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Construction Spending Hits 2-Year High in January: 5 Picks

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The U.S. construction sector has sustained its 2019 momentum so far this on the back of continued improvement in residential and non-residential construction, and a revival in infrastructure demand. Moreover, low-interest rate policy adopted by the Fed also helped in the sector’s recovery. In fact, construction attained a record level in January.

Impressive January Data

On Mar 2, the Department of Commerce reported that construction spending jumped to 1.8% in January — its highest monthly-gain in two years. The consensus estimate was for an increase of 0.6%. Notably, December’s construction spending was revised upward to a gain of 0.2% reversing the loss of 0.2% reported previously. In January, total construction spending reached a historic high of $1.37 trillion. Year over year, total construction was up 6.8%.

Spending on private construction increased 1.5% to $1.023 trillion. Spending on home construction climbed 2.1%, reflecting the biggest gain since August. The gain was driven by a 2.7% rise in single-family home constructions. Nonresidential construction was up 0.8% buoyed by strong shopping centers and religious center constructions.

Spending on government building projects increased 2.6% to $346.5 billion with spending by state and local governments rising 2%. Spending by the federal government was up 9.9% —its highest level since May 2012. Meanwhile, highway construction skyrocketed by 5.4%.

Momentum to Continue

A stable U.S. economy, despite the fact that it is in the historically longest 11.5 years of expansion, is a major positive for construction stocks. On Mar 2, in a rare and unscheduled statement, Federal Reserve Chairman Jerome Powell reiterated Fed’s intention to act accordingly to address the risks posed by the coronavirus outbreak.

The U.S. housing market saw an uptick in the second half of 2019, courtesy of the Federal Reserve’s three consecutive interest rates cuts from July to September. With interest rates low, mortgage rates remain low, helping consumers to borrow more easily. According to Mortgage News Daily, the 30-year fixed mortgage rate recently dropped to an average of 3.23% from the November 2018 peak of 4.94%. This is the lowest rate in eight years.

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 significantly benefit construction companies.

Our Top Picks

At this stage, we have narrowed down our search to five construction stocks that have strong growth potential for 2020. Each of our picks carries a Zacks Rank #1 (Strong Buy). 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 year to date.

 

PulteGroup Inc. (PHM - Free Report) is eengaged in homebuilding and financial services businesses, primarily in the United States. The company has an expected earnings growth rate of 18.3% for the current year. The Zacks Consensus Estimate for the current year has improved by 1% over the past 30 days.

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 29.8% for the current year (ending November 2020). The Zacks Consensus Estimate for the current year has improved by 0.5% over the past 30 days.

M.D.C. Holdings Inc. (MDC - Free Report) is engaged in homebuilding and financial service businesses in the United States. 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 by 2.8% over the past 30 days.

TRI Pointe Group Inc. (TPH - Free Report) is engaged in the design, construction and sale of single-family detached and attached homes in the United States. The company has an expected earnings growth rate of 6.8% for the current year. The Zacks Consensus Estimate for the current year has improved by 6.8% over the past 30 days.

Forterra Inc. (FRTA - Free Report) manufactures and sells pipe and precast products 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 744.4% for the current year. The Zacks Consensus Estimate for the current year has improved by 1.7% over the past 30 days.

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