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4 Stocks in Focus as Construction Spending Gathers Pace

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The fight for recovery for the construction sector continues, with investment in projects steadily gathering steam. Homebuilding, which had been the key driver for investments in construction projects, is also trying to rebound from its earlier lows.

Given this scenario, investing in homebuilding stocks like D.R. Horton, Inc. (DHI - Free Report) , Lennar Corporation (LEN - Free Report) , Dream Finders Homes, Inc. (DFH - Free Report) and Toll Brothers Inc. (TOL - Free Report) would be a wise decision.

Construction Spending Expands

The Commerce Department said on Dec 1 that spending on construction projects surpassed economists' expectations, rising 0.6% in October. While September's data was revised downward to a 0.2% increase from the initially reported 0.4%, there has been a consistent upward trend in construction activity in recent months.

Construction spending has now increased 10.7% in the first ten months of the year. The uptick in overall construction spending in October was primarily driven by a 0.7% jump in investments in private construction projects. Spending on residential construction projects increased 1.2% during the same period.

Specifically, spending on the construction of single-family homes rose by 1.1%, contributing to the reversal of a nine-quarter decline in residential investment during the third quarter, fueled by robust spending on new single-family home construction.

Private non-residential structures, including factories, saw a modest 0.1% increase in outlays in October. Spending on public construction projects jumped 0.2%, with state and local government spending rising marginally by 0.1%. Notably, spending on federal government projects jumped an impressive 2.2%.

The housing market suffered a major setback as mortgage rates surged following last year's interest rate hikes by the Federal Reserve. Both homebuyers and builders faced challenges as the Federal Reserve has hiked interest rate hikes by 525 basis points since March 2022.

While the homebuilding industry played a crucial role in propelling construction spending during the peak of the pandemic, it has since experienced a notable decline.

The surge in raw material and labor costs has contributed to the escalation of home prices, and the current 30-year fixed mortgage rate, exceeding 7%, has added to the challenges for potential buyers.

Despite these obstacles, there is sustained high demand driven by a shortage of existing homes, prompting increased spending on private residential construction projects.

Stocks in Focus

Given this scenario, it will be prudent to keep a watch on these four homebuilding stocks that are poised to gain from the rise in spending on construction projects. Each of these stocks carries a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold). You can see the complete list of today’s Zacks #1 Rank stocks here.

D.R. Horton, Inc. is one of the leading national homebuilders, primarily engaged in the construction and sale of single-family houses both in the entry-level and move-up markets. DHI’s operations are spread across 11 markets in 33 states in the East, Midwest, Southeast, South Central, Southwest and West regions of the United States.

D.R. Horton has an expected earnings growth rate of 8.3% for next year. The Zacks Consensus Estimate for current-year earnings has improved 0.9% over the last 30 days. DHI presently carries a Zacks Rank #3.

Lennar Corporation is engaged in homebuilding and financial services in the United States. LEN’s reportable segments consist of Homebuilding, Lennar Financial Services, Rialto and Lennar Multifamily.

Lennar Corporation’s expected earnings growth rate for next year is 7.6%. The Zacks Consensus Estimate for current-year earnings has improved 0.2% over the past 30 days. LEN presently carries a Zacks Rank #2.

Dream Finders Homes, Inc. is a homebuilding company. DFH operates principally in Florida, Texas, North Carolina, South Carolina, Georgia, Colorado, Virginia and Maryland. Dream Finders Homes is based in Jacksonville, FL.

Dream Finders Homes has an expected earnings growth rate of 10.1% for next year. The Zacks Consensus Estimate for current-year earnings has improved 0.2% over the last 60 days. DFH presently has a Zacks Rank #2.

Toll Brothers Inc. builds single-family detached and attached home communities, master-planned luxury residential resort-style golf communities, and urban low, mid, and high-rise communities, principally on the land it develops and improves. TOL operates in Arizona, California, Florida, Delaware, Maryland, Pennsylvania, and South Carolina. Toll Brothers offers homes under two segments, namely Traditional Home Building Product and City Living.

Toll Brothers’ expected earnings growth rate for the current year is 1.5%. The Zacks Consensus Estimate for current-year earnings improved 0.2% over the past 60 days. Toll Brothers presently sports a Zacks Rank #1.

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