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.

Penny Stock Infrastructure Companies was originally featured in the Penny Sleuth.

According to the report, U.S. homeowners had a tough time staying up to date with mortgage payments in Q4 2006, with the delinquency rate leaping to 4.95% from 4.67% thanks to subprime mortgages, where delinquencies rose to 13.33% from 12.56%.

To be painfully honest, we wouldn’t be surprised if a similar fate befalls those indices between June 11-15, 2007. That’s the date range for the next Mortgage Bankers Association mortgage delinquencies report (the actual date won’t be known until we get closer). Any negative MBA read will only re-strengthen lingering fears that mortgage delinquencies will eventually force consumers to cut back on discretionary spending as lenders tighten credit in the housing slowdown.

Economically speaking, we then have a problem. Once consumers spend less, the economy stops growing, and our beloved stock market rally comes to a screeching halt, and turns south.

Plus, the economy must still contend with the probability that 1.1 million additional home foreclosures will transpire over the next six years as adjustable rate mortgages reset at higher rates. These foreclosures account for about 13% of ARMs originated or refinanced from 2004 to 2006, which equals about $326 billion in debt.

Worse still, existing homes sales fell an unexpected 2.6% in April to 5.99 million, the lowest level in about four years, according to Bloomberg.com. This only adds to concerns that unsold home glut will further depress prices this year. Tragically, given the backlog of homes, existing home sales may have to drop further. This, plus increasing food and energy costs, will cut into discretionary spending, which could lead to a higher unemployment rate, which could lead to a significant slowdown in consumer spending, which could lead us into an environment that would not be good recession-wise.

Scarier, and what could prove even more tragic, according to International Forecaster (as quoted in a GoldSeek.com article), “Sixty-five percent of hedge funds are leveraged to subprime and ALT-A mortgages and could be in deep trouble.”

Still, next month’s report gives us an opportunity to profit on the short side and the long side. The short side opportunity is to buy VIX calls on increased report-induced volatility, mirroring that of March 2007’s rise, plus any investment banks with heavy subprime exposure. Death Cross Trader will issue this trade shortly. As for profiting on the long side, an argument can be made for uptrend resumption on strong economic and earnings news. An irrational market has a tendency to shake off extremely bad news, in the presence of any good news.

Sincerely,
Ian Cooper
May 29, 2007

P.S.: Death Cross Trader exploits overpriced stocks and the naïve investors who buy them, with an 86% accuracy rate with average gains of over 26% on every single recommendation! In fact, we now have 48 winners out of 56 picks for total gains of 1,485%… If you had put $5,000 into each trade, you could now be seeing as much as $74,267 in pure profit!

Investing in the Declining Real Estate Market was originally featured in the Penny Sleuth.