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Beyond Pulte: 4 Construction Stocks to Buy Now

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Shares of PulteGroup, Inc. (PHM - Free Report) rose 4% on Tuesday on rumors that hedge fund, Elliott Management Corp, has bought a stake in the homebuilder amid a public battle between the board and the founder.

The Public Battle

In April, the company’s largest shareholder, William J. Pulte, made public a letter he had sent to the board of directors that recommended the immediate removal of the long-time CEO, Richard Dugas, and a change in the company’s direction. Pulte expressed his displeasure over the company’s announcement that Dugas will retire as Chairman and CEO in May next year and requested the board to accelerate the process. Bill Pulte, his grandson, and another board member, Jim Grosfeld, criticized Dugas’ decision to move the company’s headquarters to Atlanta as well as change its overall performance or strategy.

In another letter, Pulte demanded that lead independent director, James J. Postl, should resign immediately from all his positions in the company. In response, James J. Postl, issued an open letter to shareholders stressing the board’s strong support for Dugas and the company’s value creation strategy which “has produced significantly higher profitability and shareholder returns.”

Not paying heed to Pulte’s requests, shareholders overwhelmingly re-elected Mr. Dugas as chairman and chief executive, along with all 10 director nominees, at Pulte’s annual meeting in May.

Q1 Earnings Solid

As a measure of the company’s performance, its share price has increased almost 14% year to date. Pulte posted robust first-quarter 2016 results in April with both earnings and sales beating the Zacks Consensus Estimate. Adjusted earnings of 24 cents per share surged 60% year over year on the back of higher home sales, a lower share count and taxes and an improved SG&A ratio. Home sales rose 28% as overall demand trends remained positive (read more: PulteGroup Beats Earnings & Sales, Closings Up Y/Y).

How is the Sector Placed?

In fact, the Q1 performance across the broader construction sector was overall better than expected. Leading homebuilders, Lennar Corp. (LEN - Free Report) and KB Home (KBH - Free Report) – the early birds – set the tempo for the season with positive sales and earnings surprises. Another industry bigwig D.R. Horton, Inc. (DHI - Free Report) also beat the Zacks Consensus Estimate for both earnings and sales on the back of higher home sales. Toll Brothers, Inc. (TOL - Free Report) , which reported its second-quarter fiscal 2016 results in late May, also beat the Zacks Consensus Estimate for both earnings and sales.

Almost all homebuilders are of the consensus that the spring selling season was off to a good start with strong demand and traffic trends. The companies are also optimistic that the growth momentum will be sustained through the rest of the year amid an improving economy, rising wages, favorable job outlook and a tight supply situation.

A flurry of housing data released in May – housing starts, new home sales and existing home sales - has also been fairly upbeat (read more: 4 Housing Stocks to Buy on Soaring New Home Sales).

The 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 Company (VMC - Free Report) , Martin Marietta Materials, Inc. (MLM - Free Report) , Masco Corp. (MAS - Free Report) and Headwaters Inc. and many others. They too performed generally well in Q1.

4 Construction Stocks for Your Portfolio

With the housing sector going from strength to strength, it makes sense to pick stocks from this space. However, choosing winning stocks is important.

This is where our VGM score comes in. Here 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. 

We have narrowed down our search to the following stocks based on a good Zacks Rank and VGM score.

Installed Building Products, Inc. IBP 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. The company has expected earnings growth of 78.9% for the current year. Its earnings estimate for the current year has risen 9.6% over the last 60 days. The stock’s price is up 47% year to date.

AAON Inc. (AAON - Free Report) is a manufacturer of air-conditioning and heating equipment which serve the new construction and replacement end markets.

AAON has a Zacks Rank #2 (Buy) and a VGM Score of B. The company has expected earnings growth of 11.09% for the current year. Its earnings estimate for the current year has improved 1% over the last 60 days. The stock’s price has risen 24% year to date.

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 #2 and a VGM Score of A. It has expected earnings growth of 8.84% for the current year. Its earnings estimate for the current year has increased 7.7% over the last 60 days. The stock’s price is up 17% year to date.

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 B. The company has expected earnings growth of 30.32% for the current fiscal year. Its earnings estimate for the current year has improved 10.2% over the last 60 days. The stock’s price has risen 28% year to date.

Conclusion

Things seem to be going great guns for the homebuilders and the ripple effects are being felt beyond home sales, be it new or existing homes. Home purchases generally trigger additional spending on equipment, remodelling and furnishing.    

So don’t miss out on our three stock choices that are superbly poised for growth.

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