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5 Construction Stocks to Brave Weak 2018 Spending Growth

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Spending on construction projects in the United States declined in December from the previous month as outlays in both private and public projects tumbled. Notably, the December report release was delayed by a five-week partial shutdown of the government that ended on Jan 25.

In the final month of 2018, construction spending came in at $1.29 trillion (seasonally adjusted), reflecting an annual growth rate of 1.6% but a month-over-month decline of 0.6%, as revealed by the Commerce Department on Monday.

Key Takeaways

Spending on public construction projects tumbled 0.6% in December, marking an eight-month low after decreasing 1% in November. However, public construction spending increased 4.2% in the month on a year-over-year basis. Under the public construction umbrella, spending in state and local government construction dropped 0.5% in the month, after declining 1.1% in the prior month. Highway construction was 0.9% down on a monthly basis. Meanwhile, spending on federal government construction projects fell 2.2% after increasing 0.3% in November.

Meanwhile, private outlays fell 0.6% in December, almost reversing November’s 1.3% rise. Spending in private residential projects was down 1.4% (mostly due to a 3.2% dip in single-family homes) after rising 3.4% in November, given the prevailing housing market headwinds such as higher mortgage rates, costly building material as well as land and labor shortage. On the contrary, multifamily spending gained 3.1% in the month.

Nonresidential Spending: A Bright Spot

The private non-residential construction for December was up 0.4% and 3.5% for the year. Spending on lodging, office and transportation projects all witnessed strong growth in 2018. Public non-residential construction spending dropped 0.6% in December but increased 6.9% for the year.

Overall 2018 Construction Spending

With the December setback, construction spending for 2018 registered the smallest increase in seven years. The value of construction put in place increased 4.1% in 2018 to $1.3 trillion, comprising 3.4% growth in private and 6.6% rise in public spending. Notably, the figure depicted a 3.3% gain in private residential construction, which had posted gains of more than 10% for six straight years. Within this section, single-family building was up 5.2%, while multifamily housing increased 0.7%.

On the contrary, construction spending for 2018 included private manufacturing, which fell 1.7%. On the positive side, state and local outlays jumped 7.1%, the highest since 2007.

Modest Spending Activity to Play Spoilsport?

December's weak construction spending data might have an impact on the government's fourth-quarter gross domestic product or GDP estimate published on Feb 28.

U.S. economic growth for the fourth quarter was better than expected, with GDP rising 2.6%, as per the first estimate by the Commerce Department. Growth was helped by a 2.8% increase in consumer spending as well as higher non-residential fixed investment, exports, private inventory investment, and federal government spending. Weakness in residential fixed investment, which dropped 3.5%, and state and local government spending remained a drag.

Strong Economic Fundamentals: A Boon

Before becoming bearish, investors should note that economic fundamentals are still strong given rising consumer confidence, and a strong manufacturing and job market. The U.S. economy added 304,000 jobs in January 2019, significantly higher than the consensus estimate of 154,000. Employment grew in several industries in the month, including construction, leisure and hospitality, health care, and transportation and warehousing.

Meanwhile, per the Associated Builders and Contractors analysis of U.S. Bureau of Labor Statistics data on Feb 14, construction material prices fell 0.7% in January from the prior month. This should give a boost to the companies’ margins going forward.

Picking the Right Stocks

Owing to the month-to-month volatile figures, investment in the construction sector at times becomes difficult. Adding select construction value picks to your portfolio looks like a good option at this time. However, investors need to be cautious while picking value stocks. It is important to note that some of the stocks are deemed to be undervalued with no upside potential. Or, they may appear undervalued as per one metric but not when judged by another. Our Value Style Score separates the wheat from the chaff by using multiple criteria to truly find the most attractive value stocks.

The Growth Style Score, meanwhile, analyzes the prospects of a company and evaluates its corporate financial statements.

We have shortlisted construction stocks with a Value Score of A or B as well as an impressive Growth Score of A or B. The stocks also have a solid Zacks Rank #1 (Strong Buy) or 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Great Lakes Dredge & Dock Corporation (GLDD - Free Report) , the largest provider of dredging services in the U.S. conducting business, has a Zacks Rank #1.  The company has a Value Score of B and Growth Score of A. The company has solid expected earnings growth of 170.6% for 2019.

Quanta Services, Inc. (PWR - Free Report) , a Zacks Rank #1 stock, is a leading specialized contracting services company. The company has a Value Score of B and Growth Score of A. The company has an expected earnings growth rate of 13.9% for 2019.

Comfort Systems USA, Inc. (FIX - Free Report) is a Houston, TX-based leading provider of mechanical services — including heating, ventilation, air conditioning, plumbing, piping and controls. The company has a Value Score of B and Growth Score of A. The company has expected earnings growth of 10% for 2019.

North American Construction Group Ltd. or NACG (NOA - Free Report) , a heavy construction and mining services provider, currently carries a Zacks Rank #2. The company has a Value and Growth Score of A. It has expected earnings growth of 156.8% for 2019.

EMCOR Group, Inc. (EME - Free Report) , an electrical and mechanical construction, and facilities service provider, currently holds a Zacks Rank #2. The company has a Value and Growth Score of A. It has an expected earnings growth rate of 6.3% for 2019. The Zacks Consensus Estimate for the current year has increased 1% over the past 30 days.

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