The construction market in the United States has been looking up for some time now. Per the U.S. Chamber of Commerce Commercial Construction Index, 93% of the total contracts in the country would witness a surge in profit margins by 2019. The space has also gained immensely from a steadily developing office real estate market.
Further, broad-based factors like a rise in GDP, low levels of unemployment and strong job additions and positive consumer confidence have been instrumental in propelling the sector’s growth. Investors looking to bet on construction stocks should wait no further as this is the right time to realize maximum gains from the space.
A Healthy Office Real Estate Market
Office development in the country has witnessed a boom in the recent past. High employment levels have resulted in an increase in the pipeline of office construction projects. Per a report from Knight Frank and JLL, about 11.1 million square feet of new office development took place in first quarter of 2018. Further, the report states that approximately 84.2 million square feet is under development.
If records are anything to go by, total office construction currently makes up 1.7% of total existing inventory. Further, factors like increased public spending, lower tax rates, upbeat wage rates and reduced trade deficits are bound to foster U.S. GDP growth in the future. In return, a sturdier economic growth will augment aggregate construction spending in the United States.
Sturdy Job Additions in the Sector
According to the Labor Department's Job Openings and Labor Turnover Survey, or JOLTS, job openings increased from 6.1 million to 6.6 million in March. This is the highest level recorded since the survey was first conducted in December 2000. Notably, the construction industry added 68,000 more workers to the economy, becoming one of the few industries to have created the maximum number of jobs.
Strong Earnings in Q1
Growth is very strong in Q1, but that was no surprise for the market. Importantly, the growth picture for the current and coming quarters is effectively the same as before the start of this earnings season.
Net margins are expected to increase 1.4 percentage points from the year-earlier period, with Finance, Technology, Industrials, Energy, and Construction driving most of the margin gains. For the first quarter, construction sector earnings were up 47.3% from the same period last year on 20.3% higher revenues. (A Critical Look at the Q1 Earnings Season)
All the construction companies have reported their earnings for the last quarter and the showing has been exuberant. The earnings and revenue beat ratio stand at 69.2% and 84.6%, respectively.
4 Hot Choices
A burgeoning office construction market, sturdy job growth in the sector and a robust economy have been instrumental in boosting gains for the space. Further, Trump's business-friendly policies, including tax cuts and repeal of regulations have propelled the sector’s growth.
The Zacks Construction sector is currently placed in the top 6% out of the 16 Zacks sectors. In this context, we have selected four stocks that are expected to gain from these factors. These four stocks carry a Zacks Rank #1 (Strong Buy) or 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Sterling Construction Company, Inc. (STRL - Free Report) is engaged in civil as well as residential construction across the United States.
The company is based out of The Woodlands and has a Zacks Rank #2. The expected earnings growth rate for the current year is 70.91%. The Zacks Consensus Estimate for the current year has improved 3.3% over the past 60 days. Sterling Construction has gained 17.4% over the past year.
Boise Cascade Company (BCC - Free Report) is a manufacturer and distributor of wood products and construction and building materials.
The company is based out of Boise and has a Zacks Rank #1. The expected earnings growth rate for the current year is 74.70%. The Zacks Consensus Estimate for the current year has improved 30% over the last 60 days. Boise Cascade has gained 48.8% in a year.
United Rentals, Inc. (URI - Free Report) provides equipment rental services to construction companies across the globe.
The company is based out of Stamford and has a Zacks Rank #2. The expected earnings growth rate for the current year is 48.48%. The Zacks Consensus Estimate for the current year has improved 3.9% over the past 60 days. United Rentals has gained 48.2% in a year’s time.
Louisiana-Pacific Corporation (LPX - Free Report) is a manufacturer of building products used in new home construction.
The company is based out of Nashville and has a Zacks Rank #1. The expected earnings growth rate for the current year is 25.06%. The Zacks Consensus Estimate for the current year has improved 11.1% over the last 60 days. Louisiana-Pacific has gained 15.1% in a year.
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