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Construction Spending Picks Up in July: 5 Picks

Shrabana Mukherjee
We shortlist five construction stocks for investors against the backdrop of increased construction spending in the United States.

A spur in homebuilding activity and publicly-funded building of schools and highways has led to an uptick in U.S. construction spending in July. The U.S. Census Bureau of the Department of Commerce said on Tuesday that construction spending for the month was estimated at a seasonally adjusted annual rate of $1.32 billion, 0.1% above the revised June estimate of $1.31 billion.

The July figure is 5.8% above the July 2017 estimate of $1.24 billion. In fact, through the first seven months of the year, spending was 5.2% higher than in the same period of 2017.

Homebuilding & Public Sectors Remain Strong

Spending on public construction projects rose 0.7% in July, after taking a 1.7% hit in June. Under the public construction umbrella, educational construction jumped 2.1% and highway construction inched up 0.4%.

Meanwhile, private outlays slipped 0.1% in July after decreasing 0.5% in June. Of the total private outlay, residential construction ticked up 0.6% from June following two straight months of declines. Meanwhile, nonresidential construction (comprising offices, stores, factories and other buildings) dropped 1% in the month, marking the steepest decline since August 2017 and followed a 0.1% gain in June.

Notably, residential construction grew 6.6% from July 2017 with new single-family and multi-family construction increasing a respective 6% and 1.1%.

Undeniably, there have been indications that the thriving housing market is losing steam of late. Factors like increasing construction costs, dearth of skilled labor and rising prices of homes owing to higher mortgage rates continue to make things difficult. Meanwhile, builders are perturbed by higher aluminum and steel costs, courtesy of the newly-imposed tariffs. This, coupled with increased lumber prices owing to an import tariff, is eating into builders’ margins.

Nonetheless, builders continue to report strong demand for new houses, fueled by steady job and income growth along with rising household formations. New home sales figure was 12.8% higher in July than last year, reflecting strong demand for homes as the economy continues to create jobs.

The housing market is expected to gradually recover through the rest of the year, backed by a solid ongoing job market, economic growth and lower taxes. The U.S. economy expanded at a 4.2% annual pace in the second quarter, almost double of first quarter’s 2.2% and the strongest figure since third-quarter 2014. Growth is trending higher in the world's largest economy this year and is on track to reach Trump's annual growth target of 3%.

Overall, the construction industry is on track to continue its positive growth trend, courtesy of stellar economic growth and Trump’s drive to boost the infrastructure of the country. Trump’s long-awaited $1.5-trillion infrastructure plan will likely call for more building and infrastructure spending in the near future, in turn boosting revenues and profitability of construction companies.

Picking the Right Stocks

Owing to the month-to-month volatility, investment in the construction sector at times becomes difficult. Investors need to be cautious while picking value stocks.

We have shortlisted construction stocks that have a Zacks Rank #1 (Strong Buy) or 2 (Buy) with a VGM Score of A or B. These stocks also have an expected earnings growth of more than 10% for the current year. Back-tested results have shown that stocks with a Style Score of A or B coupled with a bullish Zacks Rank are the best investment options. You can see the complete list of today’s Zacks #1 Rank stocks here.

North American Construction Group Ltd. NOA, a heavy construction and mining service provider, sports a Zacks Rank #1 and a VGM Score of A. The company’s earnings are expected to witness a stellar 228.6% growth this year.

Continental Building Products, Inc. CBPX also sports a Zacks Rank #1 and a VGM Score of A. This manufacturer of gypsum wallboard, joint compound and complementary finishing products has an expected earnings growth rate of 50.4% for this year.

Patrick Industries, Inc. PATK also carries a Zacks Rank #1 and a VGM Score of A. The company is a major manufacturer of component products and distributor of building products and materials for the Recreational Vehicle, Manufactured Housing and Marine industries. The company has an expected earnings growth rate of 49.4% for 2018.

Jacobs Engineering Group Inc. JEC, a technical, professional, and construction service provider, carries a Zacks Rank #2 and a VGM Score of B. Earrings of the company are expected to register 25.2% growth in 2018.

D.R. Horton, Inc. DHI, one of the leading national homebuilders, carries a Zacks Rank #2 and a VGM Score of A. The stock has a solid expected earnings growth of 41.2% for the current year.

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