The Smart Foundation
In this edition of the Smart Investor newsletter, we spotlight an infrastructure specialist gaining momentum from the data-center buildout and industrial expansion megacycles. We are not selling any stocks today, as markets are in flux ahead of several high-profile earnings reports and the Fed’s anticipated signal on how many cuts might come in 2026. But first, let’s review the latest Smart Portfolio developments.
1
Portfolio News and Updates
❖ JPMorgan’s (JPM) stock dropped following the bank’s updates at the Goldman Sachs financial services conference. Sentiment was hit as JPM’s consumer banking head Marianne Lake said the bank expects its expenses to reach $105 billion in fiscal 2026 – about $4 billion above the Street’s estimate and up 9% from 2025. JPMorgan has made it clear that this expense increase is driven largely by growth- and volume-related costs.
These costs are related to the company’s strategic investments strengthening its branches, advisor hiring, product marketing, and technology, including AI. JPMorgan – already one of the most technologically advanced banks in the world – is working toward its goal of becoming a fully AI-connected enterprise. As such, the increase in expenses does not reflect any fundamental problems, nor does it change the bank’s underlying balance-sheet strength, robust profitability, and strong income growth.
With spending flowing into AI-assisted tools, automation, and more advanced agent-based systems to support operations, fraud prevention, and complex account tasks, one of the key expected returns on JPM’s AI investment is efficiency. The management forecasts that AI and automation initiatives, which are already lifting efficiency across the organization, could drive 40-50% productivity improvements over several years, effectively justifying higher near-term operational expenses in order to protect and extend JPMorgan’s competitive moat.
1
❖ Alphabet’s (GOOGL) stock climbed, lifted by news that Google Cloud’s Gemini for Government was selected to deliver AI-enhanced productivity capabilities to the U.S. Department of Defense’s workforce. The DoD has launched GenAI.mil, a dedicated generative AI platform, integrating Gemini for Government as its inaugural commercial AI offering for approximately 3 million civilians, military personnel, and contractors. Defense Secretary Pete Hegseth described the initiative as positioning the DoD as an “AI-first” organization, adding that he views AI as a fighting force.
1
❖ Amazon (AMZN) gained as the cloud and retail giant continued to make headlines. The company announced a new commitment to India, planning to invest $35 billion in the country by 2030. Amazon aims to expand across e-commerce, cloud, logistics, and AI in one of its fastest-growing markets. India is rapidly becoming a strategic focus for major U.S. corporations. Microsoft (MSFT) recently announced a $17.5 billion, four-year investment plan to strengthen India’s cloud and artificial intelligence infrastructure. Back in October, Alphabet’s (GOOGL) Google revealed a $15 billion investment to build its first major AI hub in the country.
In other Amazon news, AWS unveiled a new AI stack, expanding its portfolio with Nova models, Trainium3 UltraServers, and a DevOps Agent. Moreover, Amazon’s cloud division has deepened ties with Nvidia in several ways. AWS said it will adopt Nvidia’s NVLink Fusion technology in its next-generation custom AI chip, Trainium4. Additionally, Amazon and Nvidia have launched AWS AI Factories, which combine Nvidia GPUs with AWS’s Trainium chips and core services like Bedrock to deliver full-stack AWS AI infrastructure directly into customers’ data centers.
1
❖ IBM (IBM) announced a definitive agreement to acquire Confluent for $11 billion in cash, aiming to strengthen its AI and data infrastructure stack. Confluent, a real-time data streaming platform that underpins data-intensive and AI applications, would join the $6.4 billion acquisition of cloud software company HashiCorp, which IBM completed in February, as the company advances its AI ambitions. Big Blue said it expects the deal to drive product synergies across its portfolio and to accelerate revenue growth by leveraging its global go-to-market reach, adding that it anticipates the acquisition will be accretive to adjusted EBITDA in the first full year after closing and will expand free cash flow in the second year.
