The construction sector has seen a strong year so far on robust gains from home building investments and a rebounding U.S. economy. Spending on construction was up 4.1% year over year in the first 10 months of the year, per the latest report from the U.S. Census Bureau. Notably, U.S. construction spending rose 1.4% in October, marking the best gain in five months, with increases logged by all major categories of building.
Is the rally here to stay or is it only for the short term? Let us see whether the bullish momentum can continue.
Economy in Solid Shape
The world’s largest economy expanded at an annual rate of 3.3% in the July-September quarter, marking the fastest pace since the third quarter of 2014 and a nice pickup from the second quarter's 3.1%. As per the latest Goldman Sachs forecast, U.S. GDP growth is expected to come in at 2.5% in 2018, up from the 2.2% forecast for 2017 and 1.6% recorded in 2016.
Economists are of the opinion that the rebound in the U.S. economy along with a further decline in unemployment (4.1% in November) will keep the momentum alive for the sector. The November figure marked the lowest since December 2000. The United States has added jobs for 86 straight months, the longest streak so far. Moreover, Americans are highly optimistic about the economy with consumer confidence climbing to the highest level in 17 years.
Housing Industry Boom to Continue
The dynamic performance of the construction sector has been majorly buoyed by strong homebuilding activities. Homebuilding spending has increased 6.6% so far this year. Also, there are signs of increased inclination of home purchases among millennials, a generation that had to some extent refrained from entering the market.
Again, confidence among homebuilders rose in November to its highest reading in eight months to 70 and second-highest since the recession, according to the Housing Market Index by the National Association of Home Builders ("NAHB") and Wells Fargo.
The positive momentum is expected to continue in 2018, courtesy of an improving economy, modest wage growth, low unemployment levels, positive consumer confidence, a tight supply situation and escalating rent costs.
Though the U.S. housing industry is gradually recovering from damages caused by the recent hurricanes, limited land availability, labor shortage and higher material costs, there is nothing to fret about. Also, despite the repeated hikes of the Federal Reserve’s interest rates, optimism surrounding the housing market remains largely unaffected.
Public Construction Outlook Positive
Optimism surrounding the construction sector’s grew manifold post President Trump’s victory as one of his key priorities has been driving infrastructure investments..Though spending on government projects declined 3.4% year to date, it grew 3% in October, the biggest one-month gain in three years, with spending at the federal, state and local levels rising. Government project spend is expected to increase in 2018, with the Trump Administration’s $1-trillion infrastructure spend program yet to materialize.
As per the study by Dodge Data & Analytics, public works construction is expected improve 3% in 2018, higher than the 1% growth in 2017. Highways and bridges projects are expected to get boosted as federal funding is rising owing to the FAST Act. Reconstruction efforts related to Hurricanes Harvey and Irma are also anticipated.
How is the Sector Placed?
It is very evident from the above discussed factors that the positive momentum of the constructions sector is likely to continue in 2018.
The improvement in the construction sector’s Zacks Rank is reflective of the trend. The Zacks construction sector rank jumped from 3 to 2 (out of 16 sectors) last week, reflecting 42 positive revisions versus 35 negative. Notably, a sector with a larger percentage of Zacks Rank #1 (Strong Buy) and 2 (Buy) stocks will have a better average than the rest.
Also, the Zacks Construction sector registered EPS growth of 23.1% on a year-over-year basis, highest among the 16 sectors. It has advanced 21.9% so far this year, comparing favorably with 18.9% growth of the broader market (S&P 500).
Hence, it’s wise to bet on a few construction stocks that are expected to cash in on this positive momentum.
Choosing the Right Stocks
We believe that investors can profit from extrapolating the current bullish trend. Henceforth, turning to the momentum strategy seems prudent at the moment. However, picking the right momentum stocks is quite a tricky business for even seasoned investors.
Our research shows that stocks with a Momentum Score of A or B, when combined with a Zacks Rank #1 or 2 offer the best upside potential for the short term. The Zacks Momentum Style Score indicates the best time to buy a stock and take advantage of its momentum with a highest probability of success. You can see the complete list of today’s Zacks #1 Rank stocks here.
We have also taken into consideration a few more criteria to select the stocks. These include better returns than the industry this year and average daily volume of more than 20,000. Our research shows that stocks with this combination offer the best upside potential.
Boise Cascade Company BCC sports a Zacks Rank #1 and has a Momentum Score of A. Shares of the company have gained 24.3% as compared with its industry’s gain of 9.5%, year to date.
It delivered positive surprises in three of the trailing four quarters, with an average beat of 116.3%. Moreover, the company is witnessing upward estimate revisions — up 19.6% for 2017 and 4.5% for 2018 respectively — in the last 60 days.
The Zacks Consensus Estimate projects an EPS growth of 85.7% and sales growth of 12.9% in 2017. The expansion is expected to continue next year, with current estimates hinting at earnings growth of 7.2% and revenue growth of 6.3%. Again, the company’s EPS is projected to grow nearly 17.6% in the next three to five years.
NVR, Inc. NVR has a Zacks Rank #1 and Momentum Score of A. So far this year, the company’s shares have yielded a return of 72.9%, outperforming 25.5% growth of its industry. It delivered positive surprises in three of the trailing four quarters, with an average beat of 17.2%.
Over the last 60 days, the Zacks Consensus Estimate for earnings moved up 6.4% for 2017 and 12.3% for 2018. Based on the Zacks Consensus Estimate, we expect NVR to finish 2017 with EPS growth of 42.5% and sales growth of 11.7%. The trend is expected to continue in 2018, with current estimates hinting at earnings growth of 16.8% and revenue growth of 12.8%.
Notably, the company’s EPS is projected to grow nearly 17% in the next three to five years.
Gibraltar Industries, Inc. ROCK has a Zacks Rank #2 and Momentum Score of B. It delivered positive surprises in three of the trailing four quarters, with an average beat of 12.9%. Over the last 60 days, the Zacks Consensus Estimate for the stock moved north 6.5% for 2017 and 2.9% for 2018.
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