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5 Top-Ranked Construction Stocks for Momentum Investors

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The U.S. construction market is rallying high as the country is gradually easing coronavirus-led lockdowns. Construction projects that were stalled during the shutdowns are now progressing again. Importantly,  momentum in the residential market has been the driving factor of the construction industry’s growth.

The Zacks Construction sector has gained 41.3% in the past three months, broadly outperforming the S&P 500’s 19.3%.

Residential Construction: A Bright Spot

Despite rising coronavirus cases post the reopening of operations, various construction market indicators are raising hopes among investors. Recently, construction of privately-owned homes grew 17.3% month over month in June, as reported by the Commerce Department. Also, June building permits and housing completions grew 2.1% and 4.3%, respectively, from May. The industry has positioned itself favorably, overcoming from the initial onslaught of the pandemic, during which the lowest level of construction activities were recorded.

The residential industry, which accounts for nearly 3-5% of total GDP, is banking on low mortgage rates, rising mortgage applications and increasing buyer traffic, defying challenges like increasing costs (particularly rising prices for lumber), prevailing inventory shortage, along with the absence of lot and skilled labors.

According to a National Association of Home Builders (“NAHB”) report, homebuilders’ confidence rebounded to the pre-pandemic level of 72 in July from June. (Read more: Builder Confidence Springs Back in July: 5 Top Housing Picks.)

Also, remodeling activities surged to 73 points in second-quarter 2020 from just 48 points in the first quarter, per the Remodeling Market Index released by NAHB. This indicates that remodelers are busier than prior to the COVID-19 outbreak.

Apart from rebounding residential construction, the public construction market has been benefiting from higher spending on highway construction, communications, health care, transmission and power, as well as infrastructural projects in domestic markets.  According to the latest report from the U.S. Census Bureau, spending on government construction projects rose 1.2% sequentially in May. Spending on highway construction projects edged up 2.8% in May from April.

Moreover, Trump’s intention of cashing in on the low interest rate environment that allows the U.S. government to borrow at a minimal rate is encouraging. The President has moved one step ahead with his long-standing agenda of spending almost $1 trillion on infrastructure, including roads, bridges, highways and railways, along with 5G wireless infrastructure and rural broadband.

Presently, a number of major telecommunication biggies are deploying significant wireline networks that are designed to provision bandwidth enabling 1-gigabit speed, thereby creating significant opportunities for the industry.

Our Choices

The above discussion gives us faith in the fundamentals of the sector that are improving in recent times.  Notably, the Zacks Construction sector has a Zacks Rank of 1 at present (out of 16 sectors).

We have zeroed in on our picks with the help of the Zacks Stock Screener, with the help of which an investor can shortlist stocks based on several metrics.

We have used the Zacks Momentum Style Score to pick stocks. This indicates the best time to buy a stock and take advantage of its momentum with the highest probability of success. Moreover, we prefer fundamentally strong, top-ranked high-performing stocks that can defy volatility in markets.

Back-tested results show that stocks with Momentum Style Score of A or B when combined with a Zacks Rank #1 (Strong Buy) or 2 (Buy) handily outperform other stocks. You can see the complete list of today’s Zacks #1 Rank stocks here.

Notably, all these stocks have outperformed the construction sector and S&P 500 Index in the past three months as you can see below:

Meritage Homes Corporation (MTH - Free Report) : This is one of the leading designers and builders of single-family homes. This Zacks Rank #1 stock has gained 118.1% over the past three months. It has a Momentum Score of B.

Boise Cascade Company (BCC - Free Report) : This is one of the largest producers of engineered wood products and plywood in North America. The company is also a leading wholesale distributor of building products in the United States. This Zacks Rank #1 stock has gained 66.2% over the past three months. It has a Momentum Score of B.

PGT Innovations, Inc. (PGTI - Free Report) : Based in North Venice, FL, this company manufactures and supplies impact-resistant residential windows and doors. This Zacks Rank #1 stock has gained 96% over the past three months. It has a Momentum Score of B.

BlueLinx Holdings Inc. (BXC - Free Report) : Headquartered in Marietta, GA, this company distributes building and industrial products. This Zacks Rank #2 stock has gained 151.3% over the past three months. It has a Momentum Score of A.

Norbord Inc. : Headquartered in Toronto, Canada, this company manufactures and sells wood-based panels to retail chains, contractor supply yards, as well as industrial manufacturers. This Zacks Rank #2 stock has gained 156.1% over the past three months. It has a Momentum Score of A.

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