumb new depths (now at the half-cent level). On May 1, CheshireCat said, “At todays [sic] price the entire company is valued at $2 million! I can't see how anyone can make $535 million from this without the share price going through the roof. Rearranging the deck-chairs is pointless. I did increase my holding yesterday.” The investor summed up the situation quite well in another post: “It is safe to say that this stock at this price is a speculative gamble!”
Suffice to say there is a range of opportunities out there for retail investors to take advantage of if their interest lies in infrastructure, from “speculative gambles” like Material Technologies to the relatively safe and secure yields provided by broad, sector-specific ETFs.
