The construction industry had a tumultuous first half of 2020. Like many others sectors, construction has been shaken by the shutdowns in wake of the coronavirus pandemic. That said, the industry is expected to fare better than harder-hit industries like hospitality, entertainment and restaurants. Markets have been showing resiliency of late and housing is witnessing an impressive comeback on major data points.
Harbinger of Hope: Residential & Public Construction The housing market, especially single-family, has regained momentum, beating market expectations on major data points. Lower mortgage rates on account of Fed’s dovish stance have been largely driving the recent resurgence in the housing market. Sales of new single-family homes in the United States saw a strong uptick in May, triggering hopes that the COVID-19-induced housing slowdown might be coming to an end. Sales of newly constructed single-family homes, accounting for roughly 10% of all U.S. home sales, jumped 16.6% in May from the prior month to a seasonally adjusted annual rate of 676,000 units, per data released on Jun 23 by the Commerce Department. The May figure also increased 12.7% from a year ago and beat the consensus forecast by 7.3%. It clearly depicts a rapid improvement in the housing market that is evident from the recent spike in builder confidence. Per the latest Housing Market Index (HMI), sentiment among U.S. homebuilders jumped a striking 21 points to 58 in June from May (read more: Builder Sentiment Posts Biggest Monthly Rise: Stocks in Focus). Buyers are now more eager to take advantage of lower mortgage rates and reduced coronavirus-induced restrictions. In the words of Lawrence Yun, chief economist of the National Association of Realtors, low mortgage rates will boost residential construction in the second half of 2020 as families look for new homes after being cooped up during the lockdown stretch. Meanwhile, according to the latest report from the Commerce Department, spending on government construction projects rose 1.2% sequentially in May. Spending on highway construction projects edged 2.8% higher in May from April. During the first five months of 2020, total construction spending jumped 5.7% year over year, led by a 6.4% increase in public spending. Making a Comeback The construction market’s fate, which is tied to the broader economic scenario, is expected to be bleak to some extent on projects delays, reduced customer capex, supply chain disruption and a slowdown in the global economy. Nancy Vanden Houten, lead U.S. economist for Oxford Economics, predicts rebound in construction in the second half of the year. Yet, she pointed out that any overall gains would be somewhat erased by expected declines in government spending “as state and local budgets are squeezed by the pandemic.” Nonetheless, unlike the Great Recession of 2008, the ongoing economic downturn is likely to take a different shape for the construction industry. The long-term impact of COVID-19 on the industry is hard to gauge and we do not foresee any speedy recovery. That said, the June jobs report paints an encouraging picture. The construction industry added 158,000 jobs on net in June, according to an Associated Builders and Contractors analysis of data released on Jul 2 by the U.S. Bureau of Labor Statistics. During the last two months, the industry added 591,000 jobs, bringing back 56% of the industry-wide jobs lost since the start of the pandemic. As highlighted by ABC Chief Economist Anirban Basu, “To date, this has proven correct. While recovery is likely to become more erratic during the months ahead due to a number of factors, including the reemergence of rapid COVID-19 spread, recent employment, unemployment, residential building permits and retail sales data all highlight the potential of the U.S. economy to experience a rapid rebound in economic activity as 2021 approaches.” Top Construction Picks The Construction sector has a Zacks Rank of 1 at present (out of 16 sectors). The sector has risen 25.2% in the last three months, outperforming the S&P 500’s 14.2%, as you can see below. About 90% of the industries under the sector have a Zacks Rank in the top 44%, with many stocks seeing rank upgrades and positive earnings estimate revision. With the help of our Zacks Stock Screener, we have selected five stocks that have a Zacks Rank #1 (Strong Buy) or 2 (Buy), justifying their strong fundamentals. A solid sector rank and a VGM Style Score of B or better is quite a combination to look out for in stocks, especially for investors beefing up their portfolio in the second half amid uncertainty. Notably, all the five stocks have outperformed the construction sector over the past three months. You can see . the complete list of today’s Zacks #1 Rank stocks here Thor Industries, Inc. ( THO Quick Quote THO - Free Report) : It manufactures and sells recreational vehicles, and related parts and accessories primarily in the United States, Canada, and Europe. Zacks Rank #1 VGM Score B Price Performance Over Past 3 Months: Up 116.9% Century Communities, Inc. ( CCS Quick Quote CCS - Free Report) : This company is engaged in the design, development, construction, marketing, and sale of single-family attached and detached homes. Zacks Rank #1 VGM Score B Price Performance Over Past 3 Months: Up 76.5% TopBuild Corp. ( BLD Quick Quote BLD - Free Report) : This company installs and distributes insulation and other building products to the United States construction industry. Zacks Rank #1 VGM Score A Price Performance Over Past 3 Months: Up 51.3% Winnebago Industries, Inc. ( WGO Quick Quote WGO - Free Report) : This company manufactures and sells recreation vehicles and marine products, primarily for use in leisure travel and outdoor recreation activities. Zacks Rank #1 VGM Score B Price Performance Over Past 3 Months: Up 72.6% Forterra, Inc. ( FRTA Quick Quote FRTA - Free Report) : This company manufactures and sells pipe and precast products the United States, Canada, and Mexico. 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