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This Aug. 6, 2019, file photo shows a Boralex solar farm in Powhatan, Va. The company should benefit indirectly from the build-out of transmission lines that’s part of the proposed U.S. infrastructure bill. THE CANADIAN PRESS/AP-Steve HelberSteve Helber/The Associated Press

Infrastructure stocks are garnering attention as U.S. politicians work on passing a US$1-trillion bipartisan bill to build and upgrade everything from roads and bridges to waterworks, broadband, and the electrical grid.

The Infrastructure Investment and Jobs Act, which a group of Democratic and Republican Senators proposed after much wrangling, includes US$550-billion in new spending over five years.

The bipartisan deal, which also includes dollars for environmental remediation and electric-vehicle charging stations, would be the first step in U.S. President Joe Biden’s clean-energy agenda. He also wants to push through a US$3.5-trillion package aimed at fighting climate change and improving health care and family-service programs. The Democrats could pass such a bill without Republican support via a process called budget reconciliation.

Infrastructure stocks ran up in anticipation of President Biden’s electoral victory and agenda, but some have pulled back and now provide better entry points. We asked three fund managers for their top picks to play the U.S.’s building spend.

Jeffrey Sayer, vice-president and portfolio manager, Ninepoint Partners LP

His fund: Ninepoint Partners Global Infrastructure Fund

The pick: Itron Inc. ITRI-Q

52-week range: US$53.49 to US$122.31 a share

Itron, which sells products and services to utilities to manage their energy and water systems, should benefit from the infrastructure bill, Mr. Sayer says. The Liberty Lake, Wash.-based company, a provider of hardware, software, and data analytics, will gain from utilities receiving dollars from infrastructure spending that aims to upgrade the electrical power grid and water systems. Most of Itron’s business stems from its “smart-grid technology,” which provides data on water and energy usage and is also a source of recurring revenue, he adds. Itron’s stock now trades at around 24-times forward earnings, he says. Although the company’s recent financial results were hurt by component supply constraints, “we expect earnings to grow by 30 per cent in 2023 [from 2022].” A risk is that the infrastructure bill does not get approved, but that’s not a concern as Itron still provides essential services to utilities, he adds.

The pick: Quanta Services Inc. PWR-N

52-week range: US$43.40 to US$101.96 a share

Forward annual dividend and yield: 0.24 US cents (0.3 per cent)

Quanta Services, a specialty contractor providing services to the electric power, pipeline, industrial, and communications industries, should get a tailwind from proposed new infrastructure spending, Mr. Sayer says. The Houston-based company doesn’t provide the technology, but it could be involved in the construction and modernization of the electrical power grid and broadband networks, he says. Quanta Services’ shares, which traded as high as 25-times forward earnings, are now trading at around 19-times forward earnings, he says. “We see earnings per share growth of about 16 per cent for 2021, 13 per cent in 2022 and 16 per cent in 2023, as the infrastructure dollars are being spent.” The infrastructure bill not getting passed is also a risk for this company, but that is not a concern as it provides essential services that will still be needed, he adds.

Robert Lauzon, managing director and deputy chief investment officer, Middlefield Capital Corp.

His funds: Middlefield Global Infrastructure Fund and Middlefield Sustainable Infrastructure Dividend Fund INF-UN-T

The pick: Xylem Inc. XYL-N

52-week range: US$75.08 to US$128.63 a share

Forward annual dividend and yield: US$1.12 (0.9 per cent)

Xylem, a global water technology company, is well-positioned to gain from the bipartisan infrastructure bill, Mr. Lauzon says. The Ryebrook, N.Y.-based company is involved in the design, manufacturing, and application of engineered technologies for the water industry. Xylem’s customers are utilities and municipal governments with 35 per cent of its business coming from the U.S. and the rest from Europe and emerging markets. Although its stock trades at a premium multiple of around 38 times estimated 2022 earnings, Xylem is still attractive because it’s a pure-play, a market leader, and has high environmental, social and governance scores, he says. “I can see its stock going up 10 per cent a year.” Risks include a slower transition by clients to its smart-metering technology and more lockdowns from the continuing COVID-19 pandemic.

The pick: Orsted A/S DNNGY-OTC

52-week range: US$44.55 to US$76.47 a share

Orsted, the world’s largest offshore wind-farm developer, should benefit from clean-energy initiatives in a proposed budget reconciliation bill, Mr. Lauzon says. The Fredericia, Denmark-based company, formerly known as Dong Energy, sold off its oil-and-gas business in 2017, and it is now “a pure-play on renewables,” he says. In January, President Biden pledged to double renewable energy production from offshore wind by 2030. Orsted was also recently awarded a major wind farm project by New Jersey regulators. Orsted shares now trade more reasonably at around 18 times estimated 2022 enterprise value to earnings before interest, taxes, depreciation, and amortization (EBITDA) compared with earlier this year, Mr. Lauzon says. (He buys shares via the Nasdaq Copenhagen exchange.) A risk stems from competition from big oil companies with renewable energy businesses.

Varun Anand, vice-president and senior portfolio manager, Starlight Capital

His fund: Starlight Global Infrastructure Fund SCGI-NE

The pick: Renewable Energy Group Inc. REGI-Q

52-week range: US$31 to US$117 a share

Renewable Energy Group, a producer of biofuels and renewable chemicals, could benefit from funding for an array of climate-change programs in the budget reconciliation bill, Mr. Anand says. The Ames, Iowa-based company converts natural fats, oils, and greases into advanced biofuels that help lower the carbon footprint, he says. The Biden administration wants to achieve 80-per-cent clean electricity and a 50-per-cent reduction in carbon emissions by 2030. The latter goal is beneficial for Renewable Energy Group as there will be increased demand for its products, he adds. The company has a “strong growth path” supported by the tripling of production at its Geismar renewable diesel plant by 2023, Mr. Anand says. Its stock trades attractively at less than 13 times 2022 earnings, Mr. Anand adds. Risks range from industry competition to any hiccups in expanding its Geismar plant.

The pick: Boralex Inc. BLX-T

52-week range: $32.24 to $56.70 a share

Forward annual dividend and yield: 0.66 cents (1.7 per cent)

This renewable power producer, which is expanding into the U.S. market, should benefit indirectly from the build-out of transmission lines that’s part of the infrastructure bill, Mr. Anand says. Kingsley Falls, Que.-based Boralex generates power from wind, hydroelectric, thermal, and solar sources. Its past business has focused on Canada and France, but it recently acquired controlling stakes in U.S. solar power plants. Extension of tax credits for clean-energy investments in the budget reconciliation bill would benefit Boralex, too. It’s targeting a 10 per cent to 12 per cent compounded annual growth rate for adjusted EBITDA between 2020 to 2025, he says, adding that it’s achievable given the company’s backlog and track record in delivering on projects. Boralex trades at about 13 times 2022 enterprise value to EBITDA, Mr. Anand says. A risk is competition from big oil companies in the renewable space.

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