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4 Solid Construction Stocks to Play for More Gains

Zacks

While there were apprehensions surrounding construction activity earlier in 2016, the stronger activity in August, September and October eases the worries to some extent.

As the year proceeded, the year-to-date comparisons strengthened, with total construction starts declining a nominal 1% through the first 10 months of this year, as per Dodge Data & Analytics. This compares favorably with the 3% decline at the nine-month period, the 7% decline at the eight-month mark, and the 11% fall at the end of seventh month.

Again, housing starts in the U.S. climbed 25.5% in Oct 2016 from September to a seasonally adjusted annualized rate of 1.32 million units. This marks the highest reading since Aug 2007 and a major surge since Jul 1982, as single-family housing starts advanced 10.7% and those for the volatile multi-family segment soared 68.8%.

Meanwhile, National Association of Realtors’ data showed that the existing-home sales surprisingly climbed 2% in October to the highest level since Feb 2007. The number of building permits — a gauge of future construction — rose 2.9% in the month of October.

However, if we are to consider other readings in the construction sector, the picture is not so rosy. New-home sales in October dropped to an annual rate 563,000 from a downwardly revised 574,000 in the prior month, as per the recent report from the Census Bureau. It is important to note here that existing-home sales reflect closings while new-home sales show more-recent contract signings.

Since Donald Trump's surprise win on Nov 8, mortgage rates have climbed sharply with Treasury yields scaling higher as investors are pinning hopes on Federal Reserve rate hikes and higher inflation under Trump administration. Also, the 30-year mortgage rate has risen to a three-year high.

Demand of new homes may falter as rising mortgage rates will likely curb the buying power of new homes.

So, keeping positive momentum in mind, we may zero-in some construction stocks that have gained in the current mixed scenario and have the potential to gain further before mortgage rates start rising.

Positives like improving economy will also raise optimism about the sector’s performance for 2017. Gross domestic product increased at a 3.2% annual rate instead of the previously reported 2.9% pace, the Commerce Department said in its second GDP estimate on Nov 29. This was the strongest since the third quarter of 2014 and followed the second quarter's weak 1.4%.

Winning Stocks

With the help of the Zacks Stock Screener, we have zeroed-in on four stocks in the construction sector with a Zacks Rank #1 (Strong Buy) or 2 (Buy).

These stocks have witnessed more than 20% price rise (over the last 4 weeks) and have bright prospects. Apart from the favorable Zacks Rank, these stocks have a healthy VGM style score, from our latest style score system. The VGM Style Score is a useful tool that allows investors to gain an insight into a stock’s strengths and weaknesses.

Here “V” stands for Value, “G” for Growth and “M” for Momentum and the score is a weighted combination of these three metrics. The Growth Style Score condenses the vital metrics from the company’s financial statements to get a true picture of the quality and sustainability of its growth. Our Momentum Style Score is a suggestion of the time to buy a stock to benefit from the rally in its share price.

Our research shows that stocks with VGM Scores of ‘A’ or ‘B’ when combined with a Zacks Rank #1 or 2 make solid investment choices.

MasTec, Inc. MTZ is a leading infrastructure construction company operating throughout the U.S. The company engages in the building, installation, maintenance and upgrade of energy, communication and utility infrastructure.

The company carries a Zacks Rank #2 and a VGM Score of A. The stock has been outperforming the Zacks categorized Building-Heavy Construction market since the beginning of the year, with the share price rallying 118.4% year to date compared to the broader market’s 23.9%.

Moreover, the company’s current year EPS is expected to increase 197.2%.

Thor Industries, Inc. THO manufactures a wide range of recreational vehicles (RVs) at various manufacturing facilities in Indiana and Ohio and sells them through independent dealers in the U.S. and Canada.

The company witnessed a number of achievements in fiscal 2016, ranging from the acquisition of Jayco, the successful integrations of Jayco, Cruiser/DRV and Postle Aluminum, and record sales and earnings in the fourth quarter as well as fiscal 2016.

Thor Industries expects strength in the RV market and shift toward more moderately priced towable products as well as the inclusion of full-year results of Jayco to lead to double-digit revenue growth in fiscal 2017.

The company has a long-term earnings growth expectation of 11.9%. The company reported positive earnings surprises in all of the last four quarters, with an average beat of 24.08%.

The stock has been outperforming the broader Building-Mobile Manufacturing & Recreation Vehicles market since the beginning of the year, with shares gaining 79.1% year to date compared to 68% for the broader market. The company, with a Zacks Rank #1, has a VGM Score of A. You can see the complete list of today’s Zacks #1 Rank stocks here.

Willdan Group, Inc. WLDN is a provider of professional technical and consulting services to utilities, private industry, and public agencies at all levels of government.

Willdan Group has a Zacks Rank #1 and a VGM Score of A. The company has expected earnings growth of 82.7% for the current year. Its earnings estimate for the current year has risen 11.8% over the last 30 days.

The stock has outperformed the broader construction market since the beginning of the year, with its share price soaring 193.3% year to date compared to 15.5% for the broader market.

Winnebago Industries, Inc. WGO enjoys a leading position as the manufacturer of vehicles, which are used primarily in leisure travel and outdoor recreation activities in the U.S.

This Zacks Rank #1 company’s earnings are expected to grow 32.3% this year. The company, with a VGM Score of A, has seen its earnings estimates for the current year improve 19.4% over the last 60 days.

The stock has beat the broader construction market since the beginning of the year, with share price soaring 63.1% year to date compared to the broader market’s 15.5%.

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