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The construction industry has had a tumultuous phase this year. While the coronavirus-related despairs have spooked the market, Fed’s dovish stance and residential rebound have proved to be a breather.

On one side, the non-residential sector is particularly in the doldrums given projects delays, work-from-home splurge, supply-chain disruptions, shortage of skilled labor, and constraints on state and local budgets amid the COVID-19 pandemic. Nonetheless, this was outweighed by robust gains from home-building investments. Markedly, the residential sector has performed remarkably well this year with existing-home sales continuing to trend upward in October, marking five consecutive months of month-over-month gains, according to the National Association of Realtors or NAR.

Insights Into Sector Prospects for 2021

Moving into 2021, new waves of outbreak will make coronavirus a continuing operational risk for the industry. Even many analysts believe that the economy is unlikely to accelerate in the first half of 2020. As rightly pointed out by Richard Branch, Chief Economist for Dodge Data & Analytics, “While the recovery is underway, the road to full recovery will be long and fraught with potential potholes.”

According to Dodge Data & Analytics’ 2021 Dodge Construction Outlook, total U.S. construction starts will increase 4% in 2021 to $771 billion after declining an estimated 14% in 2020 to $738 billion.

Residential construction remains the bright spot, with total residential starts expected to rise 5% in 2021, following a 2% drop in 2020, per the Dodge report. Rising need for more work-at-home space and record-low borrowing costs have been aiding the housing market that displayed stern resilience to the economic impacts of the coronavirus pandemic. In fact, mortgage rates have been slipping to all-time lows following the Fed's emergency interest-rate cuts. Fed’s decision to keep interest rates near zero moving into 2024 should keep the momentum alive in the housing industry.

Lawrence Yun, NAR's chief economist said, "With news that a COVID-19 vaccine will soon be available, and with mortgage rates projected to hover around 3% in 2021, I expect the market's growth to continue into 2021." Yun forecasts existing-home sales growth of 10% to 6 million in 2021.

Apart from residential gain, the government's endeavor to boost investment in infrastructure construction — mainly in subsectors like transportation (roads, ports, and bridges), water and sewerage, and telecommunications — should aid the overall sector.

On the flip side, the pandemic will continue to hurt supply chains as well, with contagion effect impacting both budgets and schedules well into 2021. Especially, prospects for non-residential and public construction are blurred given tepid demand, disruptions in the energy sector along with budget constraints. While the recovery challenges persist for 2021, the construction sector is expected to continue the momentum given lawmakers’ push for a new $900-billion coronavirus relief package, optimism on mass vaccine hitting the markets in early 2021, and continuously-low mortgage rates.

Investing in the Zacks Construction sector might sound profitable right now as it falls within the top 13% (2 out of 16 sectors) of the Zacks Sector Rank, which hints at further growth. Furthermore, defying all odds, companies in the sector have collectively grown 16.9% so far this year, higher than the broader market’s (S&P 500) rally of 14.9%.

4 Winning Construction Stocks

Investors can keep an eye on the following construction stocks that have performed well despite pandemic-related woes and are expected to continue the winning streak in 2021.

We have shortlisted four construction stocks with the help of the Zacks Stock Screener that carry a Zacks Rank #1 (Strong Buy) or 2 (Buy), a market cap of more than $1 billion, and are up more than 20% so far this year. Precisely, these stocks have outperformed their respective industries as well as broader construction sector year to date.

D.R. Horton, Inc. (DHI Quick Quote DHI - Free Report): Based in Texas, D.R. Horton is one of the leading national homebuilders, primarily engaged in the construction and sale of single-family houses, both in the entry-level and move-up markets. Its industry-leading market share, solid acquisition strategy, a well-stocked supply of land, lots and homes along with affordable product offerings across multiple brands will drive growth. D.R. Horton ended fiscal 2020 on a strong note, with adjusted earnings and revenues increasing 42% and 15%, respectively.

For fiscal 2021 as well, this Zacks Rank #1 company’s earnings and revenues are expected to grow 23.6% and 25.3%, respectively. Shares have gained 39.9% this year, outperforming the Zacks Building Products - Home Builders industry’s 23.4% rise.

TopBuild Corp. (BLD Quick Quote BLD - Free Report): Headquartered in Daytona Beach, FL, this company is an installer and distributor of insulation and other building products to the U.S. construction industry. Strengthening housing market prospects, systematic inorganic strategy, its strength in the Insulation Installation business, and improving repair and remodeling activities build hope.

Earnings for 2020 and 2021 are expected to increase by 27% and 21.3%, respectively. The company currently holds a Zacks Rank #2 and has gained 86.8% year to date, faring better than the Zacks Building Products – Miscellaneous industry’s 23.9% rise.

Patrick Industries, Inc. (PATK Quick Quote PATK - Free Report): Headquartered in Elkhart, IN, this company is a major manufacturer of component products and distributor of building products and materials. Its acquisition moves along with strong momentum in a recreational vehicle and marine sectors are expected to drive growth. Also, solid prospects of housing and industrial markets given low-interest rates, an increase in home improvement activity, and urban to suburban and rural relocation trends are tailwinds.

Earnings for 2021 are expected to witness 36.8% growth following an expected 5.5% growth in 2020. This Zacks Rank #2 company’s shares have climbed 34.3% versus the Zacks Building Products - Mobile Homes and RV Builders industry’s 12.9% rally.

Trex Company, Inc. (TREX Quick Quote TREX - Free Report): Headquartered in Winchester, VA, this company is a manufacturer of wood-alternative decking and railing. Continued strength in the repair and remodel sector, successful execution of the low-cost, highly-efficient operating model and higher price realization are expected to drive growth.