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January Job Data Validates Strength in Labor Market: 5 Picks

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The non-farm payroll data for January has reaffirmed the robustness of the U.S. labor market barring some minor fluctuations. Notably, the labor market has been the best driving force for the historically longest expansion of the U.S. economy, which is growing for more than eleven and half years. Notably, the steady growth of labor demand has led to increasing wage gains and a historically low-level of unemployment rate.

Non-farm Payrolls Outpace Expectations

On Feb 7, the Department of Labor reported that the U.S. non-farm job addition came in at 225,000 surpassing the consensus estimate of 162,000. Moreover, November’s estimates were revised upward by 5,000 to 261,000, while December’s estimates rose 2,000 to 147,000. Consequently, the economy added more than 211,000 jobs on average in the past three months.

The unemployment rate increased slightly from 3.5% to 3.6%, primarily due to 0.2% increase in labor force participation rate, which stood at 63.4% in January — its highest level since June 2013. Moreover, the average hourly wage rate grew 0.3% in January, in line with the consensus estimates. Average wage rate improved 3.1% year over year, reflecting the 18th successive month of 3% or above wage rate growth. 

In another report on Feb 6, the Department of Labor reported that non-farm productivity in fourth-quarter 2019 increased 1.4% on an annualized rate year over year after declining 0.2% in third-quarter 2019, which marked its biggest drop since the fourth quarter of 2015. The labor cost grew 2% in 2019 compared with 1.8% in 2018. Despite a tight labor market, inflation is expected to remain below Fed’s 2% target level.

Sectors That Added Most Jobs

In January 2019, the education and healthcare services added 72,000. This was followed by the construction, leisure and hospitality, transportation and warehousing, professional and business services, government, wholesale trade and information sector adding 44,000, 36,000, 28,000, 21,000, 19,000, 8,400 and 5,000, respectively. Meanwhile, manufacturing, retail, utilities and financial services lost 12,000, 8,300, 1,400 and 1,000 jobs.

Among the sectors that gained jobs in January, the construction sector is the most important one. The U.S. housing market witnessed an uptick in second-half 2019, due to the Federal Reserve’s three consecutive interest rates cuts from July to September. With interest rates low, mortgage rates also remain low, which in turn helps consumers to borrow more easily. Notably, the housing market constitutes around 3% of the U.S. GDP.

The Association of Equipment Manufacturers has estimated that the U.S. construction market will grow 1.5-2% between the period of 2020 to 2025. Consultancy firm Deloitte highlighted that the growing global trend in infrastructure upgrades and smart city initiatives will heavily benefit construction companies.

Our Top Picks

At this stage, it will be prudent to invest in stocks from those sectors, which added most jobs in January and have strong growth potential. We narrowed down our search to five construction stocks each of which carries a Zacks Rank #1 (Strong Buy) and popped in the past three months. You can see the complete list of today’s Zacks #1 Rank stocks here.

The chart below shows the price performance of our five picks in the past three months.

PulteGroup Inc. (PHM - Free Report) is engaged in homebuilding and financial services businesses, primarily in the United States. It conducts operations through two primary business segments – Homebuilding and Financial Services.

The company has an expected earnings growth rate of 17.2% for the current year. The Zacks Consensus Estimate for the current year has improved 5.4% over the past 30 days. The stock has rallied 18.8% in the past three months.

M.D.C. Holdings Inc. (MDC - Free Report) is engaged in homebuilding and financial service businesses in the United States. It is involved in the construction, sale and related financing of residential housing and the acquisition and development of land for use.

The company has an expected earnings growth rate of 17.2% for the current year. The Zacks Consensus Estimate for the current year has improved 3.6% over the past 30 days. The stock has jumped 16.1% in the past three months.

D.R. Horton Inc. (DHI - Free Report) operates as a homebuilding company in East, Midwest, Southeast, South Central, Southwest, and West regions in the United States. It constructs and sells single-family detached homes, and attached homes, such as town homes, duplexes and triplexes.

The company has an expected earnings growth rate of 23.1% for the current year (ending September 2020). The Zacks Consensus Estimate for the current year has improved 7.8% over the past 30 days. The stock has climbed 15.3% in the past three months.

Forterra Inc. (FRTA - Free Report) manufactures and sells pipe and precast products in the United States, Canada, and Mexico. It operates through Drainage Pipe & Products and Water Pipe & Products segments.

The company has an expected earnings growth rate of 680% for the current year. The Zacks Consensus Estimate for the current year has improved 141.7% over the past 30 days. The stock has soared 14.7% year to date.

KB Home (KBH - Free Report) operates as a homebuilding company in the United States. It operates in four segments — West Coast, Southwest, Central and Southeast.

The company has an expected earnings growth rate of 29.1% for the current year (ending November 2020). The Zacks Consensus Estimate for the current year has improved 2.2% over the past 30 days. The stock has surged 13.5% in the past three months.

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