The Resilience of the U.S. Economy: Thriving Construction Sector

The unpredictability of the U.S. economy raises questions about its future trajectory. Will it gracefully land, crash, or resoundingly splat? While the answer remains uncertain, one thing investors can be confident about is the construction sector's ability not just to survive, but to thrive.

Even in the face of a recession, various factors are at play that will keep the cyclical industry booming in 2024, even if broader economic activity falters. Among these factors is the ongoing transition toward a lower-carbon energy system. Additionally, companies are shifting their manufacturing operations back to the U.S. after years of outsourcing. Furthermore, the demand for energy-intensive artificial intelligence necessitates the development of more extensive and larger data centers.

Adding to this positive outlook are three U.S. government programs—the Infrastructure Investment and Jobs Act, the Chips Act, and the Inflation Reduction Act—that will ensure a continuous flow of funds, regardless of economic conditions. These programs represent substantial spending and subsidies, aimed at upgrading the nation's infrastructure, expanding domestic semiconductor manufacturing, modernizing the electrical grid, and more.

According to Graeme Forster, portfolio manager of the Orbis Global Equity Strategy, "The massive spending on government programs will soften the blow of a downturn compared to an average economic cycle."

This perspective is no secret, as evident from the surge in stocks of companies that stand to benefit from these projects. Take Sterling Infrastructure (STRL), for example, which was highlighted as a Roundtable pick in January 2023 when its shares were around $32. Currently, the stock has soared by 126% this year to reach a recent value of $74.

Similarly, Quanta Services (PWR), the dominant player in this space, has witnessed a 33% increase in its stock value this year. It currently trades at 27 times forward earnings, surpassing its five-year average of approximately 16.5 times. It might be challenging to enter the market for infrastructure and electrification winners at this point, but a potential market pullback could present a more favorable entry opportunity.

Introduction

While many stocks have seen significant gains, there are a few that are worth considering even in light of these impressive performances. Daniel Skubiz, a portfolio manager at Ziegler Capital Management, highlights MYR Group (MYRG) as one such stock. MYR Group is currently positioned in the ideal spot for investments being made by the U.S. government, utilities, and companies despite the potential for a recession. With a 47% year-to-date increase in its stock price, MYR Group has not lagged behind. Trading at a premium multiple of 21 times forward earnings, this company specializes in the construction of large-scale electrical infrastructure. This includes power lines, substations, and various commercial and industrial applications. Additionally, MYR Group is involved in grid hardening, renewable integration into the grid, and specialized electrical work for data centers, healthcare facilities, manufacturing plants, and more.

Other Attractive Stocks

While MYR Group may be performing well, there are other stocks in the construction and engineering sector that are trading at more affordable prices. Many of these stocks belong to small-cap companies that have experienced a challenging year in 2023. Fluor (FLR), for example, derives over 40% of its revenue from its oil-and-gas construction segment. However, the management of Fluor is actively working to diversify away from this industry and has submitted bids for contracts in U.S.-based semiconductor manufacturing. These contracts could potentially benefit from the funding provided by the Chips Act. Furthermore, Fluor is also involved in transportation infrastructure projects such as the Gordie Howe International Bridge connecting Detroit and Windsor, Ont., and the new LAX Automated People Mover. Despite its modest 6% gain in stock price this year, Fluor is currently trading at 14 times forward earnings, which is a discount compared to its five-year average of 18 times.

MasTec (MTZ) and Aecom (ACM) are two other notable construction and engineering companies that have not participated in the 2023 rally of this sector. However, these stocks are currently trading at reasonable valuations and warrant closer examination, even in the face of a potential recession.