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Brokers Love These Construction Stocks, Maybe You Should Too

Zacks

The construction sector has demonstrated stability through 2017 amid various challenges, with residential construction investment leading the way. Despite political and economic uncertainties, the sector saw sustainable growth.

A Look at Total Construction Spending

Spending on construction was up a sizeable 4.1% year over year during the first 10 months of this year, per the latest report from the U.S. Census Bureau. Notably, U.S. construction spending rose 1.4% in October, marking the best gain in five months, with increases logged by all major categories of building.

Spending on government projects grew 3% in October, the biggest one-month gain in three years, with spending at the federal, state and local levels, each witnessing growth. However, spending declined 3.4% year to date. On the other hand, residential was up 0.4% in the month, while nonresidential construction rose 0.9% after four straight declines. Homebuilding spending has increased 6.6% so far this year, reinstating its stature.

Solid U.S. Economy & Job Market a Net Positive

Gross Domestic Product or GDP expanded at an annual rate of 3.3% in the July-September quarter, said the Commerce Department in its second GDP estimate on Nov 29. This marks the fastest pace since the third quarter of 2014 and a nice pickup from the second quarter's 3.1% rate. Notably, it is the first time since 2014 that the U.S. economy has witnessed growth of 3% or more for two straight quarters.

Economists are also optimistic that the low level of unemployment, 4.1% in October, will keep the momentum alive for the sector as a whole. October figure was the lowest since December 2000. The United States has added jobs for 85 straight months, the longest streak on record.

Housing Showing a Sign of Confidence

The U.S. housing industry seems to be back on track after a few slow months, indicating gradual recovery on strong demand. Per the latest report from the Commerce Department, new-home sales increased 18.7% from a year ago and 6.2% from the prior month. This marks the second straight monthly gain and the highest level in 10 years.

Again, confidence among homebuilders increased in November to its highest reading in eight months to 70 and second-highest since the recession, according to the Housing Market Index by the National Association of Home Builders ("NAHB") and Wells Fargo.

Indeed, there are concerns that are restricting the industry’s growth to some extent for quite a while now. The industry has been challenged by shortage of homes for sale, suitable land and skilled labor. Again, limited land availability is driving prices higher, putting a serious question to the affordability.

Again, the brisk growth pace of the economy strengthens the case for the Federal Reserve to raise interest rates. The U.S. central bank has increased borrowing costs twice this year. That said, a booming economy boosts income as well. Thus, if the rise in income offsets the increase in mortgage payment, housing will do just fine. Hence, housing/homebuilding has been on a high on solid home sales data, affordable interest/mortgage rates and impressive housing starts figure. Resilient job growth along with seemingly high homebuilders’ confidence are adding to the momentum.

The SPDR S&P Homebuilders ETF XHB and the iShares U.S. Home Construction ETF ITB, the two largest exchange traded funds focusing on homebuilders and related fare, are up 26.9% and 53%, respectively, so far this year.

Investment Involves Risk

Investing in the Construction sector might sound profitable right now, as it falls within the top 6% (1 out of 16 sectors) of the Zacks Industry Rank, which hints at further growth. However, given the month-to-month volatile figures, investment in the construction sector at times becomes difficult. Hence, it might be a wise decision to go ahead with stocks preferred by analysts who offer key information which is of great value to investors.

Winning Stocks

With the help of our Zacks Stock Screener, we have selected four stocks that have been given Strong Buy/Buy rating by 80% or more brokers. A Zacks Rank #1 (Strong Buy) or #2 (Buy), which justifies a company’s strong fundamentals, further adds value to these stocks. You can see the complete list of today’s Zacks #1 Rank stocks here.

Firstly, we picked MasTec, Inc. MTZ, a leading infrastructure construction company operating throughout the United States. The company engages in the building, installation, maintenance and upgrade of energy, communication and utility infrastructure.

The Zacks Consensus Estimate for earnings for both the current year and the next have increased 2.2% and 2.7%, respectively, in the last 60 days, thus reflecting optimism in the stock’s prospects and substantiating its Zacks Rank #1. The company is also expected to witness earnings growth of 47.6% for the current year and 9.3% for 2018.

Secondly, Tecogen Inc. TGEN designs, manufactures, sells, and services systems that produce electricity, hot water, and air conditioning for commercial installations and buildings and industrial processes.

The company’s current year’s loss estimate has narrowed to 1 cent from 7 cents over the last 60 days. It has an expected earnings growth rate of 83.3% for 2017. For 2018, this Zacks Rank #1 stock has seen earnings estimates move up 400% over the past 60 days and has an expected earnings growth rate of 600% for the year.

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’s earnings estimate for the current year has increased 5.5% and 2.2% for the next, over the last 60 days. The stock has a Zacks Rank #2 and has an expected earnings growth of 19.6% for the current year and 22% for 2018.

Lastly, we picked Gibraltar Industries Inc. ROCK. The company manufactures and distributes products to the industrial and buildings market. The stock has a Zacks Rank #2. Meanwhile, the Zacks Consensus Estimate for 2017 earnings has increased 6.5% and 2.9% for 2018, over the last 60 days.

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