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Construction Spending Edges Up in April: Top 5 Stocks to Buy

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·5 min read
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U.S. construction spending increased in April from the previous month, marking the second straight month of monthly rise. Rise in private residential construction, including single and multifamily, was partially offset by losses in outlays on non-residential structures and public projects. However, the metric missed analysts’ expectation by 60%.

Housing demand remained strong buoyed by the Fed’s dovish stance, low borrowing costs and lack of available supply, despite rising lumber prices.

Through the first four months of 2021, construction activity increased 5.8% from the same period in 2020. In the past year, the Construction sector has gained 58.4%, outperforming the S&P 500 composite’s 38.9% rally.

Zacks Investment Research
Zacks Investment Research

Image Source: Zacks Investment Research

Inside the Numbers

Spending on construction projects in the United States rose 0.2% in April, after rising 1% in an upwardly revised March figure, according to a report released by the Commerce Department on Tuesday.

Private construction spending was up 0.4% for the month from March outlays. Spending on private non-residential structures, which include manufacturing and power plants, dropped 0.5% to $451.4 billion. Low spending on Transportation, Power, Religious, and Amusement and Recreation was the culprit.

Spending on public construction projects also fell 0.6% in April from March, reflecting a 3.8% decline in residential projects and 0.5% decrease in nonresidential spending.

On a year-over-year basis, overall spending on construction projects in the nation advanced 9.8%, with notable growth of 13.9% in private outlays. Public outlays fell 2.2% year over year in April.

Homebuilding Driving Construction Spending

The April uptick was mainly driven by a resilient housing market backdrop. In April, all the three metrics — building permits, housing starts, and new home sales — jumped significantly on a year-over-year basis. This apart, existing and pending home sales also rose impressively from the prior year.

Solid fundamentals drove builder confidence to 83 points in April from 82 points in March. This resilient confidence level continued in May as well, despite growing concerns over the price and availability of most building materials, including lumber.

NAHB Chief Economist Robert Dietz, said, “While mortgage interest rates have trended higher since February and home prices continue to outstrip inflation, housing demand appears to be unwavering for now as buyer traffic reached its highest level since November.”

Per the latest report from Mortgage buyer Freddie Mac, the average rate for a 30-year fixed-rate mortgage fell to 2.95% for the week ended May 27, 2021 from 3% in the prior week.

Homebuilders are witnessing a surge in demand for single-family homes owing to a record low mortgage rate. Although the industry players are continuously complaining about the rise in lumber prices, higher land and labor costs as well as supply chain constraints, Americans are seeking more space for offices and classrooms.

However, first-quarter 2021 marked the sixth consecutive quarterly decline in business investment in nonresidential structures due to a drop in commercial and healthcare buildings. Nonetheless, industry well-wishers are in a favor of recovery in second-half 2021, with Americans resuming pre-pandemic activities and a rise in demand for the nonresidential space.

Stocks to Bet on

Backed by solid industry fundamentals, we have listed five top-ranked stocks from the Zacks Construction sector that investors may add to their portfolio. Notably, these stocks have been picked with the help of the Zacks Stock Screener and carry a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

D.R. Horton, Inc. DHI: This leading homebuilder’s shares have gained 73.9% in the past year. The stock’s earnings estimates for the current year have witnessed an upward revision of 0.6% in the past seven days, reflecting analysts’ optimism over the company’s prospects. Earnings for the current year are expected to grow 62.1%.

Meritage Homes Corporation MTH: Earnings estimates of this leading designer and builder of single-family homes for fiscal 2020 have moved 28.2% upward in the past 30 days. The company’s shares have appreciated 48% over a year. Although the stock has underperformed the industry, the positive estimate revision is encouraging. Earnings for 2021 are expected to surge 32.9%.

Louisiana-Pacific Corporation LPX: This wood product manufacturer’s shares have surged 178.8% in the past year. Earnings estimates for the year have increased 7.2% in the past seven days. Earnings for 2021 are likely to advance 157.5%.

Owens Corning Inc OC: The company is a world leader in building materials systems and composite solutions. Its shares have gained 102.4% over a year. In the past month, its earnings estimates have moved up 8.5%. Earnings for the current year are expected to grow 54.3%.

Granite Construction Incorporated GVA: Granite is the largest diversified infrastructure companies in the United States. Earnings estimates for 2021 have increased 47.4% in the past 30 days. The company’s shares have risen 129% in the past year. Earnings for the current year are expected to climb 29.2%.

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LouisianaPacific Corporation (LPX) : Free Stock Analysis Report

Owens Corning Inc (OC) : Free Stock Analysis Report

D.R. Horton, Inc. (DHI) : Free Stock Analysis Report

Meritage Homes Corporation (MTH) : Free Stock Analysis Report

Granite Construction Incorporated (GVA) : Free Stock Analysis Report

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