Now that promising coronavirus vaccines have been developed and widespread vaccinations are likely in 2021, the market’s emerging rotation to cyclicals and value stocks is reflecting increasing confidence in industrials.

The end of the pandemic is now clearly in sight, allowing investors room to consider the potential for federal spending to fix the nation’s deteriorated infrastructure.

For many advisors, preparing for this will involve far more than just buying the usual suspects early. Thorough preparation also requires an up-to-date mindset grasping the reality that this is not their father’s infrastructure. Traditional infrastructure is becoming increasingly techy, and some tech is now a form of infrastructure in itself.

The subject of federal spending on traditional infrastructure is about as worn (without action) as the nation’s crumbling roads and bridges. Yet the decay has become so severe that it will likely compel bipartisan Congressional attention in 2021.

Cross Your Fingers While Crossing
After years of congressional gridlock, the state of decay has become critical. Regarding bridges alone, for example, according to the American Road and Transportation Builders Association, if the nation’s structurally deficient bridges in 2018 had been placed end to end, they would have stretched from New York to Miami—and little or nothing has been done to improve them since. At the time, though more than 9% of bridges were structurally deficient, Americans had to cross them 174 million times a day. The average age of these bridges is 69 years.

Of course, there’s much more to our crumbling national infrastructure than rickety bridges. Highways, airports, train stations, water systems and other public works plants are all far behind repair and inspection schedules, and many are in serious need of attention.

Engineering firms and construction companies likely to get work from congressional legislation are tough to pick, so it makes more sense to focus on suppliers whom all these firms must patronize. Some vendors likely to benefit are readily apparent. These include:   

• Materials: U.S. Concrete, Martin Marietta Materials, Nucor (steel), U.S. Steel, Steel Dynamic, United Steel & Aluminum, Alcoa.
• Manufacturers of earthmovers and heavy equipment: Caterpillar, Gencore.
• Renters of short-term-use equipment: United Rentals (widely associated with the oil industry but also has infrastructure markets).
• Railroads to haul stuff: Norfolk Southern, Union Pacific, Kansas City Southern.

Investment in infrastructure has already picked up. Between Nov. 2 and Nov. 20, shares of infrastructure ETF PAVE rose 12.45%. And though Caterpillar’s gains over the past few weeks have been more muted, this dividend aristocrat rose 23.51% percent between Aug. 14 and Nov. 20—perhaps more from favorable outlooks in investment newsletters than from any early anticipation of a federal infrastructure bill.

As the market’s wont is to invest incrementally more with each news-flashed benchmark, an actual feasible infrastructure bill would doubtless nudge the category upward. Moreover, many infrastructure stocks are still languishing.

Digital Behemoths
Ironically but not unpredictably, some of most brutish infrastructure tools now rely on products from nerds to function better. Ever notice that big commercial construction and sites no longer have long stretches of staked-out string along grading boundaries? That’s because the big earth movers now know exactly how far to go from ultra-precise global positioning systems. One such manufacturer is Trimble.

These systems enable huge earthmovers to operate fully autonomously. Call this juncture of traditional infrastructure items and digital technology “infratech.” Spanning the gap between today’s infratech and tradition industry is Hubbell which, along with high-tech products for electrical grid upgrades and data/communications items, produces items from the old lexicon of heavy industry: tools, dies and accessories.

Hubbell and Trimble are among a dozen small companies among the 93 held by the infrastructure ETF PAVE that exhibit the lowest downside risk in this fund, as shown by running them through the  screens of Revelation Investment Research, a quantitative equities research firm. This analysis shows that the 12 companies have a higher expected total return over the next 12 months, with a 60% chance of beating the market.

The companies aren’t big boys by any means. Beneath many advisors’ radar, they have among their multi-industry product lines items used in infrastructure. As with Trimble and Hubbell, this low-risk group manufactures products that include infratech items. The other 10 are:

EMCOR Group, construction (and engineering) that includes including  power transmission systems; Emerson Electric,  products including include those for municipal water supplies; Rexnord Corp, motion-control and water management products and satellite communication; RPM, specialty chemicals, paints and coatings, including those for infrastructure rehab and repair; Eaton Corp., electrical and hydraulic systems; Crane Co., power generation and industrial construction products; Atkore International Group, electrical conduits and fittings for infrastructure; Lincoln Electric, arc welding systems; Rockwell Automation, technical solutions for process automation; Reliance Steel & Aluminum Co., carbon, alloy, stainless and specialty steel, aluminum, brass and copper.

Further, when it comes to the I-word, advisors would do well to get their heads around the idea that it no longer just means roads, bridges, airports, water systems, power system, etc. It also refers to IT/tech infrastructure, which includes the continuing boom in semiconductors, the Energizer-bunny industry whose products were becoming ubiquitous—in everything from toasters to electric cars—long before the pandemic.

Consumer and industrial spending on this other form of infrastructure stands to sustain this growth. Many of these companies haven’t slowed down as stay-at-home growth tech has slowed in recent weeks. From July 25 to Nov. 20, semiconductor ETF SMH rose 22.76%, drawing a bright line between the wane of pandemic-centric growth tech and the fortunes of semiconductors.

Where Semis Meet The Tsunami
Tech/IT infrastructure also includes data center and cell tower REITs. Though a rotation to value might siphon off some investment in these, this won’t limit the potential of such REIT players as Equinix, Digital Realty Trust and CyrusOne for sustained revenue from the coming 5G data tsunami, enabling them to continue paying healthy dividends.

Meanwhile, semiconductor companies will continue to produce chips that mushrooming data centers need to handle the tidal wave of data from industrial and retail applications of 5G speed (fully realizable once cell tower REITS such as American Tower and Crown Castle get enough towers sited, as 5G requires far more towers than 4G) and from consumer use--even broke people will get 5G phones with Skyworks radio-frequency transceivers through their carrier plans--that includes the internet of things (IoT), through which our refrigerators order groceries. (Remember to tell your fridge when you’ll be away on vacation.)

Along with Nvidia, Taiwan Semiconductor, Texas Instruments and Broadcom, other big players already benefitting from the evolving current 5G infrastructure rush include some household names: Qualcomm, Cisco, Microsoft and Apple. Lower profile tech names in this space include KLA Corp., Lumentum Holdings, MACOM Technology Solutions and Acacia Communications.

Though value stocks are up significantly of late—large-cap value ETF SPYV increased 12.60% in the four weeks ended Nov. 20—many growth tech stocks are likely to continue performing well through and after the recovery, though at a somewhat slower pace. This pace will be aided by weak trend economic growth and low interest rates—instead of the recent fuel: the follow-on effects of focused tech sector investment during the pandemic.

If Congress passes a big infrastructure bill, federal money pouring into traditional infrastructure would combine with certain private spending on IT/tech infrastructure to produce a big potential upside for clients of advisors who position portfolios adroitly and ecumenically. This area has all the makings of a key prong in a broader, effective strategy for straddling the pandemic and post-pandemic markets.

David Sheaff Gilreath, a certified financial planner, is a 39-year veteran of the financial service industry. He established Sheaff Brock Investment Advisors LLC, a portfolio management company based in Indianapolis, with partner Ron Brock in 2001. The firm manages over $1 billion in assets nationwide.