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%.

For investors seeking to apply this strategy to their portfolio, we have highlighted four construction stocks that may stand out this season.

KBR, Inc. (KBR - Analyst Report)

Based in Houston, TX, this Zacks Rank #1 engineering, construction, and services company currently has an earnings ESP of +32.14%. The company delivered a massive positive earnings surprise of 120% in the first quarter of 2015 – a sharp turnaround from three negative surprises in the preceding quarters. The Zacks Consensus Estimate for second-quarter 2015 earnings is pegged at 28 cents. The company will report its second-quarter results on Aug 4, before the commencement of trading.

Owens Corning (OC - Snapshot Report)

Based in  Toledo, OH, this Zacks Rank #1 building materials company has an earnings ESP of +1.89%. Owens Corning has become a market-leading innovator of glass-fiber technology. The Zacks Consensus Estimate for second-quarter 2015 earnings stands at 53 cents. The company has delivered positive earnings surprises in three of the last four quarters, with an average beat of 16.23%. The company is scheduled to report second quarter results on Jul 22, before market opens.

Summit Materials, Inc. (SUM - Snapshot Report) 

Based in Denver, CO, this Zacks Rank #3 heavy-side construction materials stock has an earnings ESP of +9.38%. Founded in 2009, the company went public in March this year. In its first quarterly result since going public – announced in May - the company delivered a positive earnings surprise of 85.45%. The Zacks Consensus Estimate for second-quarter earnings is 32 cents. The company should report sometime early next month.

Ryland Group Inc. (RYL - Snapshot Report) 

Based in California, this Zacks Rank #3 homebuilder has an earnings ESP of +9.59%. The Zacks Consensus Estimate for second-quarter earnings is 73 cents. The company is scheduled to report on Jul 30, before the market opens.

Conclusion

Though there are headwinds in the form of intense competition and cost inflation amid moderating home prices, there are plenty of reasons to be positive about the homebuilding sector over the short and the long term. The improving economy and swelling consumer confidence have fuelled the desire for new homes. And if homebuilding gets a boost can the broader construction sector be left far behind? A close look at the space for some outperformers, backed by a solid Zacks Rank and a positive Zacks Earnings ESP, could be a great idea for investors to tap the optimism in the sector.