Yesterday, I took a hard look at the recent performance of various sectors of the stock market. One area stood out: the construction & engineering sector — companies that build civil engineering projects, major commercial and industrial buildings and national infrastructure — is down about 13% over the past 12 months, but up 5.7% over the past month, a period during which the broad market rose less than 1%.

Given the headline consensus that global economic growth is slowing, and that we may in fact be on the brink of a modest but real worldwide recession, why would shares of companies that rely on capital investment be rallying so sharply? 

#-ad_banner-#Maybe investors in these companies are collectively wiser than the broad market’s conventional wisdom. 

One reason for the sector’s rally was strong rebounds by a few stocks whose companies reported better-than-expected earnings. But that’s not the whole story. Across the board, investors are moving back into an area that seems vulnerable in the current climate. That’s a good sign that the market correction, while warranted somewhat by news from China, Brazil and OPEC, was an overreaction — and that investors realize that global demand for heavy infrastructure projects, particularly in the areas of clean energy, resilient electrical grids and transportation, is unlikely to wane substantially in the next few years.

2 Ways To Profit From This Comeback
When examining specific engineering & construction stocks, look for ones with strong balance sheets and diversified end markets. Companies too dependent on building rigs, pipelines and other projects for oil and gas exploration & production clients may remain in the doldrums longer than their peers.

Here are two well-positioned companies in the sector that look attractive today:

With offices in more than 60 countries, Fluor (NYSE: FLR) is on the short list of contractors whenever a major engineering project is initiated around the world. Fluor, which I recommended here, has more than a century of experience building dams, power plants, highways and electrical grids. The shift toward sustainability and resiliency, especially in power generation and the electricity grid, will put wind in the company’s sails — and drive its sales — for years. Fluor is especially well-positioned in energy infrastructure, with expertise in carbon-capture projects, solar-power projects, offshore wind farms and the like.

Fluor’s financial results have been hit fairly hard by weakness in the oil and gas sector, as energy is an important market for the company. Economic woes in emerging markets haven’t helped, either. But even so, Fluor projects a flat project backlog year over year thanks to solid demand from transportation infrastructure and industrial customers. The company’s strong balance sheet, diversification by sector and geography, top-notch management and long-term prospects all point toward better days ahead when those end markets bounce back. Flour remains a great long-term play, and potentially a solid short-term bet if oil and gas start to recover this year.

At recent prices, Fluor trades at a modest 12.5 times analysts’ consensus estimate for 2016 earnings per share, and the stock yields 1.8%.

Quanta Services (NYSE: PWR) is King of the Grid: the largest electric transmission and distribution specialty contractor in North America. Quanta gets about 70% of its revenue from designing and building electricity infrastructure at all levels, serving utility and government clients in the all-important task of upgrading and modernizing an aging, and in some areas overtaxed, power transmission system. Power grid capital spending has already risen from about $17 billion a year from 2008 through 2011 to an estimated $30 billion in 2016.

Most of the other 30% of Quanta’s revenue comes from the energy industry through pipeline construction — an area hit hard in recent months, but also one expected to require significant capital investment over the next few decades. Quanta is the #1 pipeline construction company in North America.

Created through a series of mergers over the past 12 years, Quanta has strategically positioned itself to maintain #1 market share in both of its niches: it is larger than any specialty company in the electric-infrastructure space, yet more specialized than its competitors among the giant engineering & construction companies. The company is known for its large workforce of skilled linemen and engineers and has strong relationships with almost every electric utility in North America. And because the cost of utility capital projects are approved by regulators and passed on to customers through rate increases, they tend to be less sensitive to economic cycles — providing steadier and more predictable cash flow streams for Quanta than for many of its competitors.

Quanta’s customer base is diversified, with no single customer accounting for more than 6% of revenue. The company has a strong balance sheet and has maintained solid and rising backlogs despite the energy sector’s woes. 

At recent levels, Quanta trades at 12.8 times analysts’ consensus estimate for 2016 earnings per share.

Risks To Consider: Fluor and Quanta Services may experience volatility as investors react to news impacting economic growth outlooks (globally for Fluor, in North America for Quanta) and the energy sector.

Action To Take: Buy Fluor below $48.50 and Quanta Services below $22.

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