With what trepidation did investors turn the page to September? Were they apprehending another sell-off with the global economy in the doldrums or did they believe that the market correction will find its rightful end? To add to the blues, historical data reveals that the August-October period happens to be the most volatile of the year.
As expected, the U.S. stock market stumbled into September with a loss on Tuesday as the sudden deceleration in the U.S. manufacturing activity has left investors edgy. U.S. manufacturing activity declined in August, the first time in three years. Apart from this unapprehended decline, U.S. construction spending for July edged up nominally in the month after a sharp drop in August. Notably, U.S. manufacturing and construction have been the pillars of economic growth over the past couple of years. However, market pundits have been anticipating a slowdown of late.
These headwinds are reflected in the sharp sell-off in the three important market indices on Sep 3. The Dow Jones Industrial Average declined 1.1%, shedding 285.3 points. Meanwhile, the S&P 500 lost 0.7% and the Nasdaq Composite shed 1.1% in yesterday’s session. Notably, Dow Jones, S&P 500 and Nasdaq lost 1.7%, 1.8% and 2.6%, respectively, in August. The major turbulence has been largely attributed to upsetting signs for the global economy as well as rising trade tensions and yield curve inversion.
What’s in the Cards for Construction?
U.S. construction spending grew a slight 0.1% in July at a seasonally adjusted annual pace of $1.29 trillion, aided by government spending on schools, sewers and water supply. July’s spending was 2.7% below the year-earlier level.
During the first seven months of 2019, construction spending dropped 2.1% due to a sharp pullback in spending on homebuilding. Spending on private construction has declined 4.4% so far this year, with residential falling 8.5% but non-residential rising 0.6%. Meanwhile, public spending increased a decent 5.6% during the period, led by notable gains in commercial, highway and street conservation and development, and transportation.
Indeed, the construction market, the fate of which is tied to broader economic growth, is expected to suffer due to a weak housing market and a slowdown in global economy. Meanwhile, the baffling trade scenario with China has been upsetting businesses. Also, the first revision of Q2 U.S. GDP slipped from 2.1% to 2%, signaling at more uncertainties ahead.
Nonetheless, builders are increasingly optimistic considering the industry's improving outlook, buoyed by lower interest/mortgage rates along with steady job and wage growth. That said, they equally see affordability concerns as a major hurdle for production. A measure of homebuilder confidence in August, as revealed by the National Association of Homebuilders (NAHB), rose one point to 66. Index measuring current sales conditions inched up to 73 points from 71 points, while buyer traffic rose to 50 from 48. However, expectations over the next six months fell to 70 from 71. Although spending on residential construction has been weak for a number of months, builders are hopeful that declining mortgage rates will spur a rebound.
Construction Stocks Offer Protection
To safeguard your portfolio, we ran a screen for companies that have a solid Zacks Rank and low beta. Below, we have listed five such construction stocks with encouraging prospects.
Taylor Morrison Home Corporation TMHC: This company is a homebuilder and land developer engaged in building single-family detached and attached homes for first-time buyers, move-up families to luxury and active adult customers.
Notably, although the U.S. housing industry has slowed down, single-family homes are still seeing rising demand. This Zacks Rank #1 (Strong Buy) stock is expected to benefit from this trend. You can see the complete list of today’s Zacks #1 Rank stocks here.
It has a low beta of 0.99 and has experienced a healthy 51.9% gain year to date.
North American Construction Group Ltd. NOA: This Zacks Rank #1 company provides heavy construction and mining services, primarily in Canada.
Increased infrastructural spending from federal and provincial governments, large earthwork projects (like P3 projects, flood diversion and road building) along with development and civil earthworks construction for greenfield and expanding sites will likely help the company generate higher revenues.
It has a low beta of 0.54 and has seen a healthy 36.7% gain year to date.
Loma Negra Compania Industrial Argentina Sociedad Anonima LOMA: This Buenos Aires, Argentina-based company manufactures and markets cement and its by-products. It currently sports a Zacks Rank #1 and has a low beta of 0.22.
Considering the Argentine context, its business continues to deliver both adjusted EBITDA margin expansion and net income growth. The company’s earnings are expected to grow a massive 107.3% this year.
Great Lakes Dredge & Dock Corporation GLDD: Headquartered in Oak Brook, IL, this company, with a Zacks Rank #2 (Buy), provides dredging services in the United States and internationally. Strong execution with continuous focus on improving safety on projects has been driving its performance.
It has a beta of 0.62 and has experienced a healthy year-to-date gain of 61.5%. The company has expected earnings growth of 335.3% for the current year.
NVR, Inc. NVR: This homebuilding company currently carries a Zacks Rank #2 and has gained 47.7% so far this year. The company’s disciplined business model, and focus on maximizing liquidity and minimizing risks along with rewarding shareholders are likely to drive returns for the company. The stock has a beta of 0.65.
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