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Shares of Toronto-based Northland Power are attractive because the power-producing company should benefit from being an early entrant in the high-growth, offshore wind-farm space.

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Infrastructure assets are embraced by pension funds for their predictable, inflation-linked cash flow and uncorrelated returns to stock and bond markets.

Although retail investors can’t invest directly in pipelines, utilities, transportation or telecommunications infrastructure, they can get similar exposure through publicly listed stocks. Some of these stocks offer hefty dividends while others can be virtual monopolies with strong growth potential. However, they’re not immune to market gyrations.

We asked three infrastructure fund managers for their top picks in the space.

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Kevin McSweeney, vice-president, portfolio management, and portfolio manager at Signature Global Asset Management, a division of CI Investments Inc.

His fund: Sentry Global Infrastructure Fund

The pick: Cheniere Energy Inc. (LNG-A)

52-week range: US$55.09 to US$70.60 a share

This Houston-based liquefied natural gas exporter’s (LNG) stock trades at an attractive valuation because the market “prices in too much risk” in terms of its exposure to energy prices, Mr. McSweeney says. Cheniere, the largest U.S. purchaser of natural gas, has two LNG export terminals on the Gulf Coast. However, 85 per cent of its LNG production goes to high-quality customers, such as foreign utilities, with take-or-pay contracts lasting 15 and 20 years. “The cash flow is very predictable, but the market sees it as an energy company affected by commodity prices.” Its stock trades unjustifiably at a discount to Canadian peers, such as TC Energy Corp. Cheniere buys back stock, but will likely pay a dividend within three years. Risks include cost overruns in expanding its terminals and its high-debt level, which Mr. McSweeney thinks “is manageable.”

The pick: Ferrovial SA ADR (FRRVY-OTC US)

52-week range: US$19.43 to US$30.40 a share

The Madrid-based infrastructure company – best known to Canadians for its stake in Ontario’s Highway 407 toll road – is a compelling investment because of its growth potential, Mr. McSweeney says. (He holds the euro-denominated stock listed on the Madrid Stock Exchange in Sentry Global Infrastructure Fund.) Strong traffic growth on Highway 407 – of which the controlling shareholder is Canada Pension Plan Investment Board – has enabled Ferrovial to raise prices and increase cash flow. In the United States, its toll roads in Texas also have an “innovative pricing model that allows for price increases when demand is strong.” Ferrovial operates London’s Heathrow Airport, which has experienced growth in passenger traffic despite uncertainty over Britain leaving the European Union. A proposed third runway at the airport would boost earnings growth, he says. One risk to the stock is whether Ferrovial can divest its underperforming services division at a reasonable price.

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Varun Anand, portfolio manager, infrastructure, at Starlight Investments Capital LP

His fund: Starlight Global Infrastructure Fund (SCGI-NE)

The pick: Northland Power Inc. (NPI-T)

52-week range: $20.80 to $27.05 a share

Shares of this Toronto-based power producer are attractive because it should benefit from being an early entrant in the high-growth, offshore wind-farm space, Mr. Anand says. Northland Power generates electricity from natural gas or renewable sources, such as wind and solar power. It has offshore wind assets in Europe and Taiwan and could bid for offshore wind tenders in the northeastern U.S. too. The company recently acquired an electric utility in Colombia that could be a beachhead to expand into South America. The stock, which has a dividend yield of more than 4 per cent, trades at a discount to some Canadian and U.S. utilities, partly on concerns about contracts expiring in the next few years. However, the latest acquisition and other projects should backfill growth, he says. Below-average wind speeds are a risk for its offshore wind farms.

The pick: Waste Connections Inc. (WCN-T)

52-week range: $96.16 to $128.98 a share

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The appeal of North America’s third-largest waste-management and recycling company stems from its defensive nature, Mr. Anand says. Vaughan, Ont.-based Waste Connections is a business that’s generally “resilient during an economic downturn.” The company, which has multi-year contracts with customers, had the best earnings before interest, taxes, depreciation and amortization (EBITDA) and free-cash-flow margins versus its two major U.S. competitors from 2005 to 2018. Waste Connections is the number one or number two player in 90 per cent of its markets and its management has “some of the best profitability metrics.” Although the stock trades at a premium multiple, the upside potential can come from organic growth or acquisitions, he says. One risk is competitors undercutting prices to gain market share.

Jeffrey Sayer, vice-president and portfolio manager at NinePoint Partners LP

His fund: Ninepoint Global Infrastructure Fund

The pick: Kansas City Southern Railway Co. (KSU-N)

52-week range: US$90.55 to US$156.98 a share

Shares of Kansas City Southern Railway are compelling because its U.S. rail system reaches into Mexico and allows the company to benefit from free trade, Mr. Sayer says. “Cross-border revenue is just over 35 per cent.” Despite a U.S. manufacturing slowdown, the Kansas City-based railroad increased its third-quarter profit by 24 per cent versus a year ago amid flat car-load volumes. The strong quarter was helped by cost controls from its new rail-management program. Its revenue growth stems from a 2013 Mexican energy reform permitting cross-border transport of chemical and petroleum, while two new auto plants coming online in Mexico should continue to boost its vehicle shipments. Its stock traded recently at 19 times 2020 earnings – an acceptable multiple for a quality business, he says. Risks include an auto downturn and deterioration in U.S.-Mexico relations.

The pick: Raytheon Co. (RTN-N)

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52-week range: US$144.27 to US$218.00 a share

The Waltham, Mass.-based defence contractor has appeal because its radar systems share attributes of a traditional infrastructure company, Mr. Sayer says. They include high initial capital costs, long-term contracts and a “near monopoly position,” he says, noting that he takes a broader definition of infrastructure for the assets in Ninepoint Global Infrastructure Fund. Raytheon gets 30 per cent of its revenue from international sales. It was recently awarded a US$384-billion contract for units of a new radar for the U.S. Army’s Patriot missile-defence system, but that could ultimately be worth US$5-billion because the system has been sold to many nations. Raytheon’s stock has lagged its peers amid some concerns about its proposed merger with United Technologies Corp. announced this past June, but “people are more positive now.” Its stock trades below below the market on 2020 price-to-earnings multiples despite slightly higher expected earnings growth. Defence budget uncertainties is a risk.

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