Top 4 Construction Stocks Likely to Maintain Momentum in 2022
Investors should buy Toll Brothers (TOL), Lennar (LEN), Comfort Systems (FIX), Eagle Materials (EXP) and Tecnoglass (TGLS) stocks for 2022 as these are likely to maintain their momentum amid improved...
It has been more than a year now that the U.S. construction market has been top notch. Despite witnessing record-high lumber prices, intense supply chain headwinds, and labor shortage, residential and non-residential market players have booked profits so far.
Solid housing market fundamentals and accretive infrastructural activities benefited the overall construction and related markets, defying coronavirus-related despairs.
Shares of a few market players like Toll Brothers, Inc. TOL, Lennar Corporation LEN, Comfort Systems USA, Inc. FIX, Eagle Materials Inc. EXP, and Tecnoglass Inc. TGLS have outperformed the Zacks Construction sector and S&P 500 Index since the beginning of 2021. All these companies are poised to continue the bull run through the next year, given their solid housing backdrop.
Image Source: Zacks Investment Research
Residential Construction: A Bright Spot
Despite the rising cases of the new variant of COVID-19 in recent times, various construction market indicators are raising hopes among investors. Per the recent report of the Commerce Department, construction of privately-owned homes grew 11.8% month over month in November. Also, building permits, housing completions, and sales of new single???family homes for the said month grew 3.6%, 4.1%, and 12.4%, respectively, from October. Existing-home sales also grew 1.9% in November from the previous month, according to the National Association of Realtors.
A forward-looking indicator of home sales based on contract signings, pending home sales slipped 2.2% in the same month due to low housing supply. Nonetheless, market pundits are expecting more inventory in 2022 that will probably help mitigate affordability issues. This uptrend can be supported by October’s monthly construction spending data published by the U.S. Census Bureau, which inched up 0.2% from a month ago.
The housing industry, which accounts for nearly 3-5% of total GDP, is also banking on low mortgage rates, rising mortgage applications and increasing buyer traffic. According to the National Association of Home Builders report, builder sentiment for single-family homes jumped for the fourth consecutive month in December and attained the highest reading since February 2021.
Encouragingly, the Federal Reserve expects the unemployment rate to fall from an estimated 4.3% in 2021 to 3.5% in 2022. November’s unemployment data reflects optimism. The unemployment rate fell 0.4 percentage points to 4.2% in November, per the U.S. Bureau of Labor Statistics.
Non-Residential Construction on the Rise
The non-residential construction market has been benefiting from the government's endeavor to boost investment — mainly in subsectors like transportation (roads, ports, and bridges), water and sewerage, and telecommunications. According to the Census Bureau’s latest report, spending on government construction projects rose 1.8% sequentially and 0.4% yearly in October.
Although spending for non-residential projects was not that encouraging in 2021 owing to the lack of funding, optimism remained intact, thanks to Biden’s infrastructural bill and sustained residential momentum.
Additionally, non-residential construction companies are well positioned to gain from the renewable energy drive of the pro-environmental Biden administration. Engineering services provider companies are banking on decarbonization efforts, including carbon management mitigation and compliance consulting as well as all facets of infrastructure for providing carbon-free energy solutions.
A number of major telecommunication biggies are also deploying significant wireline networks to offer bandwidth-enabling 1-gigabit speed using 5G technologies, thereby creating significant opportunities for the industry.
The Zacks Construction sector has a Zacks Rank of 5 at present (out of 16 sectors) and falls within the top 32%. This indicates profitability and hints for further growth.
Our Choices for 2022
We have zeroed our findings with the help of the Zacks Stock Screener and selected the most appropriate stocks that are poised for solid 2022. Momentum investing calls for a continued appraisal of stocks, which ensures that an investor does not pick a beaten-down name or overlook a thriving one. Momentum investors buy high on the anticipation that the stock will only ascend in the short-to-intermediate term.
Impressively, the Zacks Momentum Style Score indicates the best time to buy a stock and take advantage of its momentum with the highest probability of success. We prefer fundamentally strong, top-ranked high-performing stocks that can defy volatility in markets.
