One of the most volatile years, 2023, is about to end on a happy note after seeing a peak in inflation and weak housing demand. Particularly, the U.S. construction market is expected to be fairly strong next year. Thankfully, the Federal government took a decision to stabilize interest rates as inflation moderates. The labor market is also improving, although higher material costs are concerning due to energy market swings.

The residential market, which was a major concern for most construction companies, is also gaining confidence in the upcoming season. Per the recent Housing Market Index (HMI) published by the National Association of Home Builders/Wells Fargo, builder confidence rose three points in December from November. The HMI also noted that the component measuring sales expectations for the next six months increased six points to 45 from November.

On Dec 19, the Commerce Department's Census Bureau reported that privately owned housing starts for November rose 14.8% sequentially and 9.3% from the prior year. Permits for future construction also rose 4.1% from November 2022. Lower mortgage/interest rates and a lack of resale inventory are helping these metrics drive high, especially for single-family construction despite elevated construction and regulatory costs.

The non-residential players are also optimistic on strong R&R activities, impressive global trends in infrastructure modernization, energy transition, national security and a potential super-cycle in global supply-chain investments. Also, increased funding for carbon/ESG-related projects to focus more on carbon capture and storage work is commendable. In the first 10 months of 2023, public construction spending was up 14.7% from the year-ago period, led by notable gains in non-residential spending like power.

The solid public sector outlays and positive economic data are propelling the construction sector, which has nearly doubled from the S&P 500 index so far this year. So far in 2023, the Zacks Construction sector has risen 47.4% versus the S&P 500 index’s 24.1% rally.

Image Source: Zacks Investment Research

Notably, investing in the Construction sector might sound profitable right now, as it falls within the top 13% (2 out of 16 sectors) of the Zacks Sector Rank, which hints at further growth.

Stocks Worth Adding to Your Portfolio Now

Here are five construction stocks that have returned more than double of the S&P 500 year to date (YTD) and will continue to outperform in the coming months, as gauged by potentially superior weighting methodologies and a Zacks Rank #1 (Strong Buy) or 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

A VGM Score of A or B, along with a solid rank, is quite a combination to look for in stocks, especially for investors beefing up their portfolios amid precarious market conditions.

A few such construction stocks with encouraging prospects are Dream Finders Homes, Inc. (DFH Quick QuoteDFH - Free Report) , Sterling Construction Company, Inc. (STRL Quick QuoteSTRL - Free Report) , TopBuild Corp. (BLD Quick QuoteBLD - Free Report) , Installed Building Products, Inc. (IBP Quick QuoteIBP - Free Report) and Trex Company, Inc. (TREX Quick QuoteTREX - Free Report) . Notably, all these stocks have a market cap of more than $1 billion at present.

Dream Finders Homes: This Jacksonville, FL-based company’s land-light operating model and strategic position in high-growth markets, providing affordable homes to entry-level, first and second-time move-up homebuyers, are tailwinds. Also, the build-for-rent platform provides a consistent home delivery pipeline, which is less susceptible to temporary changes in demand from individual homebuyers.

DFH, currently sporting a Zacks Rank #1, has rallied 299.9% YTD. The Zacks Consensus Estimate for its 2024 earnings has been revised upward to $2.81 from $2.62 over the past seven days. This reflects growth of 12.2% from the year-ago period on 3.5% higher revenues. The company’s earnings surpassed the Zacks Consensus Estimate in three of the trailing four quarters and missed in one, the average being 131.6%. It currently has a VGM Score of B.

Sterling: This Zacks Rank #2 company operates through subsidiaries within segments specializing in E-Infrastructure, Building and Transportation Solutions, which aid in developing large-scale site development systems and services projects, residential and commercial concrete foundation projects, and infrastructure and rehabilitation projects for highways, roads and bridges, to name a few.

Sterling Infrastructure has gained 145.7% YTD. It has a trailing four-quarter earnings surprise of 12.2%, on average. The Zacks Consensus Estimate for 2024 earnings has moved north to $4.74 per share from $4.68 over the past 30 days, indicating 13.1% year-over-year growth on 12.1% higher revenues. It currently has a VGM Score of A.

TopBuild: Headquartered in Daytona Beach, FL, the company is an installer and distributor of insulation and other building products. BLD is experiencing significant advantages from a strong installation business and well-planned acquisitions. Additionally, improvements in operational efficiency, leveraging fixed costs and implementing measures to mitigate inflation are all contributing to increases in profit margins.

TopBuild, with a Zacks Rank #2, has gained 141.3% YTD. BLD has seen an upward estimate revision for 2024 earnings over the past seven days to $20.62 per share from $20.51. The estimate indicates 4.9% year-over-year growth on 6.9% revenue improvement. The company’s earnings surpassed the Zacks Consensus Estimate in the trailing four quarters, the average being 14.3%. It currently has a VGM Score of A.

Installed Building Products: This Columbus, OH-based company is one of the nation's leading new residential insulation installers and a diversified installer of complementary building products. The company is poised to gain from favorable pricing strategies, geographic and product diversification strategies, and solid acquisitions despite the cyclicality of the U.S. housing market. IBP continues to prioritize profitable growth through its proven strategy of acquiring well-run installers of insulation and complementary building products.

Installed Building, a Zacks Rank #2 stock, has gained 114.5% YTD. IBP has seen an upward estimate revision for 2024 earnings over the past seven days to $10.84 per share from $10.72. This indicates 7.2% year-over-year growth on a 5.9% rise in revenues. The company’s earnings surpassed the Zacks Consensus Estimate in three of the trailing four quarters and missed on one occasion, the average being 7.3%. It currently has a VGM Score of A.

Trex Company: Based in Winchester, VA, this company manufactures and distributes wood and plastic composite products, and related accessories, mainly for residential decking and railing applications. Despite soft demand due to softening economic conditions, and more resilient repair and remodeling, the sector has been driving growth. Additionally, Trex’s tiered product strategy, which supports consumers’ decision-making by providing a range of product aesthetics, is encouraging. Its focus on automation, modernization, energy efficiency and raw material processing is expected to be a major tailwind.

TREX, with a Zacks Rank #2, has gained 91.2% so far this year. The company has surpassed earnings estimates in the trailing four quarters, the average surprise being 16.9%. It has seen an upward estimate revision to $2.18 per share from $2.13 for 2024 earnings over the past 60 days. The upside suggests 18.4% year-over-year growth, with 11.4% revenue improvement. The company also has a VGM Score of B.