SET Monthly Issue October 2016
INCOME FROM INFRASTRUCTURE
There are 607,380 bridges in America. That’s according to the Federal Government’s National Bridge Inventory.
Safety officials say more than 10% of these bridges are unsafe. Experts have designated 65,605 bridges as “structurally deficient”. Another 20,808 bridges are classified as “fracture critical”.
It’s not pretty. But neither are woefully outdated airport terminals, pockmarked interstates, and shaky sewer systems.
It is impossible to look at America’s infrastructure and not notice the problems, which range from the shabby to the unsafe.
Forget politics and dueling agendas. Ask yourself, “Where’s the money to fix our infrastructure?” There’s no simple answer, but there’s a good clue in the Federal Budget. $73.3 billion for “Overseas Contingency Operations” as part of the Consolidated and Further Continuing Appropriations Act Of 2015.
Translation… Iraq and Afghanistan.
At what point will politicians feel enough public pressure to shift the spending from Afghanistan to Alabama? The answer to this question will largely determine the course of increased investment in our infrastructure.
And when the funds start to flow, investors in the First Trust ISE Global Engineering & Construction Index Fund (FLM) will profit.
WHY GLOBAL?
If we are looking for a way to profit from what we anticipate as growing government spending on infrastructure, why wouldn’t we make a pure play with domestic firms only?
There are two reasons. One is the global nature of the engineering and construction business.
The French conglomerate Bouygues operates in 100 countries. It recently completed a major tunnel project in Miami.
A Swedish firm, Skanska, has construction projects in all 50 states. The U.S. is the firm’s largest market.
(Skanska has been working in Southern California since 1917.)
Some of the major domestic players the ETF tracks…
- Fluor Corp (FLR) – Irving, TX
- Jacobs Engineering Group Inc. (JEC) – Pasadena, CA
- EMCOR Group Inc. (EME) – Norwalk, CT
- AECOM (ACM) – Los Angeles, CA
21% of the stocks in the index tracked by the ETF are headquartered here in the U.S. and 78% are global stocks.
The second reason we like the First Trust ISE Global Engineering & Construction Index Fund is where we are in the construction cycle right now. The upswing we anticipate is not just the result of increased investment in the U.S. infrastructure.
Research from the Timetric report, “Global Construction Outlook to 2020” forecasts an annual average growth rate of 3.4% through 2020.
Don’t let this modest number mask the size of the opportunity. In 2015, global construction was an $8.5 trillion business. An extra $1.5 trillion in revenue in the next four years provides for ample profits.
Growth is forecast to be particularly strong in the emerging markets of Southeast Asia, the Middle East, and Africa. Qatar’s major construction projects continue to boom, even as oil revenue has dipped.
Do we expect a slowdown in construction projects in oil-rich countries? Yes. The recent growth rates are unsustainable. The slump in oil export revenues will hurt.
But given the size and scope of the market, the thirst for construction remains strong. It’s not as if Mideastern business will dry up.
China is always a perpetual enigma. Two of the top stocks tracked by the ETF are Chinese companies. These firms do business outside of China, and are positioned to profit from increased spending in both Southeast Asia and Africa.
This ETF is broadly diversified. It tracks the performance of 69 stocks, and just 26% of assets are concentrated in the top 10 holdings.
| Company Name | Country | % Weight | ||||
| Vinci S.A. | France | 2.91% | ||||
| China Railway Group | China | 2.73% | ||||
| Skanska A.B. | Sweden | 2.72% | ||||
| Bouygues | France | 2.72% | ||||
| China Communications Construction | China | 2.61% | ||||
| 09/29/16 | ||||||
A CLOSER LOOK AT THE TOP 5 HOLDINGS
Vinci S.A.
A 117-year old French firm associated with infrastructure and property construction, highway infrastructure concessions, highways, tunnels, airports, bridges, parking garages, energy infrastructure and services.
Skanska A.B.
A 129-year old firm headquartered in Stockholm that works on residential development, commercial property, and infrastructure development around the world.
China Railway Group Ltd.
