The construction sector has demonstrated stability so far this year amid challenges. The market has been battered by fears of an all-out U.S.-China trade war, affordability concerns, global market slowdown and shortage of skilled labor.
Defying all odds, the construction sector grew 31.7% in the first nine months of 2019, higher than the broader market’s (S&P 500) rally of 16.8%. 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. Notable gains in commercial, highway and street conservation and development, and transportation have been the bright spots.
Meanwhile, the housing market, especially single-family, has regained momentum, beating market expectations on major data points. Lower mortgage rates and solid labor market have been largely driving the recent resurgence in the market, which hasn’t contributed to economic growth since the end of 2017.
Chances of Easing Trade Tensions a Boon
China has been at the receiving end of adverse tariff action by the Trump administration for over a year now, with $250 billion worth of Chinese goods now covered by a 25% tariff. That said, optimism over the initiation of U.S.-China trade negotiations during Oct 10-11 has been bolstering investors’ sentiment.
Notably, Trump administration officials refuted Friday’s report about discussing ways to curb U.S. investments in China. This along with better-than-expected economic data of China seems to have lifted market sentiment on Monday.
Meanwhile, experts are of the opinion that the markets were downplaying chances of a major escalation in the trade war. Any meaningful negotiation is going to be a blessing for sectors like manufacturing and construction that have long suffered from the trade-inflicted rise in raw material costs.
Fatter Wallets, Cheaper Homes
Personal income grew 4.6% in August from the year-ago period, marking the 25th straight month of income growth above 4.5%. Meanwhile, home price appreciation moderated from mid-2018 through early 2019, but is showing early signs of stabilization of late amid a favorable backdrop of lower mortgage rates. The Case Shiller National Home Price Index displayed a 3.2% year-over-year rise in July, matching the lowest rate of growth since 2012.
Meanwhile, the recent data on increased existing-home sales and new residential construction points to the underlying strength in the market. Notably, the latest survey from National Association of Realtors or NAR shows that over half of polled Americans believe that now is a good time to buy a home, signaling strong prospects in the quarters ahead. NAR’s chief economist Lawrence Yun said “Not surprisingly, as incomes increase, the process of buying a home is less of a strain.”
In a nutshell, as the market wrapped up another quarter, the construction space is poised to gain traction through the balance of 2019 amid optimism over the all-important trade negotiation, steady job and wage growth, moderating home prices and declining borrowing costs trend.
Top Picks
Investing in the Construction sector seems profitable right now, as it falls within the top 32% (5 out of 16 sectors) of the Zacks Sector Rank.
Here are seven construction stocks that more than doubled the S&P 500 YTD and will continue to outperform in the coming months as gauged by potentially superior weighting methodologies and a Zacks Rank #1 (Strong Buy) or 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Along with a solid rank, a VGM Score of B or better is quite a combination to look out for in stocks, especially for investors beefing up their portfolio amid precarious market conditions. Seven such construction stocks with encouraging prospects are Aspen Aerogels, Inc. ASPN, Skyline Champion Corporation SKY, Meritage Homes Corporation MTH, frontdoor, inc. FTDR, KB Home KBH, Construction Partners, Inc. ROAD and MasTec, Inc. MTZ.
Take a quick look at the best performers YTD and their key metrics in the table below:
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