4 Construction Picks To Beat Q2 Earnings On Builder Optimism

After a lull in the housing sector in the first quarter, construction activity picked up in the crucial spring/summer months, supported by an improving economic environment and a better employment picture.

Moreover, construction trends are expected to improve further in the second half. Higher job numbers, a recovering economy and improving consumer confidence, moderating home price gains, affordable interest/mortgage rates, rising rentals, recent federal initiatives to increase mortgage availability and a limited supply of inventory –  all point to a redolent housing market in the second half. Housing data released this month also clearly indicates a healthy pace of growth.

Homebuilders like D.R. Horton, Inc. (DHI), PulteGroup, Inc. (PHM) and Lennar Corporation (LEN) saw relatively stable housing market conditions in the last quarter. They also seem to be quite optimistic about improving demand as the year progresses.

Due to slow but stable demand trends in the construction end market, construction material companies Vulcan Materials Company (VMC) and Eagle Materials Inc. (EXP); building products makers like Masco Corporation (MAS) and Headwaters Incorporated (HW); equipment rental companies like United Rentals, Inc. (URI); engineering design firms like AECOM (ACM) and KBR Inc. (KBR - Analyst Report) and security products and solutions provider Allegion plc (ALLE) have been seeing rising demand for their products.

Positive trends in new home construction activity and improvement in repair/remodel businesses in North America boosted sales and profits in the broader construction sector. With the U.S. economy improving – after faltering slightly in the first quarter – construction trends should gain momentum as the year progresses.

Picking the Right Stocks?

Picking the right stock for your portfolio could appear to be a daunting task given the wide range of companies in the construction space. One way to confine the list of choices during this earnings season is by looking at stocks that have a solid Zacks Rank accompanied by a favorable Earnings ESP. The combination of a favourable Zacks Rank – Zacks Rank #1 (Strong Buy), #2 (Buy) or #3 (Hold) – and a positive Earnings ESP is usually an indication of an earnings beat.

Earnings ESP is our proprietary methodology for identifying stocks that have high chances of surprising in their next earnings announcement. It shows the percentage difference between the Most Accurate estimate and the Zacks Consensus Estimate.

Our research shows that for stocks with this combination, the chance of a positive earnings surprise is as high as 70%.

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