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5 Construction Stocks Likely to Defy Industry Odds in 2019

Shrabana Mukherjee

The construction space has commenced 2019 on cautious note. Notably, it has lost 27% in a year’s time, and with the expected economic growth and the trade deal in the doldrums, it might be veering toward another sell-off. The partial government shutdown is only adding to the woes.

Government Shutdown Likely to Affect the Housing Market Further

With the partial federal government shutdown now in its 20th day, many federal workers are working without pay. In fact, it is unclear as to when the shutdown will end. Per the latest report from the National Association of Realtors, about 11% of the association's members report an impact on current clients and another 11% are experiencing an impact on potential clients. However, on a positive note, about 75% of agents reported no impact.

Market pundits are of the opinion that the continuation of the shutdown could have broader impact on the housing market. Prospective buyers may remain on the sidelines owing to the missed paychecks. The housing market has already slowed down and the shutdown could prove detrimental to the industry as closings are getting delayed and hurting buyer confidence.

2018 Flashback: Rate Hike & Trade Fear

Investors were anticipating faster growth based on Trump’s assurance of significant tax cuts, higher infrastructure spending and lesser regulations. Although these factors have positively impacted the construction sector, there are host of factors that have dragged the sector to the bottom.

The construction stocks have suffered a jolt through 2018 amid various challenges. Within the construction space, housing stocks are already bearing the brunt of these issues. In fact, limited supply of homes for sale is pushing home prices higher, thereby affecting affordability of home buyers. Importantly, higher mortgage rates — thanks to the Fed’s rate hikes — appears to be weighing on home sales, since buyers are facing higher borrowing costs.

Trade fears continued to haunt overall construction market. Increase in raw material costs and rising freight expenses on account of the trade war are also acting as headwinds.

Does the Recent Surge in Mortgage Applications Forecast A Comeback?

According to Freddie Mac’s latest Primary Mortgage Market Survey, the 30-year fixed-rate mortgage averaged 4.45% during the week ended Jan 10. This marked the lowest level since April. Notably, the 30-year-fix-rate remains unchanged over the past two months.

Meanwhile, mortgage applications reversed its course, increasing 23.5% for the week ending Jan 4, 2019, per the latest data from the Mortgage Bankers Association's weekly Mortgage Applications Survey. The refinance activity increased 35% from the previous week, hitting the highest level since February 2018. Mortgage applications to purchase a home also grew 17% in the week.

The year 2019 may be off to a strong start, but the near-term outlook is bleak with potential headwinds. GDP is now projected to grow 2.3% in 2019 and 2% in 2020, slightly weaker than what Fed had anticipated in September 2018.

Again, the Federal Reserve hiked funds rate for the fourth time this year in December 2018 to 2.25-2.5%. However, the central bank expects to reduce the number of hikes next year. It marked the ninth hike since late 2015. The central bank now sees only two more rate hikes next year compared with the three projected in September 2018.

The reason for Fed’s dovish stance is its current U.S. economic outlook. The central bank estimated the GDP growth to slow to 2.3% in 2019 from 3% in 2018. It is anticipated be 2% in 2020 and 1.8% in 2021. The unemployment rate ends the year at 3.7% in 2018. It is expected to fall to 3.5% in 2019.  However, the unemployment rate is anticipated to rise 3.6% and 3.8% in 2020 and 2021, respectively.

Meanwhile, the latest trade truce between the United States and China remains unresolved. Although the countries agreed on a ceasefire to reduce trade-related hostilities, following a dinner at the G20 Summit in Buenos Aires on Dec 1, the uncertainty persists. According to the agreement, the nations will refrain from increasing tariffs or imposing new tariffs for 90 days (until Mar 1, 2019) as the two sides work toward a larger trade deal, failing which, the tariff war is likely to go on.

Stock Picks

The construction space is likely to remain volatile in near term owing to trade concerns. Investors can still bet on some construction stocks which can counter the current market headwinds and come up with convincing bottom-line results. It might be an uphill task to pick the right stocks for greater investment rewards amid worries. This is where our Zacks Stock Screener comes in handy to help identify the best bets.

We shortlisted five stocks backed by a Zacks Rank #2 (Buy) and an impressive VGM Score. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Gibraltar Industries, Inc. ROCK: This leading manufacturer and distributor of building products for the industrial, infrastructure and residential markets has a Zacks Rank #1 and VGM Score of B. Its bottom line is expected to witness growth of 17.2% in 2019.

The Sherwin-Williams Company SHW: The company, which is engaged in the manufacture, distribution and sale of coatings and related products, has a Zacks Rank #1 and VGM Score of B. the company’s earnings for 2019 is expected to grow 16.3%.

Great Lakes Dredge & Dock Corporation GLDD: Headquartered in Oak Brook, IL, this company is the largest provider of dredging services in the United States. This Zacks Rank #2 stock’s 2019 EPS is expected to witness growth of 1,400%. It has a VGM Score of A.

KBR, Inc. KBR: The Houston-TX based company carries a Zacks Rank #1. This global engineering, construction and services firm has a three-five year expected earnings growth rate of 10.6% and a VGM Score of B.

Gates Industrial Corporation plc GTES: Denver-based power transmission and fluid power systems manufacturer carries a Zacks Rank #2. The company has an expected earnings growth rate of 10% for 2019. It has a VGM Score of B.

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