Back to top

Image: Bigstock

5 Stocks to Buy as Construction Spending Hits 11-Year High

Read MoreHide Full Article

U.S. developers ramped up construction outlays in February to the highest level in 11 years, primarily buoyed by robust gains from home building investments. Homebuilding picked up as a healthy job market and uptick in finances gave buyers the wherewithal to make purchases. Builders also took advantage of the warm weather conditions to construct more houses. The National Oceanic and Atmospheric Administration reported the second-warmest February in almost 123 years.

Residential starts also climbed to a four-month high in February, led by the strongest pace of single-family homebuilding in nearly a decade. Home sales too increased sharply in February, a sign that growing demand and increased construction activity could result in a strong spring selling season. Needless to say, higher home prices and mortgage rates are having little impact on the housing market for now. This calls for investing in solid housing stocks that can make the most of this bullish trend.

Construction Outlays Hit Highest Level Since 2006

As per the Commerce Department, construction spending rose at a seasonally adjusted 0.8% to $1,192.8 billion in February, the highest since Apr 2006. Even though it lagged expectations of a 1% gain, the start to the year turned out to be stronger than expected. January’s drop of 1% was narrowed to a 0.4% decline.

Furthermore, compared to 12 months ago, the February figure improved 3%. While taking the first two months of this year into consideration, construction spending was 3% more than the same period last year. In fact, this followed a nearly 10% rise in spending on new home building as well as renovation in the final three months of 2016, the highest in a year.

Private sector construction outlays also rose at a seasonally adjusted rate of 0.8% to $917.3 billion in February, the highest since May 2006, after remaining flat in January. Outlays on residential construction soared at a seasonally adjusted 1.8% to $484.7 billion, the uppermost point since Jul 2007. Investment in homebuilding has moved north for five consecutive months.

Public construction spending rebounded after three straight months of declines. At a seasonally adjusted rate, public construction spending was $275.5 billion, 0.6% above the January estimate. Outlays on state and local government projects went up 0.9%, driven by roads, schools and recreational buildings.  This was the first increase in the metric in three months.

Housing Starts Rise, Single-Family Permits Highest Since 2007

Construction on new houses advanced 3% to a 1.29 million annualized rate in February over January, according to the Commerce Department. Estimates for housing starts were raised from 1.21 million to 1.4 million. Year over year, housing starts climbed 6% in February.

Construction of one-family houses went up 6.5% to a pace of 872,000, the fastest since Oct 2007. In fact, applications to build one-family homes climbed to an 832,000 annualized rate in February, the strongest since Sep 2007.

Home Sales Boom

Not just the supply side, the demand side is also showing signs of strength. The Commerce Department reported that new single-family home sales jumped 6.1% in February to a 592,000 annualized pace, the highest seasonally adjusted annual rate since Jul 2016 (read more: 4 Stocks to Buy as New Home Sales Hit 7-Month High).

Sales of existing homes decreased 3.7% to a seasonally adjusted annual rate of 5.48 million in February, but, increased 5.4% from the year-ago figure, as per the National Association of Realtors (NAR). Contracts to buy previously owned U.S. homes jumped in February to the highest level in nearly a year and second-highest level in over a decade. The Pending Home Sales Index, an indicator based on contract signings, jumped 5.5% to 112.3 in February from 106.4 in January, as per NAR.

5 Best Housing Stocks to Buy Now

Despite the higher mortgage rates, there are a lot of factors working in favor of the housing industry. Confidence among U.S. homebuilders was the strongest last month since the mid-2000s. The National Association of Home Builders/Wells Fargo said that builder sentiment rose to 71 in March from an unrevised 65 in February. Banking on such positive trends, parking money in some fundamentally sound housing stocks won’t be a bad proposition.

We have, thus, selected five housing stocks that flaunt a Zacks Rank #1 (Strong Buy) or 2 (Buy) and a VGM score of ‘A’ or ‘B’. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three metrics. Such a score allows you to eliminate the negative aspects of stocks and select winners.

Louisiana-Pacific Corporation (LPX - Free Report) manufactures and sells building products, primarily for use in new home construction. The company has a Zacks Rank #1 and a VGM score of ‘B’. The Zacks Consensus Estimate for its current year earnings rose 12.6% over the last 60 days.

Louisiana-Pacific is likely to yield a return of 70.4% this year, more than the Building Products - Wood industry’s projected gain of 17.5%. The company outperformed the broader industry on a year-to-date basis (+33.5% vs +10.6%). (Read More: Louisiana-Pacific Hits a 52-Week High on Solid Homebuilding).

Boise Cascade Company (BCC - Free Report) manufactures wood products and distributes building materials. The company has a Zacks Rank #1 and a VGM score of ‘A’. The Zacks Consensus Estimate for its current year earnings increased 2.9% in the last 90 days.

Boise Cascade is likely to yield a return of 35.7% this year, higher than the Building Products - Wood industry’s estimated gain of 17.5%. The company outperformed the broader industry on a year-to-date basis (+28.2% vs +10.6%).

KB Home (KBH - Free Report) operates as a homebuilding company in the U.S. The company has a Zacks Rank #2 and a VGM score of ‘A’. The Zacks Consensus Estimate for its current year earnings improved 3.2% over the last 60 days.

KB Home is likely to yield a return of 42.4% this year, more than the Building Products - Home Builders industry’s estimated gain of 12.9%. The company outperformed the broader industry on a year-to-date basis (+23.3% vs +18.9%). You can see the complete list of today’s Zacks #1 Rank stocks here.

PulteGroup, Inc. (PHM - Free Report) engages primarily in the homebuilding business in the U.S. The company is involved in the acquisition and development of land primarily for residential purposes. PulteGroup has a Zacks Rank #2 and a VGM score of ‘B’. The Zacks Consensus Estimate for its current year earnings advanced 0.9% over the last 60 days.

The company is likely to yield a return of 31.5% this year, more than the Building Products - Home Builders industry’s projected gain of 12.9%. The company outperformed the broader industry on a year-to-date basis (+27.1% vs +18.9%).

M.D.C. Holdings, Inc. (MDC - Free Report) engages in homebuilding and financial service businesses in the U.S. The company has a Zacks Rank #2 and a VGM score of ‘A’. The Zacks Consensus Estimate for its current year earnings increased 1.6% over the last 60 days.

M.D.C. Holdings is likely to yield a return of 26.8% this year, better than the Building Products - Home Builders industry’s estimated gain of 12.9%. This company, engaged in the purchase of finished lots or development of lots for the construction and sale of primarily single-family detached homes, has yielded a solid year-to-date return of 15.9%.

Now See Our Private Investment Ideas

While the above ideas are being shared with the public, other trades are hidden from everyone but selected members. Would you like to peek behind the curtain and view them? Starting today, for the next month, you can follow all Zacks' private buys and sells in real time from value to momentum  . . . from stocks under $10 to ETF and option moves . . . from insider trades to companies that are about to report positive earnings surprises (we've called them with 80%+ accuracy). You can even look inside portfolios so exclusive that they are normally closed to new investors. Click here for Zacks' secret trades >>

Published in