Back-tested results show that stocks with Momentum Style Scores of A or B when combined with a Zacks Rank #1 (Strong Buy) or 2 (Buy) handily outperform other stocks. You can see the complete list of today’s Zacks #1 Rank stocks here.
Toll Brothers: This luxury homebuilder’s strategy of broadening the product lines, price points and geographies will drive growth going forward. The company has been strategically adding more affordable luxury communities in view of the current demographic trends, and the expanding footprint and customer base. TOL has been expanding geographically via selective acquisitions.
Toll Brothers currently sports a Zacks Rank #1 and has gained 67.1% YTD. Earnings estimates for fiscal 2022 have increased 9.9% in the past 30 days. The bottom line is expected to grow 46.3% in fiscal 2022.
Lennar: This well known homebuilder currently carries a Zacks Rank #2 (Buy). It is benefiting from effective cost control and focus on making its homebuilding platform more efficient, which in turn is resulting in higher operating leverage.
Lennar’s earnings for fiscal 2022 are expected to rise 9.3% year over year. The Zacks Consensus Estimate for earnings for the next year has improved 4% over the past 30 days. LEN's shares have gained 52.8% year to date.
Comfort Systems: This company is a national provider of comprehensive heating, ventilation, and air conditioning installation along with maintenance, repair, and replacement services. It has been benefiting from strong construction activity levels and higher investments in productivity made earlier. The company has been increasingly gaining from substantial ongoing investments in training, productivity and technology. Also, acquisitions have increased its scale, expanded recurring service revenues, and enhanced FIX’s expertise in complex markets including industrial, technology, and life sciences.
Comfort Systems presently sports a Zacks Rank #1 and has gained 87.9% YTD. Earnings estimates for 2022 have increased 2.5% in the past 60 days. The bottom line is expected to grow 14.6% in 2022.
Eagle Materials: This Dallas, TX-based company produces and supplies heavy construction materials, light building materials, and materials used for oil and natural gas extraction in the United States. Improved cement, concrete and aggregates sales volume as well as solid contribution from the recently-acquired Kosmos Cement business have been aiding the company. Higher pricing is also adding to the positives.
Eagle Materials currently carries a Zacks Rank #2 and has gained 64.6% year to date. Its earnings estimates for fiscal 2022 and 2023 have moved 0.5% and 1.1% upward, respectively, in the past 30 days. Earnings for fiscal 2022 and 2023 are expected to grow 33.7% and 19.8%, respectively.
Investors may also add Tecnoglass, which belongs to the Zacks Building Products - Retail industry, to their portfolio as it is directly related to the Construction sector and drives revenues on major housing activity.
Tecnoglass: This company, which sports a Zacks Rank #1, is engaged in manufacturing and selling architectural glass and windows and aluminum products for residential and commercial construction industries. TGLS operates primarily in North, Central and South America.
The share price of TGLS has gained 281.3% year to date. Tecnoglass has an expected earnings growth rate of 16.8% for 2022. The Zacks Consensus Estimate for earnings for the next year has improved 11% over the past 60 days.
Zacks Top 10 Stocks for 2022
In addition to the investment ideas discussed above, would you like to know about our 10 top picks for the entirety of 2022?
From inception in 2012 through November, the Zacks Top 10 Stocks gained an impressive +962.5% versus the S&P 500’s +329.4%. Now our Director of Research is combing through 4,000 companies covered by the Zacks Rank to handpick the best 10 tickers to buy and hold. Don’t miss your chance to get in on these stocks when they’re released on January 3.Be First to New Top 10 Stocks >>
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
Toll Brothers Inc. (TOL): Free Stock Analysis Report
Lennar Corporation (LEN): Free Stock Analysis Report
Eagle Materials Inc (EXP): Free Stock Analysis Report
Comfort Systems USA, Inc. (FIX): Free Stock Analysis Report
Tecnoglass Inc. (TGLS): Free Stock Analysis Report
To read this article on Zacks.com click here.
Zacks Investment Research