Early signs of improved capital investment in the U.S. in certain end markets in the engineering and construction space are starting to lead to backlog growth developing, organic revenue growth accelerating and early signs of profit margin improvement, says Alex Rygiel, a Managing Director at FBR Capital Markets & Co.

“Certain end markets that are favorable right now include domestic telecom, capex for both wireline and wireless infrastructure, domestic electric transmission and domestic gas pipeline, particularly in the shale regions. These are trends we are seeing throughout the engineering, planning and construction phases,” he said.

Rygiel has Dycom Industries Inc. (DY), a smaller-cap stock with $750 million, as his top pick in the E&C sector. The average E&C company is trading at 5.5 times 2012 enterprise value to EBITDA, which is below the historical 15-year average of 9.5 times trailing EBITDA. Rygiel says he believes this is an early sign of improving fundamentals that are not yet appreciated in the valuations of these securities.

“The company has seen accelerating backlog and revenue growth and pretty meaningful margin expansion over the last several years. It is a company that historically was a pure-play telecom wireline contractor that has recently started to expand into wireless,” he said.

Expectations for better volumes and modestly favorable pricing trends in the building and construction space should support revenue growth of 6% in 2012 and sector EBITDA to grow by 18% as a result of positive sales leverage, says Robert C. Wetenhall Jr., an Analyst at RBC Capital Markets.

“As we are looking at the space, we know things are rallying, so the key objective now is to assess whether the housing market has reached an inflection point in terms of the proper alignment between supply and demand. We are also focused on how the spring selling season,” he said.

Wetenhall says Armstrong World Industries, Inc. (AWI) continues to be the best idea in the sector in terms of risk-adjusted returns on an absolute basis. He points to the company’s cost-cutting story which has led to substantial margin improvement, as well as the long-term upside in its international component, which isn’t fully factored into the share price right now.

“And third, management has a strong history of paying extremely large special dividends as opposed to squandering surplus cash on acquisitions and other investments which don’t work,” Wetenhall said. “Accordingly, it’s been one of the best-performing stocks in the entire space during the last couple of years, and we think it’s going to continue to outperform both the sector and the broader market.”

Small-cap investing opportunities can be found in the technology and industrials sectors by examining the management teams, valuations and balance sheets of individual companies rather than trends in the space or industries, says Steven H. Scruggs, Director of Research and Senior Portfolio Manager for Bragg Financial Advisors, Inc.

“Again, it’s not so much that we’re trying to see the trend in those particular sectors or industries, but rather we’re looking at the companies. The industries that they happen to be in, we do look at the prospects for the industry, but we’re more concerned about the prospects of the individual company,” he said.

Scruggs likes Tech Data Corp. (TECD), a diversified wholesaler of technology products with about $24 billion in revenue. He says TECD sells through 100,000 resellers worldwide in more than 100 countries and has about 25% of its revenues generated in Europe, which is a concern, but the company has taken some expense initiatives there, such as downsizing its infrastructure to account for soft revenues.

“Margins coming out of the recession had been falling. They seem like they’ve turned around, and they’re creeping back up to more normal levels of 1.5% operating margin, this business is a great one, and they’re probably going to do that this year. And if they do, they will generate, we estimate, over $200 million in free cash flow,” Scruggs said.

Northeast banks, on a relative basis, have been more profitable and have more of a capital cushion, which is going to be incremental in driving shareholder value in the near term, as investors need to shift away from a focus on growth and look more to profitability and capital management, says Collyn Gilbert, Managing Director, at Stifel, Nicolaus & Co., Inc.

“I think probably the biggest thing is the stability in the Northeast banks’ balance sheets. The overall profitability profile is actually pretty good,” she said. “And I think that is relevant as it ties into our view of the overall banking space, and that banking should be much more about profitability than about growth, because as we look at the industry, it’s deleveraging. Financial assets are shrinking.”

Gilbert likes Oritani Financial Corp. (ORIT), a niche, multifamily/commercial real estate lender in New Jersey, which recently converted to a thrift and has excess capital. She says to make money in the banks going forward, there needs to be a shift back to ROA, ROE, which essentially is what drives tangible book value, and then complement that with dividends.

“They’re growing nicely, they’re very profitable. They’ve got capital that they can put to work, either through increased dividends, buying back their stock, and they’re building a franchise,” Gilbert said. “I think that’s going to be desirable into what I think will be a consolidating market, all of this for a reasonable valuation in its shares.”

The continued traditional open market M&A activity unique to Northeastern community banks during the past couple of years will be a guide for investors to the broader theme emerging in the U.S. of a resurgence in M&A in the sector, says Damon DelMonte, a Senior Vice President of Equity Research at Keefe, Bruyette & Woods, Inc.

“Looking ahead with regards to M&A on a broader spectrum outside the Northeast, the view is that given the higher regulatory scrutiny, coupled with a challenging operating environment, whether it be the low interest rate environment or the sluggishness of a full recovery to the economy,” he said, “it’s going to be tough for these smaller banks to remain independent and justify their independence. We think that this will act as a catalyst to spur M&A activity throughout 2012 and beyond.”

DelMonte points to Berkshire Hills Bancorp Inc. (BHLB) as an example of a successful bank able to grow its franchise during the slow economic recovery. He says the bank’s management team has laid the foundation for the company to become a meaningful regional player through its three acquisitions in the past 12 to 18 months, where they’ve been able to execute on these deals without having a dilutive impact on tangible book value, and have positioned themselves to expand earnings.

