When then-Senator Obama delivered his address on American recovery and reinvestment, a prevalent theme was the retrofitting of America's infrastructure for the 21st century. If now-President Obama can follow through with the stances upon which he campaigned -- helping small businesses, bolstering broadband, and subsidizing clean energy projects -- it's clear that certain companies will benefit from stimulus spending.
For the sake of argument, let's assume that the stimulus money won't end up getting squandered on pet projects like honeybee insurance or chauffeur services for government employees. Further, let's also assume that it will succeed in jumpstarting spending on industrial projects like the rebuilding of roads and highways, the expansion of the broadband grid, and the development of clean-energy alternatives.
I believe that a key component of this stimulus package is making sure that any spending will specifically (directly or indirectly) benefit small-cap companies. The idea here is that even if certain firms don't directly receive stimulus money, if larger competitors do get such payments, they'll be more inclined to make certain strategic acquisitions in order to become more vertically integrated, create synergies, or simply expand market share.
Moreover, with all of the recent banter about small businesses being the heart of the American economy, it wouldn't surprise me if federal funds fell directly into the hands of certain small-caps.
Let's go down the list of categories of proposed spending.
Repairing crumbling roads and bridges
I'm not saying that we should immediately go out and invest heavily in heavy civil construction contractors on a whim without any further research. But a company like Granite Construction (NYSE: GVA ) is worth a good look. It operates all over the U.S., and its official business description reads like something out of one of President Obama's speeches. It provides the exact road and bridge repair services described as key components of the recovery plan.
A longtime favorite of mine, Caterpillar (NYSE: CAT ) is usually among the first companies to come to mind when considering the benefactors of a massive infrastructure overhaul. However, you should also consider Chattanooga-based Astec Industries (Nasdaq: ASTE ) . From quarrying to laying asphalt, Astec either makes or sells products and services used in every phase of road building. It's a supporter of the National Asphalt Pavement Association (NAPA), a lobby that takes special interest in passing highway spending legislation. And it's trading at an attractive multiple compared to its future growth prospect -- at least for the moment.
Expanding broadband lines
What President Eisenhower did for the Interstate Highway System, President Obama would like to do for the Information Superhighway. This task obviously has huge implications for broadband service providers like Comcast (Nasdaq: CMCSA ) , but what about the behind-the-scenes crowd? Specialty contractors that offer support for engineering, construction, maintenance and installation services to telecommunications providers will undoubtedly benefit from these endeavors.
That's why I like companies like EMCOR Group (NYSE: EME ) and MasTec, which have already seen sharp rebounds from their lows but which I believe are still trading at reasonable valuations. Also, don't forget about Dycom, another player in the telecom infrastructure contracting services game. It would shock me if Dycom isn't at least mentioned.
Doubling production of clean-energy alternatives
No one expects America to quit using oil cold turkey, but efforts to wean us away from current consumption levels could be dramatic, so let's turn our attention to viable alternatives. Natural gas is an obvious choice here, but instead of focusing on one commodity, we can hedge our bets by determining which suppliers should do well as a result of the shift toward cleaner energy -- regardless of what's being burned.
For a long time, some investors have been waiting for a turning point in Capstone Turbine's (Nasdaq: CPST ) underdog story. If Capstone finally receives the big government financing package it has craved for several years, the company could prove to be the speculative clean-energy play of the decade.
Maybe a safer bet would be Woodward Governor, which makes electrical power systems essential for optimizing turbine output. Woodward and Capstone both have ongoing business relationships with United Technologies (NYSE: UTX ) , which is also actively involved in the clean-energy movement, though more suitable as a large-cap investment.
What's yet to come
Among the challenges facing our country in the years ahead, modernizing our infrastructure with environmentally friendly technologies is no small task. But it's not the only thing on the agenda, as other possible projects include digitizing medical records, reforming health care and Social Security, and restructuring the financial system.
Although there's no guarantee that other companies won't take the lion's share of the government's stimulus money, it wouldn't take a huge amount for many of these small caps to soar. By going beyond the obvious large-cap plays, you might get in early on a winner. So if you're a small-cap equity investor, I hope you have a few ideas to help get you moving in the right direction.
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