Goldman Tears Down Infrastructure Stocks

By Dr. Duru written for One-Twenty

December 14, 2008

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As soon as infrastructure stocks display the kind of breakout strength that is hard to find in this market, Goldman Sachs fires back with a "too good to be true" downgrade on Friday. Goldman analysts downgraded the entire engineering and construction sector, including sell ratings on Fluor (FLR) and Caterpillar (CAT) and neutral ratings for Foster Wheeler (FWLT) and Jacobs Engineering (JEC). The one-day market reactions were price moves of -4.9%, -0.3%, +0.7%, and -1.9% respectively. All stocks were down significantly before recovering on the day.

It seems what got the final ball rolling was Goldman's concurrent forecast that oil would average $45 next year and get as low as $30 in the next few months. Many of these infrastructure stocks are heavily dependent on oil-related investments, and such projects will not be economical at such low prices for oil. The infrastructure spending planned by the U.S. will not be enough to make up the losses. So, Goldman has concluded that infrastructure stocks have run far ahead of the fundamentals of a cyclical peak.

Goldman's downgrades have not arrested the current upward momentum in these stocks, but many of them have now pulled back to interesting buying areas with clear stops for shorter-term trades. If the market continues to buy bad news and/or the S&P 500 continues its current run upward, buying the dip here could prove worthwhile. Goldman's downgrade did not include cement stocks, but Cemex (CX) in particular has pulled back into an interesting buying area. Instead of repeating charts I just posted last week, I will produce a list of revised short-term outlooks.

  1. JEC filled last Monday's gap up. JEC is a buy if it surpasses Friday's high ($47.59) with Friday's low as support ($42.60). Interesting support also exists at the 50DMA ($37.61) which now represents the bottom of the last range of consolidation.
  2. CAT was only marginal before the downgrade, but it did bounce off support at the 50DMA. A move above $45.50 would demonstrate renewed and buyable strength. Monday's gap up has not yet been filled.
  3. CX has filled Monday's gap up and bounced from support at the 50DMA ($7.28). It is buyable above Friday's high ($8.36).
  4. Texas Industries (TXI) is still bouncing around since Monday's gap up. I am waiting for a renewed push up above Monday's high ($37.75) as a sign of buyable strength.
Beyond these short-term views, I have to agree that continued declines in oil prices (and commodities in general) will undermine the buying theses for infrastructure stocks. But with the gears of reflation spinning frantically across the globe, I remain more interested in looking for buying opportunities in this sector than selling (shorting) ones. If the charts of these infrastructure plays eventually break down, I will consider such action a reinforcement of the economic danger implied in the current acceleration of job losses in the U.S.

Be careful out there!

Full disclosure: long S&P 500 in an index mutual fund. For other disclaimers click here.

DR. DURU®, 2008