Based on revenue, the largest construction company in the world. Projects range from railways and highways to manufacturing. The firm has a significant presence in the Mideast, particularly in Abu Dhabi.
China Communications Construction Co. Ltd.
The firm is China’s largest port construction and design company, and the country’s largest dredging company. It is involved in road, railway, and port infrastructure projects.
Bouygues
The French conglomerate operates in 100 countries. Its divisions focus on civil engineering, real estate development, media, and telecommunications services.
THE ROLE OF FLM IN YOUR PORTFOLIO
This is an ETF for investors who want to be positioned to capture the upside in emerging markets without a pure play, and without the problems of smaller stocks.
It is not a recommended core holding for income investors, although it pays a modest dividend. FLM is better suited for the investor seeking long-term capital appreciation.
This is a thinly traded ETF. This can make it vulnerable to problematic gaps in bid-ask prices.
Trade Alert
Buy: First Trust ISE Global Engineering & Construction Index Fund (FLM) up to $50.00
Recent Price: $48.17
Price Target: $61.00
Stop Loss: $44.00
YEAR TO DATE SECTOR PERFORMANCE
| Consumer Discretionary | XLY | +2.40% | |||
| Consumer Staples | XLP | +5.39% | |||
| Energy | XLE | +17.08% | |||
| Financial Services | XLFS | -1.39% | |||
| Financials | XLF | -0.19% | |||
| Health Care | XLV | +0.11% | |||
| Industrials | XLI | +10.13% | |||
| Materials | XLB | +9.97% | |||
| Real Estate | XLRE | +5.09% | |||
| Technology | XLK | +11.56% | |||
| Utilities | XLU | +13.19% |
PORTFOLIO UPDATES
. . . . Vanguard High Dividend Yield ETF $VYM – BUY
It’s been a down month, and you don’t have to look far to find out why. One of the key culprits is Wells Fargo & Co. (WFC), a top five holding of the ETF. The Wells Fargo stock has been battered since revelations of its cross-selling abuses have surfaced.
Current yield is 2.99%.
Buy up to $77.00. The price target is $82.00.
. . . . iShares MSCI Emerging Markets Minimum Volatility ETF $EEMV – BUY
The ETF has been edging up and down lately, but in keeping with its investment objectives, no wild swings.
Current yield is 2.40%.
Buy up to $59.25. The price target is $76.00.
. . . . Vanguard Information Technology ETF $VGT – HOLD
It’s been the same story for the past few months… tech stocks have been on a winning run. Along with energy stocks, they’re the market darlings.
The ETF is up 12% since our buy recommendation in July.
Current yield is 1.82%.
The price target is $127.00.
. . . . First Trust ISE-Revere Natural Gas Index Fund $FCG – BUY
We expected minor ups and downs with natural gas prices since our buy recommendation, and that’s what’s taken place.
The ETF is up 2% since June. Monitor the price of the ETF, which is now approaching where we’re comfortable acquiring it.
The buy up to price for the ETF is $26.70 and the price target is $37.00.
. . . . PowerShares S&P SmallCap Energy ETF $PSCE – HOLD
Last week’s announcement of efforts from OPEC countries to cut production in an effort to increase prices helped push the ETF higher.
It is up 17% since our recommendation in May, and has surpassed our buy up to price of $17.50.
Move from Buy to Hold.
. . . . Aberdeen Chile Fund $CH – HOLD
The ETF has rebounded since a dip last month, but is trading below highs hit earlier in the year.
A $0.14 per share dividend has been paid to shareholders of record as of September 21st.
The price target is $11.00.
. . . . Utilities Select Sector SPD $XLU – HOLD
Continue holding. Despite the fallback from recent highs, this ETF remains a solid defensive, long-term position.
Portfolio Changes
- This month we’re buying First Trust ISE Global Engineering & Construction Index Fund (FLM) up to $50.00.
- Move S&P SmallCap Energy ETF (PSCE) from Buy to Hold… it has exceeded our buy up to price of $17.50
Category: SET Monthly Issues
