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Brokers Love These Construction Stocks, Maybe You Should Too

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The ongoing pandemic has not been able to derail construction activity from its current upward course. Specially, housing — within the broader construction terrain — remains unscathed, given historically low mortgage rates.

In fact, the Zacks Construction sector has a Zacks Rank #1 at present (out of 16 sectors). The sector has risen 136% in the past year, outperforming the S&P 500’s 74.4%, as you can see below. About 90% of the industries under the sector have a Zacks Rank in the top 44%, with many stocks seeing rank upgrades and positive earnings estimate revisions.

What’s Driving the Sector

Per the latest report of construction spending from the Commerce Department, construction spending in the United States reached a seasonally adjusted annual rate of $1,521.5 billion in January. This monthly rate marked an increase of 1.7% from the previous month and 5.8% from a year ago as residential market continues to boost the sector.

Private construction rose 1.7%. Within the private umbrella, residential construction rose 2.5% in January. Despite unprecedented challenges caused by the pandemic, a combination of lower interest rates and rising need for more work-at-home space aided the residential market. Although severe winter weather in major parts of the country impacted home construction sharply in February, a measure of confidence among U.S. homebuilders remained steady at 82 in March amid strong demand conditions.

Meanwhile, non-residential construction spending ticked up 0.4% in January from the prior month after months of decline. Also, U.S. public construction spending — which has been constrained by tight state and local budgets in the wake of the pandemic — rose 1.7% in January. Notably, highway construction rose 5.8% to $107.8 billion.

Federal Stimulus & Fed’s Upbeat Economic View: A Boon

Per the latest report of Bureau of Economic Analysis, personal income advanced 10% in January, primarily due to $600 stimulus checks from the government. Household wealth increased almost $2 trillion for the month, while spending rose just 2.4%. Again, Congress approved a comprehensive $1.9-trillion coronavirus relief package on Mar 10, 2021 that provides another round of payments to consumers, aids to states and localities, along with funding for COVID-related programs.

Meanwhile, the U.S. economy is heading toward the strongest growth in nearly 40 years, as stated by the Federal Reserve or Fed on Wednesday. The Fed expects the economy to accelerate speedily this year and now envisions the economy to expand 6.5% this year, up from the previous expectation of 4.2% in December 2020.

Meanwhile, the Fed still expects to keep its benchmark interest rate pinned near zero through 2023, despite concerns about higher inflation. It lifted its forecast for inflation to 2.4% by the end of this year from its previous estimate of 1.8%.

Although higher inflation and unemployment are major impediments for the construction sector, broad-based economic growth supported by sustained vaccination drive and stimulus program is expected to be major tailwind for the sector.

“With strong federal fiscal support and continued progress on vaccination, GDP growth this year could be the strongest we’ve seen in decades,” New York Federal Reserve President John Williams said in a speech.

Investment Involves Risk

Investing in the Construction sector might sound profitable right now, as it falls within the top 7% (1 out of 16 sectors) of the Zacks Industry Rank, which hints at further growth. However, given the month-to-month volatile figures, investment in the construction sector becomes difficult at times. Hence, it might be a wise decision to go ahead with stocks preferred by analysts who offer key information that is of great value to investors.

Winning Stocks

With the help of our Zacks Stock Screener, we have selected five stocks that have been given Strong Buy/Buy rating by 80% or more brokers. A Zacks Rank #1 (Strong Buy) or 2 (Buy), which justifies a company’s strong fundamentals, further adds value to these stocks. You can see the complete list of today’s Zacks #1 Rank stocks here.

First up is Century Communities, Inc. (CCS - Free Report) , a Greenwood Village, CO-based home building and construction company.

The Zacks Consensus Estimate for earnings for both the current and next year has increased 38.2% and 31.1%, respectively, in the past 60 days, reflecting optimism in the stock’s prospects and substantiating its Zacks Rank #1. The company is expected to witness earnings growth of 33.8% for the current year and 13.5% for 2022.

Then there is Gates Industrial Corporation PLC (GTES - Free Report) , a Denver, CO-based manufacturer of engineered power transmission and fluid power solutions.

Its earnings estimates for 2021 and 2022 have increased 37.8% and 29.9%, respectively, over the past 60 days. The stock also has a Zacks Rank #1, and an expected earnings growth of 61.4% for 2021 and 12% for 2022.

D.R. Horton, Inc. (DHI - Free Report) is a homebuilding company based in Arlington, TX. Its earnings estimates for the current and next year have increased 14.1% and 11.5%, respectively, over the past 60 days. The stock has a Zacks Rank #2 and an expected earnings growth of 42.9% for the current year and 12.1% for 2022.

Next in line is Howmet Aerospace Inc. (HWM - Free Report) . This Pittsburgh, PA-based company is a provider of advanced engineered solutions for aerospace and transportation industries.

Howmet Aerospace, a Zacks Rank #2 stock, has seen an upward estimate revision of 9.2% and 17.1% for 2021 and 2022 earnings, respectively, over the past 60 days. It has an expected earnings growth of 18.8% for the current year and 51.1% for 2022.

Last, we pick Mayville Engineering Company, Inc. (MEC - Free Report) . Headquartered in Mayville, WI, this company operates as a contract manufacturer that serves heavy and medium-duty commercial vehicle, construction, powersports, agriculture, military, as well as other end markets in the United States.

This Zacks Rank #2 company’s consensus estimate for earnings has increased 7.8% for 2021 and 15.1% for 2022 over the past 60 days. Its 2021 and 2022 earnings are likely to grow 252.8% and 121.2%, respectively.

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