3 Housing Stock Picks - Analyst Blog

Construction spending touched a five-year high in April, according to a report released by the government on Monday. Additionally, March data was revised upwards. Taken together, these reports suggest that the construction industry is making a strong recovery following a slump during a long and harsh winter.

Construction Spending Rises

The US Census Bureau of the Department of Commerce reported construction spending of $953.5 billion in April, up 0.2% from the revised March estimate of $951.6 billion. Gains in government construction and home building activity were the primary reasons for this increase.

However, the increase in the payout by builders on residential and nonresidential structures was less than the consensus estimate. But the revision of the gains made in March from 0.2% to 0.6% was a more significant development.  

Gains in April mark the third consecutive increase for the industry after a harsh winter led to a 0.4% decline in January. The slump in construction spending weighed on the economy in the first quarter. GDP contracted during this period, marking the first quarterly decline in three years.

Home Sales Increase

A series of housing sales reports released last month also supports the view that the housing sector is picking up steam. Existing home sales data increased 1.3% to a seasonally adjusted annual rate of 4.65 million in April from 4.59 million in March. Existing home sales rose for the first time this year at the fastest pace since December 2013.

Sales of new single-family houses increased 6.4% from March's revised rate of 407,000 to seasonally adjusted annual rate of 433,000 in April. The rise was larger than the consensus estimate, which predicted sales would increase to 422,000. The Pending Home Sales Index, a forward looking indicator based on contract signings, moved up 0.4% to 97.8 in April.

Privately owned housing units authorized by building permits surged 8.0% to a seasonally adjusted annual rate of 1,080,000 in April from March's revised figure of 1,000,000. Separately, single family housing starts in April increased 0.8% above March's revised figure of 644,000.

Our Choices

Below we present three stocks poised to benefit from the increase in construction spending, each of which also has a good Zacks Rank. The first of these is a property management company while the second is directly involved in construction activity. The third company is a homebuilder.

CBRE Group, Inc. CBG is a commercial real estate services and investment firm, offering a wide range of services to tenants, owners, lenders and investors in office, retail, industrial, multi-family and other types of commercial real estates across the globe. Revenues are generated by the company from management fees on a contractual and per-project basis, as well as from commissions on transactions.

CBRE holds a Zacks Rank #2 (Buy) and expects earnings growth of 12.10%. The forward price-to-earnings ratio (P/E) for the current financial year (F1) is 18.81.

Emcor Group, Inc. EME is a leading construction and manufacturing company specializing in electrical facilities, energy infrastructure along with designing and manufacturing life saving facilities. The company's core area of expertise is planning and installing critical infrastructure systems by providing high quality commercial services aimed to extend the life of new and existing structures.

Currently, the company holds a Zacks Rank #2 (Buy) and expects earnings growth of 19.1%. It has a P/E (F1) of 17.12.

Our third choice is Toll Brothers Inc. TOL. The company builds luxury single-family detached and attached home communities; master planned luxury residential resort-style golf communities; and urban low, mid, and high-rise communities principally on the land it develops and improves. The company also caters to 50+ year old, active adult buyers, second homebuyers and move up home buyers.

Apart from a Zacks Rank #3 (Hold), Toll Brothers Inc. expects earnings growth of 68.9%. It has a P/E (F1) of 21.44.

Rising temperatures have given a welcome boost to construction spending.  Additionally, data released recently suggests that this trend is expected to continue going forward. This is why these stocks would make good additions to your portfolio.

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