As everyone knows by now, the housing market is in a bad state. The NAHB/Wells Fargo Housing Market Index (HMI) is hitting new lows every month:

That’s not the story…

What people are simply forgetting, as they always do, is that not everything in the “construction” sector is housing related. In fact, many other types of construction markets are flourishing or will be soon.

For instance, I wrote to you back in June: “In about 13 years, 90% of urban interstates will be at or exceeding capacity, according to the American Association of State Highway and Transportation Officials’ February 2007 report.”

But urban interstates aren’t the only thing that needs upgraded. As we have seen this summer, a lot of old infrastructure is at a tipping point. The New York City steam-pipe burst in July…

The Minneapolis bridge collapse in the beginning of August…

These are just the early signs of a complete breakdown across the country.

The American Society of Civil Engineers (ASCE) conducts a study every two years grading (A-F) various infrastructure problems in the U.S. The most recent one in 2005 declared that the overall American infrastructure received a D.

This report included 15 areas that were graded, but I want to focus on four of them today: roads, bridges, transit, and wastewater. Of these four, three received a D grade and only one got a C — bridges. That’s right, the one that has had the most public criticism because of the I-35 disaster.

So what does any of these mean to us? The report also evaluated how much it would cost to bring the overall ratings up to an adequate level. It concluded that it will cost $1.6 trillion over the next five years… $1.6 TRILLION!

That’s a lot of money in only a five-year period. So, I quickly realized that there have to be some amazing opportunities that will come out of this. I recognized two immediate things: 1) the entire construction industry as a whole has recently taken some serious hits due to the housing bust…and 2) because of the bubble that preceded the bust, most of the construction companies out there have spread into the residential business.

So, I had to look for companies that are staying 100% out of residential construction. That’s when I happened upon a beauty, Sterling Construction Company Inc. (STRL: NASDAQ).

Sterling specializes in the initial construction and the rebuilding of both transportation and water infrastructures. They have road, highway, bridge and lightrail projects in very key locations in certain cities in Texas. They also build (and rebuild) water infrastructure projects like water, wastewater and storm drainage systems.

Their largest customer is the Texas Department of Transportation (TxDOT), which will ultimately be the recipient of that state’s share of the $1.6 trillion. Already this year, TxDOT has awarded Sterling with contracts for concrete paving, feeder road reconstruction, installation of a major storm sewer system, construction of a bridge, major storm drainage systems and water line work.

Now, companies like this aren’t always a sure bet when looking to invest. This particular company does have excellent numbers — sturdy 18% revenue growth and is trading at 9/10th of its sales — but that doesn’t always bring it market security. The construction business is a very cutthroat one. With so many residential construction crews out there looking for work, you can bet that this infrastructure market will soon be flooded.

That’s why the smart money is betting on the companies in various niche markets that can’t easily be invaded by new companies. Ones like water-pipe manufacturers, or pre-cast concrete companies. These types of investments will surely make the lucky few a buck or two.

Sincerely,
Jim Nelson
September 26, 2007

P.S.: I’ve been watching this infrastructure crisis for a while, but I’m not alone. Chris Mayer has been on this for years. He’s given his Capital & Crisis and Mayer’s Special Situations readers plenty of opportunities to make big money from it. In fact, right now he has a fantastic water- and wastewater-treatment company that works in one of the world’s most H2O-desperate countries.

Jim Nelson

Jim Nelson is the managing editor of Penny Sleuth. He has been playing the stock market since he was 14, always with a preference toward smaller companies. He has honed his stock picking skills at Agora Financial since 2004, effectively combining a growth and value approach. Like Greg Guenthner, Jim also contributes to Penny Stock Fortunes on top of bringing you the Penny Sleuth every weekday.

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