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5 Stocks to Ride on Increased U.S. Construction Spending

Zacks Equity Research

The U.S. Commerce Department recently reported that the country’s construction spending had registered a spike in February. This marks the rise in construction spending for the third straight month, owing to macroeconomic factors such as Fed’s accommodative policy on interest rates, easing mortgage rates and President Donald Trump’s tax cuts.

Secondly, the rise in construction spending also indicates that construction activity in the country remained unaffected by fears of a global slowdown. Therefore, in such an encouraging scenario, investing in a few stocks that would raise your portfolio’s exposure to the construction sector makes sense.

Construction Activity Moves Up

Construction spending in the United States increased 1% in February, the Commerce Department cited in a report. In fact, construction spending touched a nine-month high in the month on an increase in both public and private construction projects.

This strong rise in construction spending has taken place amid land and labor setbacks, and increasingly expensive building materials.

Investment in federal government construction projects increased 0.9% in February to reach the highest level since October, after rising 5.7% in January. Spending on state and local government construction projects also increased 3.8% in the month after gaining 5.7% in January.

Spending on private nonresidential structures declined 0.5% in February after a 1.1% jump in the prior month, while spending on public construction projects increased 3.6% after a 5.7% rise in January. Construction spending on private construction projects and private residential projects also rose in February, gaining 0.2% and 0.7% respectively.

Highest New Home Sales Since March 2018

In addition to the impressive construction spending data, new home sales in the United States rebounded in February to its highest since March 2018. According to a government report on Mar 29, single-family home sales increased from 636,000 in January to 667,000 in February.

New home sales data is particularly imperative to judge the pulse of housing because this indicates when the contracts have been signed instead of when they are closed, thus giving a timelier insight of the housing market.

Easing mortgage rates since late last year and tax concessions played a vital role in boosting buyer interest in properties. The rates on 30-year fixed-rate mortgages fell to their lowest levels in April since February 2018, owing to the central bank’s decision to freeze interest rates (in the range of 2.25-2.50% at present) for the year in January. Fed’s dovish stance is also making homebuyers less concerned about rising interest rates.

Also, the number of properties purchased for which construction is yet to start increased 14% to a one-year high of 197,000, a Bloomberg report cited. This is indicative of a stronger market, which could keep property developers busy in the near future.

Our Choices

Keeping in mind the aforementioned positives, investing in construction stocks makes sense at present. Therefore, we have chosen five stocks from the construction sector that are likely to register impressive gains. These stocks carry a Zacks Rank #1 (Strong Buy) or #2 (Buy).

Quanta Services, Inc. PWR provides specialty contracting services in the United States, Canada and Australia among others.

Quanta Services has a Zacks Rank #1 and its expected earnings growth rate for the current year is 25.3% compared with the Zacks Engineering – R and D Services industry’s projected decline of 11.9%. Its Zacks Consensus Estimate for current-year earnings has risen 9% in the past 60 days. You can see the complete list of today’s Zacks #1 Rank stocks here.

Summit Materials, Inc. SUM manufactures and sells construction materials and related products for use in residential and non-residential construction, public infrastructure and other markets.

Summit Materials has a Zacks Rank #2 and its expected earnings growth rate for the current year is more than 100% compared with the Zacks Building Products – Concrete and Aggregates industry’s projected rise of 31.9%. Its Zacks Consensus Estimate for current-year earnings has risen 3.8% in the past 60 days.

Armstrong World Industries, Inc. AWI is a manufacturer and marketer of ceiling systems that are mostly used in the construction and renovation of residential and commercial buildings in the United States, Canada and Latin America.

Armstrong World Industries has a Zacks Rank #2 and its expected earnings growth rate for the current year is 21.9% compared with the Zacks Building Products –Miscellaneous industry’s projected rise of 8.9%. Its Zacks Consensus Estimate for current-year earnings has risen 2.8% in the past 60 days.

AAON, Inc. AAON manufactures and markets air conditioning and heating equipment in the United States and Canada.

AAON has a Zacks Rank #2 and its expected earnings growth rate for the current year is 61.7% compared with the Zacks Building Products – Air Conditioner and Heating industry’s projected rise of 26.8%. Its Zacks Consensus Estimate for current-year earnings has risen 2.3% in the past 60 days.

Orion Energy Systems, Inc OESX is a manufacturer and marketer of energy management systems for area lighting, commercial office and retail and industrial markets in North America.

Orion Energy Systems has a Zacks Rank #2 and its expected earnings growth rate for the current year is 31.6% compared with the Zacks Building Products – Lighting industry’s projected rise of 19%. Its Zacks Consensus Estimate for current-year earnings has risen 10.3% in the past 60 days.

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