1
❖ Pfizer (PFE) entered a collaboration with YaoPharma, obtaining exclusive worldwide rights to develop, manufacture, and commercialize YP05002 and related agonists. YP05002 is an oral, once-daily and small-molecule GLP1 receptor agonist being developed primarily for chronic weight management, with potential in broader metabolic indications. The deal includes a $150 million upfront payment and up to $1.935 billion in milestones plus tiered royalties. It significantly expands Pfizer’s cardiometabolic and obesity pipeline and is expected to be paired with Pfizer’s existing assets in planned combination studies.
In other news, PFE’s cancer drugs were added to China’s state-run health insurance scheme, as Beijing launches its first innovative drug catalog for private coverage, featuring 19 high-cost drugs from foreign and domestic manufacturers. The addition of Pfizer’s treatments to the coverage list opens a new, extensive market channel for the company.
1
1
Portfolio Stocks Under Review
❖ Uber Technologies’ (UBER) stock has rebounded from its unexpected post-earnings slide, but we plan on keeping it under review for a while longer to make sure investor sentiment doesn’t slide again.
Uber delivered an impressive Q3 2025 – with double-digit revenue growth, surging profitability, and a cash-generation profile that now rivals mature platform leaders – yet the stock fell on results. The results were robust across every major line – including accelerating bookings and trip growth, fast delivery expansion, strengthening user engagement, and outperforming Uber One program. Uber’s partnerships with Nvidia and Toast also reinforce its long-term positioning in autonomous mobility and restaurant infrastructure – areas that could materially expand its platform economics over time.
The challenge is not the numbers, but rather the mood. Investor expectations had drifted ahead of reality after a powerful multi-month rally, and guidance for the seasonally strongest quarter, while objectively solid, failed to satisfy the most bullish projections. The result has been a sentiment reset rather than a business-quality downgrade.
We believe that Uber’s long-term setup remains compelling: a scaled platform with rising margins, durable engagement, expanding partnerships, and a clearer path to autonomy monetization than the market currently credits. But in the short term, the stock has become more sensitive to investor anxiety and macro swings than we expected. That’s why, despite the rebound to near pre-earnings levels, UBER stays under review until we see clearer stabilization in both price action and market positioning.
1
❖ We are keeping KKR & Co. Inc. (KKR) under review, where we placed it following a period of persistent stock price weakness that has detached from the company’s fundamentally strong operational performance and highly bullish long-term outlook.
Despite record assets under management (AUM), strong fee-related earnings (FRE) growth, and market-leading diversification, the stock has undergone a significant valuation contraction, dropping by around 20% from mid-September to mid-November. Although KKR has strongly rebounded, gaining more than 17% over the past three weeks, it is still notably below its recent peak.
The company’s earnings results alone reflect no fundamental reason for its stock’s weakness, signaling that the strategic direction remain robust across every major line. KKR is executing a powerful strategic pivot, with its annual revenue projected to grow about 21% through 2027 at exceptionally high margins (around 73%). This durability is underpinned by its move toward predictable, recurring management fees and massive expansion in strategic, defensive areas like Credit, Infrastructure, and its fully-owned Global Atlantic insurance platform. The Global Atlantic acquisition, in particular, enhances visibility across market cycles and provides a stable source of high-quality, long-dated capital. Management remains confident in achieving its above-consensus EPS targets for 2026.
The challenge is not the quality of the business, but rather the market’s aversion to the industry’s cyclical exposure. Investors have reduced price targets due to the industry-wide time lag in realized performance earnings, with share declines visible across the alts space. KKR’s recent stock underperformance reflects the slowing number of exits and suppressed valuations resulting from the high-rate environment of the prior years. While accelerating deal activity and falling interest rates are powerful long-term tailwinds for KKR, these improving conditions will not translate into substantial, high-margin performance fees (realized carried interest) until late 2026 or 2027. Furthermore, concerns about transparency and reliability in private credit marks – and how KKR values stressed private loans – are prompting analysts to temper forecasts despite the company’s robust execution.
