The construction sector performed impressively in 2019 supported by 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 recovering this sector.
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. The recently signed phase-one trade deal between the United States and China is expected to add to the growth in the U.S. economy. Fed’s decision to pursue an accommodative and easy monetary policy will be the other driver.
The Zacks defined Construction sector rallied nearly 36% in the past year. Moreover, this sector has started 2020 from where it ended last year. Year to date, the construction sector has gained 3.2% and is currently in the top 20% of the Zacks defined 16 broad sectors.
Revival of Housing Market
The U.S. housing market saw an uptick in the second half of 2019, thanks to 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 finance agency Freddie Mac, the 30-year fixed mortgage rate recently dropped to an average of 3.65% from the November 2018 peak of 4.94%.
U.S. housing starts jumped 16.9% in December to a seasonally adjusted annual rate of 1.608 million units, reflecting the highest percentage gain since October 2016. Building permits fell slightly to 1.416 million units in December after hitting their highest level in more than 12.5 years in November.
Per the National Association of Realtors data, sales of previously owned home rose 3.6% in December to an annual rate of 5.54 million. Moreover, the National Association of Home Builders’ monthly confidence index came in at 75 in January 2020, remaining close to the highest reading since 1999.
Fed’s decision to keep interest rates unchanged throughout 2020 should keep the momentum alive in the housing industry. In fact, mortgage applications went up more than 30% in December and refinance applications increased 109% year over year in 2019.
Per Statista, new construction spending in the United States is projected to grow from $1.30 trillion in 2019 to $1.45 trillion in by 2023. Residential and non-residential construction spending are projected at approximately $586 billion and $590.4 billion, respectively, in 2023.
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, we have narrowed down our search to five construction stocks that have skyrocketed in 2019 and still 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 in the past year.
Meritage Homes Corp. MTH designs and builds single-family homes in the United States. It operates through two segments, Homebuilding and Financial Services. The company has an expected earnings growth rate of 19.2% for the current year. The Zacks Consensus Estimate for the current year has improved by 0.2% over the past 60 days. The stock has surged 71.7% in the past year.
M/I Homes Inc. MHO operates as a builder of single-family homes in the United States. It operates through four segments: Midwest Homebuilding, Southern Homebuilding, Mid-Atlantic Homebuilding and Financial Services. The company has an expected earnings growth rate of 13% for the current year. The Zacks Consensus Estimate for the current year has improved by 3.5% over the past 60 days. The stock has climbed 86.2% in the past year.
KB Home KBH 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 by 6.1% over the past 60 days. The stock has jumped 90.3% in the past year.
Installed Building Products Inc. IBP is engaged in the installation of insulation, waterproofing, fire-stopping, fireproofing, garage doors, rain gutters, window blinds, shower doors, closet shelving and mirrors and other products in the continental United States. The company has an expected earnings growth rate of 15.1% for the current year. The Zacks Consensus Estimate for the current year has improved by 0.5% over the past 60 days. The stock has rallied 92.6% in the past year.
Arcosa Inc. ACA manufactures and sells infrastructure-related products and services for the construction, energy, and transportation markets. It operates through three segments: Construction Products Group, Energy Equipment Group and Transportation Products Group. The company has an expected earnings growth rate of 14.5% for the current year. The Zacks Consensus Estimate for the current year has improved by 2.4% over the past 60 days. The stock has advanced 56.9% in the past year.
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