There are a number of encouraging economic indicators out there right now.
Unemployment is 7% and continues to move slowly downward. Despite big gains already, housing prices just rose at the highest rate since 2006. And of course, the stock market tacked on 30% in 2013.
If you believe that collectively these indicators are telling a story of a cyclical recovery, then it’s time to start thinking about which sectors are going to play the biggest role in the economy’s resurgence.
In my mind, that should lead investors to infrastructure stocks.
Consider the recent snafu with FedEx (FDX) and UPS (UPS) getting overwhelmed by holiday shipments. There’s probably a bit of timing to blame here, since the surge did come all at once, but the bottom line is that e-commerce grows every year and package volume continues to move higher. That means a bull market for shipping stocks like FDX and UPS if spending stays strong.
More broadly, the same can be said for railroad stocks like Norfolk Southern (NSC), CSX Corp. (CSX) and Union Pacific (UNP). U.S. exports just hit a record, and rail cars are the easiest and cheapest way to get containers to ports and start the process of shipping key commodities like coal and soybeans around the world.
If you don’t like the conventional idea of infrastructure, then consider a 21st century twist via telecoms AT&T (T), Verizon (VZ) and even Comcast (CMCSA). In an increasingly wired world, the Internet capabilities these companies provide are crucial to the success of businesses and the leisure time of consumers. These telecom stocks maintain the information superhighway, which is perhaps an even more important part of our economic infrastructure than some physical roadways are.
There are plenty of ways to skin this cat, and these are just a few ideas.
The risk, of course, is that the recovery is not cyclical at all and won’t be grounded in higher spending from businesses or governments. Admittedly, one hallmark of the bull market has been massive stock buybacks. According to the WSJ MoneyBeat blog:
“Stock buybacks among S&P 500 companies jumped to $128.2 billion in the third quarter, the highest level since the fourth quarter of 2007, according to S&P Dow Jones Indices. Buybacks rose 8.6% from a quarter ago and 24% from a year earlier.”
When you rely on these techniques to juice earnings and deliver shareholder value, it’s very different than organic growth and top-line expansion.
But for what it’s worth, earnings are looking up in 2014 and economic indicators continue to be favorable.
If you want to get into cyclical stocks before they break out, then infrastructure might be your best bet.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. As of this writing, he did not hold a position in any of the aforementioned securities. Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP.