President Calvin Coolidge famously said, “The chief business of the American people is business.”
Thank goodness we’re getting back to that.
President-elect Donald Trump, a successful businessman himself, says rebuilding America’s infrastructure is his number one business priority.
That’s great for America… and great for investors betting on infrastructure businesses.
Over the past three days infrastructure stocks have been on a tear.
They’ve been bought up at a furious pace, propelling indexes higher and pushing the Dow Jones Industrials Average to all-time record highs.
The Rising Tide Will Not Lift All Boats
So-called infrastructure stocks – engineering companies, construction companies, heavy equipment makers, industrial materials manufacturers, miners, energy companies, toolmakers, and a host of other building related industries – have mostly been out of favor.
With Donald Trump’s election, investors have been rotating into these stocks at a furious pace, while at the same time dumping stocks they fear will be hammered if Mr. Trump makes good on his campaign promises.
While jumping on hot momentum stocks isn’t a bad idea, rushing into the big gainers that just exploded higher in a matter of three days might be dangerous.
Everyone knows stocks don’t go up forever. So piling onboard suddenly screaming stocks while the rest of the market struggles may not be the wisest move right now.
Besides, not all infrastructure-related companies are going to be employed in America’s rebuilding.
If you own some infrastructure-related companies whose share prices have just popped higher, stick with them.
But because not all boats will rise with the coming tide, it makes sense to employ trailing stops on those positions.
By having stop orders down on your positions, and raising those stop orders as your shares rise, you can rest assured you’ll lock in profits if the rush into them turns around on account of profit-taking or the fact that they may not be beneficiaries in the upcoming building binge.
Besides, we’re not there yet.
Mr. Trump has to get into office and then he has to come up with the money to start the thousands of building projects we all want to see.
On the way there, he’s going to come up against the dreaded debt ceiling in March, very early on in his first 100 days in office. Raising the debt ceiling, again, in the face of needing to raise hundreds of billions of dollars needed to rebuild America isn’t a slam dunk.
Spending heavily on infrastructure will also put upward pressure on interest rates.
A showdown over raising the debt ceiling and the prospect of rising rates could hit the markets. And those aren’t the only headwinds markets are facing.
Our Blueprint for Profiting on Trump’s Infrastructure Boom
So the questions to ask are: which infrastructure stocks are likely to be big beneficiaries of America’s building renaissance, and when should you get into them?
Since there are no guarantees of who the winners will be, it makes sense to buy stocks that are winners either way.
That means buying solid companies with a history of getting government contracts, a history of making money and, for me, a history of paying dividends.
There are plenty of other companies whose stocks may become high-fliers, but we’re just at the starting gate, and it doesn’t make sense to speculate on what we don’t know.
By getting into infrastructure stocks that have been lagging, which usually means investors will rotate into them to catch their move up and out of the doldrums, that also have a decent dividend yield, is the smart way to start building your rebuilding portfolio.
For starters, I like Caterpillar Inc. (NYSE:CAT), Deere & Co. (NYSE:DE), Emerson Electric Co. (NYSE:EMR), Cummins Inc. (NYSE:CMI), and Nucor Corp. (NYSE:NUE) all for their dividend yields and because they are proven winners.
The problem with them is they’ve all been bid up through the roof and are way too lofty for my liking right this second.
As far as timing when to get into them so that you don’t miss the boat if they keep going higher, I like selling out-of-the-money puts on them.
Puts are options contracts that give the contract holder (in this case, the person you’re selling to) the right to sell that stock back to you later at a predetermined price (the strike price).
By selling out-of-the-money puts, you collect some money up front.
If share prices go up and you don’t get into the stock, you’ve at least made some money on its move up.
If share prices go down, you have the obligation to buy the stock if you get “assigned” on your put options and have to buy at the strike price.
And if the stocks you sell put options on go down enough and you have to buy them, which you want to do anyway, you’ll get them at a lower price than they are trading at now.
That’s how I like to play stocks I want to own if I think they’re too pricey on account of having just been bid up on short-term speculation.
Of course, there’s another way to get into them right away and protect yourself if they go down.
Buy them now and look forward to collecting the fat dividends they pay, while you hope they appreciate, but buy put options on them at the same time, in case prices go down. That way you’ve got downside protection.
The stocks I recommended all have good dividend payouts, which can be used to pay for put options that protect your downside.
I’ve got a ton more great infrastructure plays teed-up for my newsletter subscribers, a few of which I’ll tell you about after we get into them.
There’s going to be a lot of money to be made on rebuilding America, and we’re all going to participate in that, so keep reading here for smart plays on the infrastructure windfall.