How to play the infrastructure bill?
How to play the infrastructure bill?
President Joe Biden is planning to unveil his $2.25 trillion infrastructure plan today. The plan will include large chunks of funding for transportation, clean water, high-speed broadband, manufacturing, and many other categories.
What does this mean for investors?
Keep in mind that the unveiling of the infrastructure bill has been priced in for a while. We’ve known about it for weeks, so there won’t be any easy money made today by jumping into say a transportation ETF before Biden announces the plan.
In fact, the SPDR S&P Transportation ETF, XTN, is down 1.21% today. People may be selling the news after it gained 49% over the last six months.
There is definitely money to be made once more specifics of the plan are unveiled. If you have a hunch that one particular area might receive more funding than expected, like electric vehicle credits and incentives, you could weigh your portfolio more heavily in that area.
Unfortunately, none of us know the specifics of the plan. Your guess is as good as mine, and it probably wouldn’t be a good guess. Industries that I’m looking at for a potential infrastructure play are:
Cement manufacturers (keep in mind during the Obama administration cement kilns had to undergo increased capex to for regulatory purposes which could be a future headwind)
Asphalt plays
5G tech infrastructure plays
Small and micro-cap industrials (think of the picks & shovels that will benefit from increased capex spending)
Green energy (wind tower manufacturing, EV charging stations, energy efficient buildings)
Inflation beneficiaries (higher spending will lead to higher inflation which should benefit inflationary type hedges)
The downside of the plan is that Biden wants to increase the corporate tax rate from 21% to 28%. Trump’s lowering of this rate a couple of years ago provided a boost to stocks, so the opposite could happen here if the market believes the tax hike is likely to pass. Remember when small and micro-cap stocks rocketed 10% plus after the tax rate was cut? The same thing will happen if taxes are increased. Domestic small businesses will suffer.
However, any company with a significant amount of net operating losses (“NOLs”) should benefit from a rise in the corporate tax rate as they will shield any future free cash flows from the tax man. I will be closely monitoring NOL shells as I think these will get a significant amount of potential investment from professional investors in the future.
Overall, an increase to the corporate tax rate negatively impacts just about every industry that generates taxable income. The recent sell-off in domestic small-cap and micro-cap companies could be an indication that investors are worried about a potential increase in corporate taxes. Remember, small and micro-cap domestic businesses have much less options to defer taxes unlike large corporations which can shield taxes through international subsidiaries.
Keep in mind that Biden’s plan may not come to fruition at all. Congress would still have to pass a bill to secure funding for the plan. The announcement today will just lay out the President’s formal plan for what he wants proposed in Congress. The details could be changed by the House or Senate, or the entire thing may not pass at all.
In the mid-term we expect progress on the infrastructure plan to be beneficial to the Dow, along with construction and infrastructure ETFs. We’ve noted in past editions of the newsletter that investing in stocks and ETFs of companies with real assets is a good idea if you’re worried about inflation right now. If that’s the case, inflation worries and infrastructure hopes could continue to provide catalysts for mining, construction, and other industrials.
Options
Did you know we have an options newsletter? We post real trades and analyze each one so that you can follow along. Here’s a trade we did yesterday:
Sell 10 AAL Apr1 $24 Calls @ $0.47
This trade is a bet that American Airlines will fall from here. IV is not very high, but I figure that AAL’s 5% spike will sell-off either this afternoon or tomorrow.
The airline is up on an update the company put out saying that its optimistic about Q2 travel. However, we’ve known that air travel is picking up pretty quickly for the last several months, and American has already rallied quite a bit on this news this entire year. So, I figure there will be a sell-off pretty soon.
Sign up for the free version of the options newsletter here.
Stock Picking Service
For those who don’t know, we launched a paid stock picking service last week. The subscription service will be a way for me to highlight my top ideas for paying subscribers. As a background I worked at a hedge fund for several years and achieved outsized returns investing in the smallest, most obscure companies on the public market. The research I will be providing will be institutional quality. In addition, every stock I highlight, I will also be invested in.
The plan is to write-up 1-2 high quality, and actionable stock picks per month that have potential to generate high alpha for subscribers. For the month of March we have written up two ideas.
The first idea has crashed on zero news since I dropped the research report. I have added substantially to my position as I think the company is in play to be sold. There is more risk with this idea that I typically like to deal with (total capital loss from bankruptcy) but if the company is sold you could 2-4x your money. I sized my position accordingly where if I am wrong it will be a small speedbump in the road, but if I am right I will make a lot of money.
The second idea is up 36% since I have written it up. I still believe this stock could potentially double or more if the management team executes. This company should benefit from the gradual reopening of the economy, and if they can keep costs down, they will drive a substantial amount of free cash flow.
For the month of April I will be highlighting another retail investment that I think could go up 200% if the management team executes and also two movie theatre stocks Wall Street has forgotten about, and frankly are in a way better position than AMC over the long-term. The small retail stock with implied upside of 200% (give or take) should be out by this weekend at the latest.
Thanks for your support and feel free to reach out anytime.
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