The construction industry has had a tumultuous phase this year. While fears of an all-out U.S.-China trade war, affordability concerns, global market slowdown and shortage of skilled labor have battered the market, Fed’s dovish stance, residential rebound, ongoing job growth and rising wages have supported a gradual improvement.
Defying all odds, companies in the Zacks Construction sector have collectively grown 36.4% so far this year, higher than the broader market’s (S&P 500) rally of 25.3%. Residential construction remains a strong driver, beating market expectations on major data points. Lower mortgage rates and solid labor market have been largely driving the recent resurgence in the market, which hasn’t contributed to economic growth since the end of 2017. Also, the economy has received a boost from government expenditures, as government outlays are expected to be the strongest this year in a decade.
Will the Rally Fizz Out?
Per the latest report from the U.S. Census Bureau, U.S. construction spending during the first 10 months of 2019 amounted to $1.087 trillion, 1.7% below last year’s $1.105 trillion. Precisely, U.S. construction spending dropped unexpectedly in October as investment in private projects hit to the lowest in three years. This sets a cautionary tone despite the recent string of buoyant reports.
During the first 10 months of 2019, spending on private construction declined 4.2%, with residential falling 7.1% and non-residential declining 0.7%. Meanwhile, public spending increased a decent 6.3% during the period, led by notable gains in non- residential spending like commercial, power and transportation.
Despite cost pressure, labor shortages, and trend toward fixed-bid projects, the construction market saw overall growth. The companies are expected to benefit from the U.S. transportation and infrastructure upgrade initiative and the rise of smart city mega projects, to name a few. Meanwhile, a comprehensive digital outline to realign their business and operational processes will support the growth story.
According to the latest 2020 Dodge Construction Outlook of Dodge Data & Analytics, public construction starts will rise 4% in 2020 with growth continuing across all project types. By and large, recent federal appropriations have kept funding for public works construction either steady or slightly higher — translating into continued growth in environmental and transportation infrastructure starts.
That said, slower economic growth is expected to weigh on the market in 2020. Although the U.S. economy will continue to expand for the 12th consecutive year in 2020, but by only about 2%. The economy is expected to grow beyond 2% only when headwinds like trade disputes and slowing global growth subside.
While some stocks have capitalized on the positive fundamentals of the market backed by strong public sector activity, Fed’s dovish stance and strong labor market, there are many that have failed, mostly owing to fundamental weakness. Hence, investors should reassess portfolio holdings in the light of the present scenario and dump the worst-performing stocks right away.
Dump These Construction Stocks Now
In view of the above challenges, we believe 2020 will turn out to be more of a disappointment for the industry. Given this gloomy background, we have picked five construction players which investors would benefit from getting rid of. These stocks have a Zacks Rank #4 (Sell).
You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.
AAON, Inc. (AAON - Free Report) : This Tulsa, OK-based company engages in engineering, manufacturing, marketing, and selling air conditioning and heating equipment in the United States and Canada. Lower unit production and efficiency have been affecting AAON of late. Again, its net sales have been constrained primarily by sheet metal production. Also, the Zacks Consensus Estimate for its 2020 EPS has moved down 14% over the past 60 days.
Market Cap: $1.3 billion
Price Performance (YTD): 42.5%.
Patrick Industries, Inc. (PATK - Free Report) : This Elkhart, IN-based company is a major manufacturer of component products and distributor of building products and materials for the Recreational Vehicle, Manufactured Housing and Marine industries. Lower revenues from the RV industry (representing 55% of sales) as well as from the marine industry have been affecting the company’s performance. Earnings estimates for 2020 have moved 7.1% south over the past 60 days.
Market Cap: $1.22 billion
Price Performance (YTD): 73.8%.
Masco Corporation (MAS - Free Report) : Headquartered in Livonia, MI, this company manufactures, sells and installs home improvement and building products. Masco's business has been suffering from lower volume, unfavorable mix and softness in certain markets. Also, implementation of China tariffs and soft end-market demand impacted its profits. Softer international outlook, particularly for a few areas of Europe and Latin America, added to the woes. Earnings estimates for 2020 have moved 5.1% south over the past 60 days.
Market Cap: $13.45 billion
Price Performance (YTD): 60.8%.
Skyline Champion Corporation (SKY - Free Report) : This Elkhart, IN-based company operates as a factory-built housing company in North America. Although the company’s efforts on operational improvement coupled with lower material cost are encouraging, continued softness in its trucking business is a pressing concern. The Zacks Consensus Estimate for its fiscal 2020 EPS has moved down 1.5% over the past 60 days.
Market Cap: $1.86 billion
Price Performance (YTD): 123.4%.
KB Home (KBH - Free Report) : Based in Los Angeles, CA, KB Home is a well-known homebuilder in the United States. Although the U.S. housing market is gradually improving, certain headwinds, especially affordability concerns, are acting against KB Home and a few others. A drop in selling price is a major concern as well.
Market Cap: $3.09 billion
Price Performance (YTD): 83%.
Zacks Top 10 Stocks for 2020
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