“In my view, I think that with each step this management team takes going forward, they’re building longer-term shareholder value. So that’s a name that I believe is well positioned in New England and will ultimately be involved in M&A activity in the upcoming years,” DelMonte said. “Given the deals they’ve done recently, I also think investors can have confidence that they’re going to execute smart and sensible acquisitions, which will ultimately lead to longer-term value.”

Energy MLPs are a critical link in taking the new oil and gas production in the U.S. and getting it to consumers, says Ethan Bellamy, a Senior Research Analyst at Robert W. Baird & Co., and so, from a secular standpoint, the fundamentals are robust for most of the sector because of this development and the current major oversupply situation on production increases.

“Probably, the healthiest place in the U.S. economy is the oil and gas development sector,” he said. “MLPs, both as upstream and midstream participants, benefit, both in terms of new oil and gas exploitation that’s occurring in the United States that’s creating opportunities for new upstream development and shifting of capital and resources in the upstream, and it’s also creating the need for infrastructure to move those products to new places.”

Bellamy names EV Energy Partners LP (EVEP) as his favorite pick in the sector, which he says is a repeat of 2011. He says he expects an outright sale later this year for EVEP, or potentially, a swap for assets with another U.S. energy firm, which he believes would add a significant amount of value to EVEP.

“We feel pretty strongly that they will monetize their 150,000 net acre position in Ohio in the second half of 2012, and when they do that, I think there’s going to be significant value creation for the partnership,” Bellamy said.

Increased capital investment in the sector is driving distribution growth in energy MLPs, which are expected to post a total return toward the 10% to 16% range over the next 12 months, says John D. Edwards, a Senior Vice President and Senior Equity Research Analyst for Morgan Keegan & Company, Inc.

“We are looking for a little stronger distribution growth in 2012, and as we indicated earlier, total return approximately equivalent to what we experienced in 2011. Last year, our target was a 4% to 6% distribution growth range, and again, we were close to the upper end of that range, around 6%,” he said.

Edwards likes Targa Resources Inc. (TRGP), the general partner to Targa Resources LP, which is a provider of midstream natural gas and natural gas liquid services in the U.S. He says one of the drivers in the energy MLP sector is the strong oil prices relative to natural gas, which means some of the natural gas processers are likely to do well.

“In the next couple of years, there will be a tremendous number of new projects in the liquids area, so most of the major investment going on is in things like oil storage, natural gas liquids pipelines, oil pipelines, oil terminals,” Edwards said. “There is such a shortage of pipeline capacity right now, you’re seeing companies ship oil by rail, and that just gives you an idea of the opportunity set that’s in front of us.”

The option of investing in stocks that pay dividends looks more appealing, and bank stocks in the Northeastern and Mid-Atlantic region should be among those favorite industries, as older Baby Boomers turn 65, and their need for income versus capital appreciation grows, says Richard D. Weiss, Director of Financial Services at Janney Montgomery Scott LLC.

“We have a number of ‘buys,’ and that’s primarily due to dividends. As more investors seek yield in the low interest environment, you cannot find it among fixed income products unless you’re willing to go very long on a curve, we opine that investors will gravitate to dividend-paying stocks, including bank stocks,” he said.

Weiss recommends People’s United Financial Inc. (PBCT), although he gives it a “neutral” rating. He says it is a larger company in the Northeastern U.S. with solid core deposit franchises, which are generally attractive sellers to potential acquirers, and it pays a 5% yield.

“What I’m trying to do is to have two classes of ‘buy’-rated stocks because the rating system doesn’t work well when an investor objective is to receive a steady dividend stream versus capital appreciation. Therefore, we have several ‘neutral’-rated names that we find appealing,” Weiss said.

Energy trading volumes remain high despite a general softening in volumes for the exchanges, fueling growth in the exchanges space beyond the current upside seen from investor optimism and investor interest in the yield, says Richard Repetto, Principal at Sandler O’Neill + Partners, L.P.

“Energy has been the only asset class whose volume has been robust earlier and has moderated more of late. You look at cash equities, you look at the majority of the futures volumes, the option volumes to a lesser extent, it’s following the trend of volatility which is downward,” Repetto said.

Repetto’s favorite pick in the exchange space is the IntercontinentalExchange (ICE). He says the stock has performed well over the last six quarters, and it primarily focuses on energy, trading oil, gas oil, natural gas and other hydrocarbons.

“ICE has set record revenues and record net income in each of its last six consecutive quarters. So, ICE is my top pick in the exchange space, given that track record, their position in CDS clearing and a very, very innovative management team,” Repetto said.

The ongoing expansion of shale supply and the shift to NGL-rich supply sources continues to propel long-haul transportation needs for natural gas and liquids, as well as the midstream infrastructure side, making for a robust market with at least 10% upside potential, says Carl Kirst, CFA, a Senior Research Analyst and Managing Director at BMO Capital Markets Corp.

“But right now, what’s going to essentially be the bridge will be the oil infrastructure that’s required, and most certainly the midstream and NGL infrastructure, which continues to be required, and you see everyone from the MLPs to the C-Corps participating in all of that,” he said.

Kirst has El Paso Corp. (EP) as a top pick in the oil and gas sector. He believes El Paso offers about 10% to 15% upside this year versus the 40% to 50% upside from two years ago because the stock was so disassociated from its sum-of-the-parts valuation. Kirst also favors EP ahead of its merger with Kinder Morgan, Inc.

“We liked El Paso because it was a cheap way into Kinder Morgan. We thought Kinder Morgan was undervalued, so you wound up getting an arbitrage lift plus the upside of Kinder Morgan,” he said. “Well, Kinder Morgan year to date is now up 16% and is at $37, so that one is beginning to be a little bit closer to fair value, perhaps.”