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3 Construction Stocks to Buy as Housing Market Strengthens

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This spring selling season the housing market fared much better than it had in the past years. Despite a weak start amid equity market volatility and global concerns, the construction sector seems to have recovered on the back of strong housing fundamentals. Positives like an improving economy, rising wages, favorable job outlook and a tight supply situation raise optimism about the sector’s performance for the rest of 2016.

This optimism is backed by the recently released housing data. New home sales soared in April – per data released on May 24 - way ahead of market expectations. Sales of new single-family homes rose 16.6%in April on the back of strong housing demand and traffic. Moreover, existing home sales rose for the second straight month in April, per data released by the National Association of Realtors on May 20. U.S. housing starts rose 6.6% from a revised March number to an annual rate of 1,172,000 in April, surpassing market expectations. The number of building permits — a gauge of future construction — rose 3.6% in April, according to data released on May 17.

And to top it all, Q1 performance across the broader construction sector was more or less better than expected. Most of the homebuilding companies, including Toll Brothers, Inc. (TOL - Free Report) , PulteGroup, Inc. (PHM - Free Report) , and KB Home (KBH - Free Report) exceeded market expectations and remain optimistic that the growth momentum will sustain through the rest of the year.    

This increase in home construction not only benefits homebuilders but also spurs demand for homebuilding materials, home decoration products and other related businesses. This, in turn, boosts the growth prospects of companies manufacturing these products like Vulcan Materials Co. (VMC - Free Report) , Martin Marietta Materials, Inc. (MLM - Free Report) , Masco Corp. (MAS - Free Report) Headwaters Inc. and many others.

Stocks for Your Portfolio

With the housing sector gaining momentum, it makes sense to pick stocks from this space. Therefore, here we have picked three stocks from the wider construction sector based on a favorable Zacks Rank and an attractive VGM score.

In VGM, V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three scores. Such a score allows you to eliminate the negative aspects of stocks and select winners. However, it is important to keep in mind that each Style Score will carry a different weight while arriving at a VGM score.

Installed Building Products, Inc. (IBP - Free Report) operates as a residential insulation installer in the U.S.

Installed Building Products has a Zacks Rank #1 (Strong Buy) and a VGM Score of B. Its earnings estimate for the current year has risen 9.6% over the last 30 days. The company has gained about 20% over the month of May.

Installed Building Products reported strong first quarter 2016 results on May 5, beating market expectations for both earnings per share and revenue.  The better-than-expected results in the first quarter of 2016 were driven by benefits derived from the company’s recent acquisitions and higher rate of housing completion.

Dycom Industries, Inc. (DY - Free Report) provides diverse services such as engineering, construction, maintenance and installation for cable and telephone companies.

Dycom has a Zacks Rank #1 and a VGM Score of A. Its earnings estimate for the current year has gone up by 5.9% over the last 30 days. The company has gained about 17.0% over the month of May.

Dycom reported robust fiscal third quarter 2016 results on May 24, crushing markets expectations on both counts. The strong quarterly results were driven by stellar top-line growth and favorable industry trends.

Comfort Systems USA, Inc. (FIX - Free Report) provides comprehensive heating, ventilation and air conditioning installation, maintenance, repair and replacement services.

The company has a Zacks Rank #1 and a VGM Score of A. Its earnings estimates for the current year increased 7.7% over the last 30 days. The company has gained about 1% over the month of May.

Comfort Systems reported strong earnings per share in the first quarter of 2016 on Apr 27. The quarter was also marked by solid bookings and positive cash flow. The company is optimistic about the upcoming quarters of 2016 and beyond.  

Conclusion

With the rise in demand for homes in 2016, manufacturers of homebuilding products such as the ones discussed above are poised to benefit. Despite the obvious headwinds, there is a strong possibility that these companies will continue to perform well in the near term.  

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