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Hurricanes Hit Homebuilders' Confidence: 5 Stocks to Avoid

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U.S. homebuilders’ confidence slipped in September, as two devastating hurricanes — Harvey and Irma — brewed uncertainty for builders.

The National Association of Home Builders or NAHB/Wells Fargo Housing Market Index (HMI), which measures confidence in the market for new single-family home, dropped to 64 this month, from a downwardly revised 67 in August.

Hurricane Harvey hit Texas and Louisiana in late August, and Irma lashed Florida in early September. Economists are of the opinion that shortage of skilled construction labor is expected to worsen following the two devastating storms and rebuilding operations are likely to drive construction costs higher causing delays. The construction sector was already witnessing a labor shortage, which has worsened post the hurricanes.

All three HMI components fell in September. A measure of current sales conditions for single-family homes dropped four points to 70, while the index depicting sales expectations over the next six months slid four points to 73. Meanwhile, the component measuring buyer traffic edged down one point to 47.

Undoubtedly, sales tumbled this summer, reflecting the inventory shortage prevailing in the U.S. real estate market.  This has shot up average home prices nationwide. Investors should note that housing starts, permits and completions dropped 4.8%, 4.1% and 6.2%, respectively, in July. New U.S. single-family home sales also unexpectedly fell 9.4% in July, the lowest level since December 2016. August new-home sales readings are due out next week (Sep 26, 2017).

Reaffirming Positive Outlook

September readings gauging builders' view on sales over the next six months slipped from August. However, homebuilders' overall vision of the new-home market remains positive.

The housing market is expected to gradually recover throughout the rest of the year, banking on solid ongoing job market, economic growth and rising consumer confidence. New home sales figure has been higher compared with last year, reflecting strong demand for homes as the economy continues to create jobs.

Against such a backdrop, homebuilders with strong fundamentals are cashing in on higher demand and favorable dynamics, partially offsetting the ongoing challenges of the industry comprising land and labor shortages and rising material prices.

However, a number of companies have been losing grounds in recent times and it would be wise for investors to reshuffle their portfolio and get rid of stocks that may hurt returns.

5 Names to Stay Away From  

Selecting weak stocks and dumping them from your portfolio is a daunting task, as there are names aplenty. With the help of the Zacks Stock Screener, we have zeroed in on five stocks in the Construction sector with a Zacks Rank #4 (Sell) or 5 (Strong Sell). Notably, these stocks are also witnessing downward estimate revisions, which clearly indicate analysts' skepticism about their performance in the future.

Chicago Bridge & Iron Company N.V. CBI designs, builds, repairs and modifies steel tanks and other steel plate structures and associated systems. The stock has seen current-quarter and current-year earnings estimates being revised downward by 48% and 152.1%, respectively, over the past 60 days. It carries has a Zacks Rank #5.

Fluor Corporation FLR provides engineering, procurement, construction and maintenance services (EPCM) through a number of subsidiaries. The company’s current-year and next year estimates have moved down 38.1% and 11.6%, respectively, in two months. The stock carries a Zacks Rank #5.

USG Corporation USG, a leading manufacturer and distributor of building materials, holds a Zacks Rank #5. Over the past 60 days, the Zacks Consensus Estimate has decreased 7.1% and 6.3% for 2017 and 2018 earnings, respectively, thereby adding up to the stock’s woes.

M.D.C. Holdings, Inc. MDC is engaged in the construction, sale and related financing of residential housing and the acquisition and development of land for use in its homebuilding activities. The stock has seen current-quarter and current-year earnings estimates being revised downward by 10.8% and 4.3%, respectively, over the past two months. It currently has a Zacks Rank #4.

Martin Marietta Materials, Inc. MLM is a producer of aggregates for the construction industry. Analysts have revised the stock’s current-quarter and current-year earnings downward by 2.9% each, over the past two months. The company carries a Zacks Rank #5. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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