This disconnect – durable long-term growth versus near-term earnings volatility – is the core reason KKR was moved into the “Under Review” bracket. The long-term setup is compelling: a scaled, diversified platform that is capitalizing on powerful secular trends in private markets, while actively shifting its business mix toward less volatile revenue streams. The stock’s average analyst price target implies over 17% upside potential. We see no apparent reason to exit, but will monitor KKR closely until we are convinced that the recent rebound has taken hold.
1
1
Portfolio Earnings and Dividend Calendar
❖ The Q3 2025 earnings season is over, but some Smart Portfolio companies have different fiscal calendars. Two of our major holdings are scheduled to report this week: Oracle (ORCL) will release its fiscal Q2 2026 results today after hours, while Broadcom (AVGO) will post its fiscal Q4 2025 tomorrow after close.
❖ The ex-dividend date for TSMC (TSM) is December 11, while for Leidos (LDOS) it is December 15, and for Amphenol (APH) – December 16.
w
1
New Buy: Sterling Infrastructure (STRL)
Sterling Infrastructure, Inc. is a national leader in specialty construction and engineered solutions, operating at the intersection of e-commerce expansion, data-center build-outs, transportation renewal, and advanced site development. The company focuses on complex civil and infrastructure projects that require precision execution – from highways and bridges to large-scale e-infrastructure foundations and advanced residential platforms. Its mix of services positions it as a critical enabler of growth sectors that depend on reliable logistics, resilient transportation networks, and high-performance industrial sites. Sterling combines engineering expertise, disciplined project management, and technology-enhanced workflows to deliver outcomes that support long-term economic development. In many of its end markets, it functions as an indispensable partner, providing the foundational work that makes modern industrial, commercial, and community infrastructure possible.
1
Foundations Recast
Founded in 1955 and headquartered in The Woodlands, Texas, Sterling Infrastructure traces its roots to a traditional heavy civil contractor model – a business shaped by highway work, bridge construction, and public-sector projects where margins were thin and cycles were unforgiving. For years, the company operated much like its peers: competing on bid discipline, executing complex earthwork, and delivering the essential but commoditized components of America’s physical landscape. The real transformation began when leadership recognized that the industry itself was changing. Infrastructure was no longer defined only by concrete and steel – it was increasingly tied to data centers, logistics hubs, advanced manufacturing, and population-driven housing demand. Sterling needed to evolve.
Across the past decade, the company set that evolution in motion through a series of strategic divestitures, acquisitions, and operational resets that gradually rewired its identity. STRL exited non-core, low-return activities and began redeploying capital into specialty infrastructure work where engineering precision, speed, and technology offered clearer paths to competitive advantage. Acquisitions in residential and e-infrastructure services deepened its capabilities in master-planned communities, site development, and mission-critical industrial platforms, pulling Sterling into higher-growth markets tied to long-term demographic and digitalization trends. These transactions also widened its geographic footprint to several additional U.S. states and territories, improving scale and diversifying the project mix.
The past five years marked a decisive break from its legacy profile. STRL leaned into disciplined portfolio curation, integrating earlier acquisitions, pruning lower-margin operations, and emphasizing businesses with recurring project flow and superior gross margins. It invested in advanced surveying, digital project controls, automation, and data-driven estimating – tools that improved accuracy and reduced risk on complex civil work. Partnerships with major e-commerce and hyperscale operators began drawing the company deeper into the fast-growing e-infrastructure ecosystem, where demand for distribution, logistics, and data-center-ready sites expanded even during slower macro cycles.
In 2025, Sterling took the next step in this progression with the acquisition of Continental Electrical Construction (CEC), adding mission-critical electrical and mechanical services that broadened its role on large data center and advanced manufacturing programs. The early customer response reinforced the strategic fit, positioning the combined platform to accelerate project timelines and command a larger share of high-growth work.
