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Business Cycles Create "Tortoises and Hares"

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One of the most compelling and distinctive features to this current U.S. domestic business cycle is its sheer length. That cyclical clock now adds up to over 10 years AND it is still running strong.

A decade is a long time for a business cycle to run… and not build up excesses to tip it over. Thanks to “Muddle Through” real GDP growth rates, that’s what we got.

Yet, whirring away inside this seemingly steady U.S. economy are internal industry drivers that pick up speed this deep in the cycle. These are the ones that must rely on a broad feeling of prosperity, due to an accumulating build-up in both incomes and wealth.

Think of this as a Tortoise industry. It is slow to gain consumers at the start of the cycle. Industries driven by smaller Consumer Discretionary purchases typically outpace comparatively big spending outlays -- early on.

Those early industries are the Hares.

Over time, the steady gains of a Tortoise industry can overtake early movers.

One prime example: The 11-company strong Zacks Building Products industry. It is on a roll now. The Zacks Industry Rank over the last eight weeks has stayed between #9 and #37. This rank currently stands at #16 out of 265 industries we track.

Consistent with that positive story, this construction-related industry has been fruitful for the stock investor. Over the last year, the Building Products industry has returned +22.95% versus the S&P 500 index offering +20.59%.

I. A Brief Exploration of Building Products Macro Fundamentals

A. What Defines the Building Products Industry?

Fidelity writes, “The Building Products Industry in the Industrials Sector includes manufacturers of building components, home improvement products and equipment.

“It does not include manufacturers of lumber and plywood classified under Forest Products, and cement and other materials classified under Construction Materials.”

B. What Are Building Products’ Fundamental Drivers Across the Cycle?

Value Line offered this cyclical insight to these businesses—

“Historically, the housing market has accounted for about 60% of all annual domestic construction spending.

“Those interested in the [Building Products] industry have a bevy of leading indicators to monitor, including housing starts, building permits, home sales, foreclosures, unsold home inventories, mortgage rates and employment figures. Data is accessible from regular news, business and government publications. 

“This market has proven volatile.

“Trends reveal which direction the housing and, essentially, the Building Materials markets are headed.”

C. Why the Current Building Products Demand Outperformance?

Duff & Phelps says, “Low mortgage rates, strong consumer confidence and a healthy economy with rising wages continued to drive [Building Materials] buyer demand.”

II. Conclusion

To conclude, we are at past the tipping point stage in this long 10-year business cycle. Various types of home construction, repair and remodeling spending have ramped up.

Now, I want to show you what Building Products companies operate well this late in a long business cycle – and most profitably.

I finish by sharing with you the best Zacks Ranked stock picks.

Four Top Zacks #1 Rank (STRONG BUY) Stocks—

I list them in order of market capitalization.

(1) Trex ((TREX - Free Report) ): This is a $4.8 billion market-cap stock. This stock carries an F in Zacks Value but an A in Zacks Growth. It has beaten on quarterly earnings 11 consecutive times. The average of the last 4 surprises is +12.6%.

Trex Company, Inc. is a manufacturer of wood-alternative decking and railing. Trex Company is based in Winchester, Virginia.

(2) Norbord ((OSB - Free Report) ): This is a $3.8 billion market-cap stock. The Price to Earnings Growth (PEG) ratio is 1.28. That ratio arrives from an A in Zacks Value and an A in Zacks Growth.

Norbord Inc. is a producer of wood-based panels. It operates primarily in the United States, Europe and Canada. Norbord Inc. is headquartered in Toronto, Canada.

(3) Potlatch Corp. (PCH): This is a 2.95 billion market-cap stock. The Price to Earnings Growth (PEG) ratio is 3.43. This arrives from a D in Zacks Value and a C in Zacks Growth.

Potlatch is a Real Estate Investment Trust (REIT) with the acres of timberland in Alabama, Arkansas, Idaho, Minnesota and Mississippi.

Potlatch, a certified forest practices leader, is committed to providing superior returns to stockholders through long-term stewardship of its forest resources.

The company also conducts a land sales and development business and operates wood products manufacturing facilities through its taxable REIT subsidiary.

(4) Armstrong Flooring (AFI - Free Report) ): This is a $455 million market-cap stock. The Price to Earnings Growth (PEG) ratio is 1.90. That ratio arrives from a B in Zacks Value and an A in Zacks Growth.

Armstrong Flooring, Inc. is engaged in the design and manufacture of flooring solutions primarily in North America. Armstrong Flooring, Inc. is headquartered in Lancaster, Pennsylvania.




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