Timing Economic Expansion: 3 Stocks For Good Times & Bad

The length of the current U.S. economic expansion cycle is nearing a record, which makes it tricky for investors to choose stocks for their portfolio. Ideally, we need companies that will perform well even when the economic cycle takes a turn for the worse. For instance, companies that are less dependent on discretionary spending will fare better when the economy treads downward.

Also, companies with lower debt burdens will be more resistant to recessionary shocks. Recently, a fair bit of volatility has been witnessed in the market. This, coupled with hawkishness on the part of the Federal Reserve, indicate that the best course of action for investors right now is to play safe. For a portfolio, market anxiety can easily be balanced by investing in a less volatile industry.

So which industry can guarantee stability during a recession?

Screening Industries for Safety

Let’s get the obvious out of the way. In a recession, retailers rarely have the benefit of a floor on sales. Industries that deal in consumer staples witness lower margins as customers cut corners and shift habits.

Focusing on infrastructure companies, their growth is likely to be hampered as new projects are delayed in a recessionary environment. However, infrastructure must be maintained, which grants such companies a steady, stable revenue base. Infrastructure companies have long-term master agreements with utilities to maintain and service pipelines, electrical grids or telecom equipment.

The replacement of outdated and risky infrastructure is as essential. Doubtless these companies benefit from economic expansion. But this revenue base makes them a good choice in bad times too.

Likewise, renewable energy calls for the improvement of existing electrical grids and construction of new power sources. Transmission and distribution spending are reaching new highs and are set to sustain the trend in the upcoming days. Innovative technologies like fracking require new infrastructure in under-developed regions, which gives another boost to infrastructure companies.

Stocks that Fit

There is one American company that stands out as a leading provider of infrastructure solutions — Quanta Services Inc. (NYSE:PWR) . Other companies in the same space include Fluor Corp. (NYSE:FLR) , Jacobs Engineering Group Inc. (NYSE:JEC) , KBR, Inc. (NYSE:KBR) , and AECOM (NYSE:ACM) . While all these companies provide exposure to the industry we discussed, it will be prudent to assess these companies comparatively as well.

Assessing Stocks Under Different Metrics

In terms of earnings history, Quanta Services beat estimates just twice in the trailing four quarters, while Jacobs Engineering managed to generate four healthy beats with an average of 11.4%. Fluor has generated three strong beats in the trailing four quarters with an average of 8.4%.

Quanta Services’ forward PE multiple stands at 13.4 right now, lower than the industry’s PE of 17.8. Jacobs Engineering is undervalued as well, with its PE of 15. Fluor is priced almost at par with the industry, as its PE multiple currently stands at 17.7.

In the past year, Quanta Services’ shares have lost 6.4%, which indicates that the company is trading at a discount right now relative to its growth prospects. In contrast, Jacobs Engineering’s shares have returned 8.1%, while Fluor’s shares have rallied 8.3%.

However, what we are concerned about safety in turbulent times. Let’s take a look at the companies’ debt-equity ratios. Quanta Services’ debt-to-equity ratio currently stands at just 0.18, much lower than the industry ratio of 0.42. Jacobs Engineering compares unfavorably with the industry with a ratio of 0.43. Fluor is also riskier than the industry in terms of debt burden, with a ratio of 0.46.

Quanta Services’ inherent stability is underlined by its low beta of 0.86, which compares favorably to that of Jacobs Engineering at 1.54 and Fluor’s beta co-efficient of 1.52.

Also, in terms of growth, Quanta Services is expected to grow 34.6% this year, higher than the industry’s growth expectation of 23.6%.

Estimate Revisions

Let’s see how the analyst community currently feels about these stocks.

Quanta Services, which carries a Zacks Rank #3 (Hold), has been attracting bullish analyst attention in recent times. The company’s Zacks Consensus Estimate for 2018 earnings has trended up from $2.47 to $2.65, in the past two months, which indicates that analysts expect good things from the company this year.

Jacobs Engineering, which holds a Zacks Rank #2 (Buy), has also witnessed positive estimates revisions. Its Zacks Consensus Estimate for fiscal 2018 earnings rose from $3.60 to $4.00 in the past 60 days, highlighting bullish analyst sentiment.

Fluor sports a Zacks Rank #1 (Strong Buy) and has been enjoying favorable estimates revision activity. Its Zacks Consensus Estimate for 2018 earnings has jumped from $2.38 to $3.26 in the past two months.You can see the complete list of today’s Zacks #1 Rank stocks here.

Clearly, analysts are feeling optimistic about the space as a whole. The Engineering-R&D Services industry currently holds a Zacks Industry Rank of 72 out of more than 250 industries, and lies among the Top 27% of all industries. Positive industry developments will benefit the stocks as well.

While all the stocks hold strong growth potential and enjoy favorable industry trends, in terms of valuation and financial stability, Quanta Services trumps Jacobs Engineering and Fluor. However, in terms of earnings history and Zacks Rank, Jacobs Engineering and Fluor beat Quanta Services.

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