5 Construction Stocks to Build a Strong Portfolio

The construction market is a broad umbrella under which you have housing, commercial, government and institutional segments. So the impact of the pandemic on the construction market has not been uniform.

All segments were severely impacted by the pandemic and the forced stay-at-home orders. Moreover, the partial reopening followed by re-imposition of lockdowns in several states also impacted the industry. The rapid construction of hospitals and care facilities positively impacted a few companies.

As an initial reaction to the pandemic, companies focused on supply chain issues to make sure they had sufficient inventory, but clearly, this wasn’t the main problem. Going into the pandemic, there was already a shortage of skilled labor and the industry’s relatively slow adoption of technology wasn’t helping matters.

As the pandemic hit, the labor shortage turned more acute and the race for increased digitization (work from home, digital collaboration, use of technology for efficiency enhancements, etc), picked up. This trend is likely to continue in the foreseeable future. It’s also currently expected that offsite construction (prefabrication) and module-based construction will increasingly be adopted to boost efficiency.

Since the work-from-home trend is expected to extend and expand, home buying/upgrading continues. It was a very strong home buying market going into the pandemic and the bounce-back looks equally strong.

The NAHB/Wells Fargo Housing Market Index (HMI), which represents builder confidence in the construction of single-family houses, dropped from 72 in Mar to 30 in April, and then jumped to 37 in May, 58 in June and back to 72 in July. Anything above 50 indicates growth. It’s based on respondents’ opinion on market conditions including buyer traffic impacting new home sales from the present time to six months out.

Housing data from Zillow shows that new home sales remain 13.8% higher than last year with inventory selling 11 days faster. Sales are slightly softer on a week-to-week basis because of insufficient inventory. The median list price in the U.S. is 6.6% higher. So it’s a sellers’ market and a very hot one.

Commercial construction is a different ballgame however. This market is tied to economic growth and the plunging GDP has taken this market down with it. The USG + U.S. Chamber of Commerce Commercial Construction Index is a quarterly indicator of the health of this segment. So its decline from 72 in the first quarter to 56 in the second shows a pretty severe impact.

In USG Corporation CEO Chris Griffin’s words: “I’ve been through a lot of these kinds of recessions, but nothing like COVID-19…What I am excited about is technology as an enabler. It has enabled us to collaborate and innovate with our people internally and also with our customers. We happen to be a slow-adopting sector of new technologies, and I think that COVID-19 is going to help accelerate that.”

The construction segment was declared essential during the nationwide lockdown, so that was a positive. The government has been in talks about infrastructure projects that can help boost the economy and undo some of the pandemic-related damage. Infrastructure build not only contributes to economic growth, but it also helps employment. This is a growth driver that may be tapped at any time because there’s bipartisan support.

Here are five stocks from the segment with attractive prospects-

M.D.C. Holdings, Inc. MDC

M.D.C. Holdings, one of the largest homebuilders in the U.S., engages in the construction, sale and related financing of residential housing and the acquisition and development of land for use in the Denver, Phoenix, Maryland, Virginia, the mid-Atlantic region, Las Vegas, Dallas and California metropolitan areas.

Zacks Rank #1

VGM Score A

Industry: Building Products - Home Builders (top 2%)

June quarter EPS surprise 59.8% (reported earnings of $1.31 compared to the estimated 82 cents)

2020 estimate went from $2.99 to a $4.69 in the last 30 days (this is up 26.1% from 2019)

2021 EPS estimate went from $3.45 to $5.39 (this is up 14.8% from the 2020 estimate)

Revenue is currently expected to grow 16.4% in 2020 and 16.3% in 2021

TopBuild Corp. BLD

TopBuild Corp. is an installer and distributor of insulation and other building products to the U.S. construction industry through TruTeam and Service Partners.

Zacks Rank #1

VGM Score B

Industry: Building Products - Miscellaneous (top 11%)

June quarter EPS surprise 41.2% (reported earnings of $1.68 compared to the estimated $1.19 cents)

2020 estimate went from $4.98 to a $6.03 in the last 7 days (this is up 9.8% from 2019)

2021 EPS estimate went from $6.18 to $7.32 (this is up 21.5% from the 2020 estimate)

Revenue is currently expected to grow 1.6% in 2020 and 8.5% in 2021

Gibraltar Industries, Inc. ROCK

Gibraltar Industries manufactures and distributes things like ventilation and expanded metal products, mail storage solutions and rain dispersion products and solutions to the industrial and other building construction markets.

Zacks Rank #1

VGM Score B

Industry: Building Products - Miscellaneous (top 11%)

June quarter EPS surprise 110% (reported earnings of 84 cents compared to the estimated 40 cents)

2020 estimate went from $2.38 to a $2.71 in the last 7 days (this is up 5.0% from 2019)

2021 EPS estimate went from $2.80 to $3.17 (this is up 21.5% from the 2020 estimate)

Revenue is currently expected to grow 1.6% in 2020 and 8.5% in 2021

Norbord Inc. OSB

Norbord is a producer of wood-based panels operating primarily in the U.S., Europe and Canada. Norbord is headquartered in Toronto, Canada.

Zacks Rank #2

VGM Score A

Industry: Building Products - Wood (top 1%)

June quarter EPS surprise 171.4% (reported earnings of 38 cents compared to the estimated 14 cents)

2020 estimate went from $1.23 to a $1.90 in the last 7 days (this is up 613.5% from 2019)

2021 EPS estimate went from $2.86 to $3.03 (this is up 59.5% from the 2020 estimate)

Revenue is currently expected to grow 5.8% in 2020 and 16.9% in 2021

BlueLinx Holdings Inc. BXC

Bluelinx Holdings is the largest distributor of building products in the United States. Operating in all of the major metropolitan areas in the U.S., BlueLinx distributes products to more than 11,700 customers through its network of warehouses and third-party operated warehouses.

Zacks Rank #2

VGM Score A

Industry: Building Products – Wood (top 1%)

June quarter EPS surprise 273.2% (reported earnings of 71 cents compared to the estimated loss of 41 cents)

2020 estimate went from a loss of $1.28 to a profit of 70 cents in the last 7 days (this is up 156% from 2019)

2021 EPS estimate went from 24 cents to $2.14 (this is up 17.2% from the 2020 estimate)

Revenue is currently expected to grow 2.6% in 2020 and 7.4% in 2021

The Hottest Tech Mega-Trend of All

Last year, it generated $24 billion in global revenues. By 2020, it's predicted to blast through the roof to $77.6 billion. Famed investor Mark Cuban says it will produce "the world's first trillionaires," but that should still leave plenty of money for regular investors who make the right trades early.

See Zacks' 3 Best Stocks to Play This Trend >>

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
 
BlueLinx Holdings Inc. (BXC) : Free Stock Analysis Report
 
Gibraltar Industries, Inc. (ROCK) : Free Stock Analysis Report
 
M.D.C. Holdings, Inc. (MDC) : Free Stock Analysis Report
 
TopBuild Corp. (BLD) : Free Stock Analysis Report
 
Norbord Inc. (OSB) : Free Stock Analysis Report
 
To read this article on Zacks.com click here.
 
Zacks Investment Research