At the same time, Sterling embedded a performance system focused on safety, cost visibility, and cash generation, enabling it to compete more effectively for high-value projects. The shift from a bid-driven contractor to a solutions-oriented infrastructure platform accelerated as the company aligned its capabilities with structurally growing markets in transportation upgrades, industrial reshoring, and master-planned residential development. Strategic divestitures removed distractions, while selective tuck-ins strengthened its presence in specialized earthwork, environmental services, and large-scale site preparation.
What emerged is a fundamentally different company – one defined less by heavy civil commodity work and more by engineered services that benefit from scale, technology, and long-term demand drivers. Sterling’s evolution reflects a deliberate strategy: refocus, upgrade capabilities, and concentrate on markets where expertise commands a premium. That transformation laid the foundation for the growth trajectory the company is pursuing today.
1
Building for Intelligence
Sterling today operates as a modern infrastructure platform built around three businesses – E-Infrastructure Solutions, Transportation Solutions, and Building Solutions – each serving markets shaped by technology, population growth, and national investment cycles. What ties them together is Sterling’s shift from a traditional contractor to a specialist in mission-critical work, where engineering precision and predictable execution carry a premium.
E-Infrastructure Solutions now anchors the company, generating about half of total revenue and the clear majority of operating income. This segment develops large, complex sites for hyperscale data centers, semiconductor fabrication plants, advanced manufacturing facilities, and e-commerce logistics hubs. These are multi-phase, high-specification programs where customers demand speed, scale, and certainty – conditions under which Sterling has thrived. Data-center work has become the engine of the platform, supported by hyperscaler spending estimated to exceed $300 billion in 2025 – with industry estimates calling for more than $450 billion in AI-data-center and cloud-infrastructure capex in 2026.
AI-driven compute expansion has pushed Sterling deeper into multi-phase campuses, where it often performs integrated civil, utility, and mechanical-electrical scopes through its recently acquired CEC business. That acquisition expanded Sterling’s capabilities beyond earthwork and foundations to include electrical and mechanical contracting, giving customers an end-to-end infrastructure partner and opening more than $400 million in new contracts. With data centers accounting for over 60% of E-Infrastructure backlog and future phases extending visibility through multiple years, this segment forms the structural growth story of the company.
Transportation Solutions contributes roughly one-quarter of revenue, serving state and municipal clients with roadway, bridge, rail, and aviation-related projects. While comparisons have been uneven following the deconsolidation of RHB,1 the underlying market remains healthy. Federal funding from the IIJA continues to support stable bidding activity, and Sterling’s pivot toward higher-value, lower-risk projects – including alternative delivery and aviation work – has improved segment quality even as the company reallocates resources toward faster-growing opportunities in E-Infrastructure.
Building Solutions represents about 15% of total revenue, centered on residential and commercial site development. Housing affordability pressures have created headwinds, but demand in key Sun Belt markets remains resilient, and management sees potential for improvement as monetary conditions ease. Although this segment is no longer the company’s growth engine, it still provides geographic presence, customer continuity, and long-term optionality tied to population growth.
Across these businesses, Sterling’s prospects reflect a clear pattern: larger projects, deeper integration, stronger customer retention, and a multiyear pipeline approaching $4 billion. With hyperscalers expanding into new geographies, manufacturers reshoring capacity, and state and local governments upgrading transportation networks, Sterling enters the next phase of its evolution positioned not merely to participate in these trends, but to shape the foundational infrastructure behind them.
—
1 – RHB is a 50%-owned heavy-civil construction joint venture. In early 2025, changes in its governance structure meant Sterling no longer controlled day-to-day operating decisions, so RHB ceased to be consolidated and is now treated as an unconsolidated joint venture within Sterling’s broader portfolio.
