Beware the Obama stimulus bubble

Construction stocks have surged since the election on hopes of increased infrastructure spending. But some stocks have run up too much.

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By Paul R. La Monica, CNNMoney.com editor at large

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Should the Obama administration launch a massive stimulus plan upon taking office?
  • Yes
  • No

NEW YORK (CNNMoney.com) -- Death and taxes...and overexuberance by investors.

Yes, even in this terrible environment for the markets and economy, traders were certain to find a sector to pump up.

This time around it's construction, and leading stocks in this sector have surged on the expectation that President-elect Barack Obama will push for more spending on infrastructure as part of an economic stimulus package.

In just the past week alone, shares of construction-management firm Fluor Corp (FLR, Fortune 500). have gained 17% and energy-engineering company Shaw Group (SGR, Fortune 500) has skyrocketed 22%

Some of these stocks began to run up even before the election in the hopes of an Obama victory. Shares of contractor and construction materials maker Granite Construction (GVA) are up nearly 70% in the past month. Engineering firm URS (URS, Fortune 500) has soared 65%.

Investors need to be cautious here.

Yes, it's likely that many of these firms would receive some financial lift from increased spending on highways and other projects.

But any new business from a stimulus package might not be enough to offset lost business stemming from a weak economy.

"There has been a focus on who will benefit from infrastructure stimulus. While these companies will get work from it, I don't know how significant the benefit will be," said Chase Jacobson, an analyst with Sterne Agee. "I do think that the runup here is a little overdone. Next year for these companies might be okay, but there's a huge question mark around 2010."

Jacobson said that while investors are focusing on the potential increase in public-works projects, many construction firms rely more on other areas of the economy, such as the energy sector.

Jacobs Engineering (JEC, Fortune 500), for example, is a company he follows that may get some new business as a result of more infrastructure spending. But it would not move the dial on the company's sales or profits all that much, he thinks

"To do work on a highway or build a small bridge - that amount is nothing in comparison to building a refinery," he said.

Matt Kaufler, co-portfolio manager of the Touchstone Value Opportunities fund, agreed that investors should not rush into infrastructure stocks just because of the hope of increased stimulus spending.

Kaufler said his fund owns shares of Shaw Group but not because he expects a short-term stimulus pop. Instead, he's holding the stock for the long-haul because he believes Shaw is the best company to benefit from a global buildout of power-generating infrastructure.

So like with any industry, investors should do their homework and not blindly buy a stock just because it's perceived to be in a hot sector. With any group, there will always be losers as well as winners. A big call on an entire sector is a risky move.

Anyway, happy Thanksgiving to all. I hope that none of you are going to stuff yourself with a Turgooduccochiqua. Yuck! To top of page

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