Inside Wall Street: Bring on the Cranes and Road Graders by Gene Marcial

The Dow Jones industrial average has plunged some 41% since its record close at 14,164 on Oct. 9, 2007—for a $1.7 trillion loss in market capitalization. And the broader Dow Jones Wilshire 5000-stock index has lost 46%, or $9.1 trillion. The huge sell-off is causing some strategists to figure that the market has already priced in a recession. Not only that, “it also has posted the worst performance entering a recession in over 60 years,” notes Jeffrey Kleintop, chief market strategist at LPL Financial. While volatility is likely to continue, history suggests additional significant downside is unlikely. “The stage is set for an eventual recovery, led by the early cyclical sectors,” predicts Kleintop. It’s well-known, he adds, that powerful gains in the stock market come well before the end of a recession.

One group that some investors believe will spearhead the recovery parade is the infrastructure sector. Stocks in the group will benefit not only from signs of an economic upturn but also from an “infrastructure buildup” that President-elect Barack Obama is expected to pursue, says William Rutherford, president of Rutherford Investment Management. He favors Caterpillar (CAT), the world’s largest maker of earthmoving equipment; Terex (TEX), a global manufacturer of heavy-duty machinery for construction, infrastructure, and mining; and Manitowoc (MTW), a maker of construction cranes and boom trucks.

Shares of these infrastructure plays have been crushed, as analysts turned cautious over concerns that the global recession would hurt demand for their products. Caterpillar dived to 34.01 on Nov. 19, down from 85 on May 19; Terex tumbled to 10.27 from 76.25 on May 19; and Manitowoc plunged to 5.50 from 51.49 on Dec. 26, 2007. Rutherford sees Caterpillar, which sports a dividend yield of 4.5%, snapping back close to its high. He expects Caterpillar will also benefit from China’s plan to spend $586 billion on infrastructure and other programs to lift its economy.

Charles Brady of BMO Capital Markets rates Terex outperform, although he has cut earnings forecasts because of concern over slowing demand. Nonetheless, he believes the stock’s current valuation doesn’t fully reflect the company’s “long-term positives and strong financial position.”

Seth Weber of Bank of America (BAC), also cautious about the economy, rates Manitowoc neutral and has reduced some of his earnings estimates. Even so, his 12-month target is 17.

Rutherford believes these infrastructure plays will advance by at least 15% to 20% in price on the prospects of Obama’s reconstruction program alone.

Unless otherwise noted, neither the sources cited in Inside Wall Street nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.