Editor’s Note: Remember those beaten-down stocks everyone loved to ignore in 2023? Well, they’re back with a vengeance. As economic growth kicks into high gear, the market’s former laggards are taking a victory lap, proving that sometimes the tortoise really does beat the hare. Below, I spotlight an erstwhile underperformer that’s now leading the charge.

This week, as I scoured the investment landscape for little-noticed growth opportunities, a stock caught my eye: Advanced Drainage Systems (NYSE: WMS), which operates in the cyclical infrastructure and construction sector.

With a market cap of $12 billion, the company’s valuation hovers near the mid-cap threshold, which means it has a greater ability to move the needle than large cap companies but possesses greater stability and financial wherewithal than small caps.

Based in Hilliard, Ohio, WMS specializes in manufacturing water management products used in construction, agriculture, and public infrastructure—industries sensitive to macroeconomic conditions like interest rates and inflation.

Infrastructure companies like WMS are rate-sensitive due to their reliance on capital-intensive projects and long-term investments. As interest rates fall in the coming months, borrowing costs for governments and private sectors will decrease, likely resulting in increased infrastructure spending. This will create more demand for water management systems, a core focus for WMS.

A Beneficiary of Sector Rotation

The cyclical nature of WMS’s industry positions it to benefit from sector rotation. In 2023, industrials and utilities lagged due to rising rates and inflation fears, but with the Federal Reserve now easing monetary policy, these sectors are taking the lead. WMS, operating at the intersection of infrastructure and utilities, will attract investors as they rotate into these traditionally defensive sectors that are now poised for growth.

In 2023, the stock of Advanced Drainage Systems experienced volatility, ultimately trending lower by the end of the year. The company faced a challenging economic environment, with construction sector slowdowns impacting demand for its stormwater management solutions.

However, as you can see from the following chart, WMS has been on an upward trajectory in recent weeks:

WMS hovers above its 20- and 50-day moving averages. The stock’s Relative Strength Index (RSI) is about 53, within the bullish zone.

WMS benefits from its focus on sustainable water management, which gives it a strategic advantage in securing contracts for environmentally friendly projects. The company has maintained solid margins even during inflationary periods because its products are seen as crucial for environmental, social, and governance (ESG) initiatives. As inflation remains subdued, WMS can expand margins, improve profitability, and outpace competitors.

The company’s potential is further supported by the U.S. government’s multi-year infrastructure spending programs, particularly the Biden administration’s bipartisan infrastructure bill. WMS is well-positioned to benefit from the ongoing push for improved stormwater systems, drainage solutions, and sustainable water management.

What’s more, the severe damage caused this month by hurricanes Helene and Milton will generate substantial work for companies like Advanced Drainage Systems.

Under-The-Radar

While infrastructure giants like Caterpillar (NYSE: CAT) or Vulcan Materials Company (NYSE: VMC) dominate headlines, WMS has escaped the attention of many large institutional investors due to its smaller size. However, with earnings growth expected to pick up as interest rates decline, this under-the-radar stock should experience outsized gains as its revenue base expands with new projects in 2025.

WMS’s products are aligned with growing global trends in sustainability. Its focus on recycling plastic to manufacture drainage systems caters to the increasing demand for environmentally friendly solutions. This makes it a favorite for governments looking to implement green infrastructure projects.

WMS generates revenue from multiple sectors, including residential, non-residential, agriculture, and public infrastructure, which diversifies risk and increases resilience in economic downturns.

On Track for Earnings Growth

The company has been investing in expanding its manufacturing capacity and improving operational efficiencies, which positions it for significant revenue growth as demand ramps up.

The average analyst expectation is for Advanced Drainage Systems to rack up year-over-year earnings growth of 10.50% in the third quarter and 9.70% in the fourth quarter.

As interest rates fall, inflation wanes, and economic growth accelerates, Advanced Drainage Systems is poised to benefit from increased infrastructure spending, sector rotation into cyclical industries, and a favorable government policy environment.

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John Persinos is the editorial director of Investing Daily.

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