—
1
Boom Under Construction
Sterling Infrastructure’s financial story in 2025 is one of accelerating momentum hidden behind conservative headline optics. On the surface, GAAP revenue for the first nine months of this year rose 7.3% year over year – a number that appears at odds with the company’s operational trajectory. The gap is purely an accounting issue. Starting in 2025, Sterling no longer consolidates its 50%-owned RHB joint venture. Because prior periods included RHB’s revenue and current periods do not, the comparison mechanically depresses reported growth. Adjusted for this change, underlying consolidated revenue for the nine-month period grew 21% year-over-year, with organic growth closer to 18%, reflecting strength across continuing operations rather than a slowdown.
Nowhere was this clearer than in the third quarter. STRL delivered 32% year-over-year underlying revenue growth in Q3, well above analyst expectations, powered by a 58% surge in E-Infrastructure Solutions and 10% growth in Transportation. Reported Q3 revenue of $689 million marked a 16% GAAP increase, again understated by the RHB accounting shift but still exceeding the consensus range. Profitability followed the same upward arc. Gross margin expanded meaningfully, and adjusted EBITDA margin reached 22.6%, up from 17.9% a year earlier. Adjusted EPS rose to $3.48, up 76% year-over-year and beating consensus by a wide margin. This quarter extended Sterling’s long pattern of outperformance – its 11th straight beat on adjusted EPS.
The drivers of these gains are structural. High-margin, mission-critical E-Infrastructure work now anchors both growth and profitability, with data-center programs alone accounting for over 60% of segment backlog. Transportation, despite tough year-over-year comparisons tied to RHB, remains healthy; bidding activity is stable, and mix continues shifting toward higher-value work. Building Solutions remains a modest drag with residential volumes pressured by affordability constraints, though the segment shows signs of stabilization as monetary conditions ease.
STRL entered Q4 with $2.6 billion of signed backlog – up 64% from last year – and roughly $4 billion when adding unsigned phases of multi-year data-center and manufacturing projects. This visibility underpins management’s confidence in its outlook. For full-year 2025, Sterling raised its guidance to revenue of $2.375-2.390 billion, adjusted EBITDA of $486-491 million, and adjusted diluted EPS of $10.35-10.52. These ranges sit above prevailing analyst estimates, which had expected EPS in the high-$9 range and EBITDA closer to $465 million. Street forecasts for Q4 call for continued double-digit earnings growth and steady revenue expansion as E-Infrastructure remains the dominant engine. Early analyst previews for 2026 point to ongoing double-digit EPS growth supported by mix shift, strong backlog conversion, and the first full-year contribution from CEC.
Taken together, the financial picture is unmistakable: Sterling’s headline numbers understate a business still in the opening chapters of its growth curve – one powered by AI data centers, reshoring-driven manufacturing, and a once-in-a-generation wave of U.S. infrastructure spending that is only now hitting its full stride.
1
Grade Upward
Sterling’s closest peers anchor the heart of the U.S. infrastructure build-out, led by MasTec (MTZ) – a standout performer across telecom, power, and data-center megaprojects, and one of the Smart Portfolio’s high-conviction holdings. MasTec sets the scale and growth benchmark for complex, mission-critical infrastructure, providing the clearest read-through on secular demand and execution. Additionally, IES Holdings offers the most direct comparison on specialty electrical and data-center systems, while Primoris Services brings a balanced mix of civil, utility, and industrial infrastructure that mirrors Sterling’s legacy footprint. Dycom Industries rounds out the group with its leading position in fiber and digital-network deployment, a sector riding parallel demand curves to hyperscale AI buildouts. Together, these peers frame a sector where Sterling’s accelerating mix shift and margin profile now place it firmly among the industry’s emerging leaders.
All stocks in the group have performed strongly this year, and STRL’s ~90% climb places it just behind Dycom and IES – both of which have surged even faster on hyperscale-driven demand. Although Sterling is growing more and more exposed to data-center demand, it is still less a “pure-play AI infrastructure” stock than these two; additionally, the headline growth has been obscured by RHB deconsolidation, depressing headline-fed sentiment. At the same time, analysts – who look beyond the headlines – forecast a potential upside of over 40% for STRL over the next 12 months.
