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7 Winning Construction Stocks of 1H With Room to Run

Shrabana Mukherjee

The first half of 2019 was dynamic for the construction market. After a sharp selloff in the second half of 2018, rising demand, declining mortgage rates and solid economic fundamentals took most of the sting out of this hostile situation.

The construction sector grew almost 25% in the first six months of 2019, higher than the broader market’s (S&P 500) rally of 16.1%. Increased infrastructure spending, mainly in non-residential areas, along with the Fed’s dovish stance, ongoing job growth and rising wages, is contributing to the gradual improvement in marketplace.

Notably, spending grew in double digits in areas like highway and street, sewage and water disposal, transportation, water supply, and manufacturing during the first five months of 2019. Meanwhile, although residential outlays remained in a soft patch as home building fell for the fifth straight month in May, per the latest Commerce Department report, the only positive is new multi-family homes spending, which was up 9.3% during the period.



 

Insights Into Sector’s Prospects for 2H

After GDP growth of 2.9% in 2018, U.S. economic growth is expected to shift to lower gear at a 2.1% pace in 2019, according to Fed projections. GDP advanced at a 3.1% annualized rate in the first quarter, driven by a large increase in inventories of unsold goods and an improved trade balance, neither of which is expected to be repeated. The U.S. economy is expected to grow at a 1.5% annualized rate in the second quarter, the Atlanta Federal Reserve’s GDPNow forecast model showed on Jul 1.

Indeed, the construction market, the fate of which is tied to broader economic growth, is expected to suffer thanks to rising raw material costs, a weak housing market and a slowdown in global economy. Meanwhile, trade tensions with China and Mexico have been upsetting businesses and dampened consumer confidence.

Nonetheless, the truce in trade war is a boon to the construction market. In a tentative plan to end the trade war, President Donald Trump de-escalated the ongoing trade war with China on Jun 29 at the G20 summit in Japan, where he announced that the United States would not be adding the planned 25% tariffs on $300 billion worth of Chinese goods.

Also, the Fed recently signaled that it will cut interest rates if damage from President Trump’s trade battles with China and Europe, slowing global growth and geopolitical tensions threaten to curtail the U.S. economy further.
 
In a nutshell, lower interest/mortgage rates along with steady job and wage growth is expected to drive the construction sector. 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 that Led the Way

The positive developments led to a few winners in the construction equity space in the first half of 2019 that not only crushed the broad market returns, but also have the potential to outperform in the latter part. Of these, we have selected seven stocks with the help of our Zacks Stock Screener that have a Zacks Rank #1 (Strong Buy) or 2 (Buy), justifying their strong fundamentals. These are, namely, TopBuild BLD, Construction Partners ROAD, Great Lakes Dredge & Dock GLDD, KBR KBR, Altair Engineering ALTR, Jacobs JEC and Eagle Materials EXP.

As per the Zacks Sector Rank, the Zacks Construction sector is currently #2 out of 16 (top 14%), mirroring analysts’ optimism on the market’s earnings growth potential.

A solid sector rank and a VGM Style Score of B or better is quite a combination to look out for in stocks, especially for investors beefing up their portfolio in the second half amid volatility and uncertainty. You can see the complete list of today’s Zacks #1 Rank stocks here.

Take a quick look at the best 1H2019 stocks and their key metrics in the table below:


 
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