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5 Top Construction Picks as Housing Starts Hit 9-Year High

Tirthankar Chakraborty

Housing starts touched a nine-year high in October as builders ramped up construction of both single and multi-family homes. Steady increase in hiring and healthier finances have made home purchases affordable, which eventually boosted construction. Rise in income levels is also likely to drive demand among buyers, in spite of an uptick in borrowing costs.

President-elect Donald Trump’s emphasis to boost infrastructural spending is further expected to spark sharp gains among the top publicly-traded construction companies. Banking on this optimism, it will be prudent to invest in companies positioned to profit in the near term.

Residential Starts Scale a 9-Year High

New home construction climbed 25.5% to a seasonally adjusted rate of 1.323 million in October from the prior month, according to the Commerce Department. This was stronger than the seasonally adjusted 1.161 million forecasted by the consensus. In fact, residential starts touched the highest level since Aug 2007, while the percentage increase from September was the biggest since Jul 1982.

A strong upside in single family housing helped new home construction gain traction in October. The uptick in starts in the month followed a sharp drop in September. Single-family home construction jumped 10.7%, reaching a rate of 869,000, the highest since Oct 2007. Work on multi-family homes, such as townhouses, condominiums and apartment buildings, also posted a dramatic rebound, clocking a staggering 68.8% gain to hit a rate of 454,000 in October. Starts for buildings with five units or more touched their highest level since Jun 2015.

New construction accelerated in all regions of the country, with starts soaring more than 44% in both Northeast and Midwest regions. Permits for new construction, in the meantime, edged up 0.3% to an annual rate of 1.23 million. This shows that builders will continue to ramp up construction to meet the escalated demand for new homes and apartments.

What’s Behind the Reasonable Pricing?

A tightening labor market driven by rise in income levels made new homes reasonablefor many Americans who had restrained from purchasing in the wake of the Great Recession. The U.S. Department of Labor said that the average hourly earnings increased by 10 cents or 0.4% to $25.92 in October, which was preceded by an increase of 8 cents in September.

Wage growth increased 2.8% year on year, the highest since Jul 2009. The unemployment rate, meantime, declined 0.1 percentage point last month to 4.9% (read more: 4 Stocks to Buy on Strongest Wage Growth Since Recession ).

Improving job market may also help prop up housing demand despite higher borrowing costs. The average for a 30-year fixed-rate mortgage jumped to 3.94% from 3.57% last week, according to mortgage giant Freddie Mac. The 15-year fixed-rate mortgage, popular among homeowners who are refinancing, increased to 3.14% from 2.88%. Even though borrowing expenses have risen in recent times, it remains lower than the 4% mark achieved at the beginning of the year.

Trump’s Plan to Boost Construction

While there is an outsized advance in the number of new-home construction, Trump has pledged to spend significantly on infrastructure. On his campaign trial, he said that he will spend $1 trillion in over 10 years on a number of infrastructure projects. He wanted to upgrade the nation’s frayed airports, bridges highways, ports and waterways (read more: 4 Stocks to Gain From Trump's Infrastructure Push).  

The prospect of more federal and state spending drove construction specialist Aecom ACM almost 38% since Trump won the election, while rival Jacobs Engineering Group Inc JEC gained around 19%. Suppliers of concrete, sand and gravel like Vulcan Materials Company VMC and Martin Marietta Materials, Inc. MLM ended up 11.2% and 14.9% higher, respectively. Construction equipment makers also saw a rally, with Terex Corporation TEX increasing more than 25%.

5 Solid Choices

Construction of new houses hitting record highs along with Trump’s infrastructural push will surely continue to drive a rally in construction-related stocks. Steady job creation with improved income levels, on the other hand, helps buyers step up purchases. Given the bullish trends, it will be apt to invest in fundamentally solid construction companies for lofty gains. We have selected five such stocks that flaunt a Zacks Rank #1 (Strong Buy) or 2 (Buy).

EMCOR Group Inc. EME provides mechanical construction services to commercial, industrial, utility, and institutional customers. EMCOR has a Zacks Rank #1. The company’s expected growth rate for the current quarter and year are 3.75% and 17.5%, respectively. The Zacks Consensus Estimate for its current year earnings advanced 3.2% over the last 60 days.

MasTec, Inc. MTZ, an infrastructure construction company, has a Zacks Rank #2. The company’s expected growth rate for the current quarter and year are 175.4% and 194%, respectively. The Zacks Consensus Estimate for its current year earnings rose 8.2% over the last 60 days.

Simpson Manufacturing Co., Inc. SSD designs, engineers, manufactures, and sells building construction products. Simpson Manufacturing expects growth rate for the current quarter and year of 31.67% and 37%, respectively. The Zacks Consensus Estimate for its current year earnings increased 7.4% over the last 60 days. Also, the company sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Gibraltar Industries, Inc. ROCK manufactures and distributes building products in North America. The company has a Zacks Rank #1. The company’s expected growth rate for the current quarter and year are 9.2% and 45%, respectively. The Zacks Consensus Estimate for its current year earnings jumped 9.7% over the last 60 days.

LafargeHolcim Ltd. HCMLY operates in the building materials industry worldwide. The company is the largest diversified supplier of construction materials in the U.S. LafargeHolcim has a Zacks Rank #2. The company’s expected growth rate for the current year is 171.4%. The Zacks Consensus Estimate for its current year earnings climbed 85.2% over the last 60 days.

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