Analysts expect STRL’s revenue to grow at faster rates than all of its peers but Dycom in the next 12 months, while in terms of EPS growth expectations it lags only MasTec – and is slated to outrun the pack in terms of its forecasted EBITDA growth. As for profitability metrics, STRL has delivered best-in-class EBITDA and net profit margins, with the gross margin coming second after IES’s.
Against this backdrop, Sterling’s valuation metrics look less demanding, particularly taking into account the transformation it has undergone. RHB’s deconsolidation makes STRL’s revenue and EBITDA appear smaller, which mechanically inflates simple valuation multiples – GAAP P/E, GAAP and adjusted EV/EBITDA, EV/Sales, and Price/Sales – but it simultaneously improves margin quality, cash flow, risk profile, and secular exposure, all of which justify a higher valuation multiple in the first place. Sterling’s non-GAAP P/E ratios (both trailing and forward) – which are minimally affected by the RHB change – are around the group average, signaling that the company’s true economics are moderately priced. Meanwhile, its forward PEG ratio of 1.19x is the lowest among peers except growth champion MasTec, and sits far below the sector median, hinting at a possible GARP (growth at a reasonable price) setup.
Stock-price appreciation potential is only part of Sterling’s story, as the company has recently become a prolific buyer of its own shares. STRL leads a balanced capital-allocation strategy prioritizing organic growth, strategic M&A, and shareholder returns – although until 2024, it kept a restrained approach toward stock repurchases, making only minimal moves. As Sterling’s transformation took hold and its profitability began reflecting it, the company ramped up capital returns. A $200 million share-repurchase authorization, approved in 2024, took about 3% of its share float off the market – even though it still had about $81 million in capacity by November 2025. At this point, the company announced a new buyback plan of up to $400 million, expiring in 24 months – signaling a far more aggressive approach to shareholder compensation. However, analysts agree that Sterling’s robust cash flow and net-cash position allow it to continue pursuing further growth opportunities – including capacity investments and M&A – along with large share repurchases.
Taken together, the valuation setup, growth visibility, and capital-return pivot point to a company still early in a structural re-rating. With the data-center, semiconductor, and domestic-infrastructure cycles only beginning their multi-year buildouts, Sterling appears less like a stock that has already rerated – and more like one still climbing into the flow of the megatrends it now directly serves.
1
Investing Takeaway
Sterling Infrastructure has reshaped itself into a higher-quality, higher-growth platform positioned at the center of America’s data-center, semiconductor, and industrial build-out. What was once a conventional civil contractor now operates as a mission-critical partner to hyperscalers, manufacturers, and transportation agencies, with a portfolio oriented toward long-cycle, technology-linked infrastructure. This shift has strengthened margins, improved cash generation, and expanded the company’s strategic relevance across multiple secular tailwinds. Sterling pairs its disciplined project execution with a balanced approach to reinvestment, targeted M&A, and meaningful share repurchases, reinforcing both competitiveness and long-term shareholder value. With a clearer mix, a stronger operational profile, and growing exposure to some of the economy’s most durable demand drivers, Sterling stands out as a compelling long-horizon opportunity for investors seeking structural growth with measured risk.
1
1
Smart Investor’s Winners Club
The 30% Winners Club represents stocks from the Smart Investor Portfolio that have risen at least 30% since their purchase dates.
The markets ebbed and flowed, but the ranks of the Winners remained unchanged, still holding 19 stocks: AVGO, GE, ANET, TSM, APH, EME, HWM, ORCL, IBKR, PH, GOOGL, VRT, CRWD, IBM, MTZ, BK, MS, CSCO, and RTX.
The first contender for the Club’s entry – or, in this case, return – is now UBER with a 24.47% gain since purchase. Will it make a comeback, or will another stock outrun it to the finish line?
1
1
|
