The construction sector has been witnessing good tidings of late. Positives like an improving economy, modest wage growth, low unemployment levels, positive consumer confidence and a tight supply situation raise optimism over the sector’s performance.
The positive momentum that the construction sector has been experiencing is evident from the improvement in its Zacks sector rank. The Zacks construction sector rank jumped from 12 to 4 (out of 16 sectors) last week, reflecting four positive revisions versus one negative. A sector with a larger percentage of Zacks Rank #1 (Strong Buy) and 2 (Buy) stocks will have a better average than the rest.
The Zacks construction sector registered EPS growth of 26.25% on a year-over-year basis, highest among the 16 sectors. It has advanced 6.3% so far this year, comparing favorably with 5.2% growth of the broader market (S&P 500), as you can see below. The sector also outperformed the broader market in the last one year as well.
Several recent statistics released regarding the construction sector raise optimism. Construction spending inched up 0.8% on a monthly basis to $1,192.8 billion in February, at a seasonally adjusted rate. It also increased 3% on a year-over-year basis. Further, private and public sector construction expenditure increased a respective 0.8% and 0.6% on a monthly basis in February.
Also, housing/homebuilding industry in the sector has been riding high on solid new home sales data, affordable interest/mortgage rates and impressive housing starts figure. Resilient job growth and a healthy demand-supply balance along with seemingly high homebuilders’ confidence are adding to the momentum. Meanwhile, the rise in mortgage rates seems to be having a minimal effect on the industry.
As reported by the National Association of Realtors (“NAR”), sales of existing homes increased 5.4% from the year-ago figure in February. Contracts to buy previously owned U.S. homes jumped in February to the highest level in nearly a year and second-highest level in over a decade. The Pending Home Sales Index, an indicator based on contract signings, jumped 5.5% in February from January, as per NAR.
Thus, it looks like a good time to add a few construction stocks and cash in on the positive momentum.
Our Key Picks
With the help of the Zacks Stock Screener, we have zeroed in on four construction stocks with a VGM Score of “A” or “B” and a Zacks Rank #1 or 2. Our research shows that stocks with a VGM Score of “A” or “B” when combined with a Zacks Rank #1 or 2 offer the best upside potential.
Headquarted in Stamford, CT, United Rentals, Inc. (URI - Free Report) is one of North America's largest equipment rental companies with branches in the majority of the states and several Canadian provinces. The company has a Zacks Rank #2 and a VGM score of ‘A’. The Zacks Consensus Estimate for current year earnings rose 2.3% in the last 60 days.
The company outperformed the broader industry on a year-to-date basis (+19.2% vs +4.5%). Also, shares of United Rentals returned over 103% in the last one year, much higher than the Zacks categorized Building Products - Miscellaneous industry’s gain of 20.8%.
Further, the company’s Return on Equity or ROE in the trailing 12 months was an impressive 44.2%, better than the industry’s 10.6%. This indicates that the company reinvests more efficiently in comparison with its peers.
Louisiana-Pacific Corporation (LPX - Free Report) manufactures and sells building products, primarily for use in new home construction. The company has a Zacks Rank #1 and a VGM score of ‘A’. The Zacks Consensus Estimate for current year earnings rose 4% in the last 60 days. Louisiana-Pacific is likely to yield a return of 74.2% this year, more than the industry’s projected gain of 19.7%. You can see the complete list of today’s Zacks #1 Rank stocks here.
The company outperformed the Zacks categorized Building Products - Wood industry on a year-to-date basis (+37.7% vs +13.6%). The company’s ROE in the trailing 12 months was an impressive 10.6%, better than the industry’s 8.8%.
MASTEC INC. (MTZ - Free Report) is one of the largest providers of construction services to the telecommunications industry in the U.S. The company has a Zacks Rank #2 and a VGM score of ‘A’. In the last 60 days, the Zacks Consensus Estimate for current year’s earnings has moved up 14.1%. MASTEC is likely to yield a return of 26.8% this year, more than the industry’s projected gain of 15.8%.
The company outperformed the Building Products-Heavy Construction industry on a year-to-date basis (+7.8% vs +1.4%). The company’s ROE in the trailing 12 months was an impressive 13.3%, better than the industry’s 7.7%.
Engaged in the construction, sale and related financing of residential housing, M.D.C. Holdings, Inc. (MDC - Free Report) carries Zacks Rank #2 and a VGM score of ‘A’. In the last 60 days, the Zacks Consensus Estimate for current year’s earnings has moved up 0.8%. M.D.C. Holdings has projected earnings per share (EPS) rate of 26.8% in 2017, higher than the industry average of 16.1%.
Shares of M.D.C. Holdings returned over 21% in the last one year, much higher than the industry’s gain of 13.3%.
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