The Q4 earnings season has so far seen releases from 25% of the construction companies. Though one might expect trade tensions and elevated input and freight costs to show on the construction sector’s results, the estimates tell a different tale.

Q4 Expectations

According to the latest Earnings Preview, earnings growth for the fourth quarter is expected to be in double digits for eight of the 16 Zacks sectors, construction being one. The sector is expected to report year-over-year earnings growth of 23.8% on 15.9% revenue growth.

Notably, earnings growth rate is expected to decelerate a bit from 33.7% growth reported in the third quarter. Investors should note that construction companies have been grappling with trade war-driven increase in raw material costs, rising freight expenses and volatility in commodity prices. Again, higher land/labor costs and rising interest/mortgage rates have added to the woes. All these factors have kept margins of many companies in the construction space under pressure, hurting bottom lines to some extent.

What’s Working in Favor?

Trump administration’s business-friendly approach, including tax cuts and higher construction spending, have kept construction activities going strong. Higher demand for state-of-the-art construction and engineering services, an impressive job market scenario and Trump’s impetus to boost infrastructure spending seem to be vital catalysts for the industry. Overall, in the first 10 months of 2018, construction spending advanced 5.1% year over year on a strong economy and low unemployment.

The headwinds confronting the sector have been countered by stronger growth for the U.S. economy, leniency in bank lending standards, solid market fundamentals for commercial real estate, and increased federal funding for school construction and public works.

Meanwhile, mortgage rates were steady for the third consecutive week, in the week ending Jan 24. The 30-year fixed rate averaged 4.45%, at the lowest level in nine months after six weeks of decline, according to Freddie Mac’s weekly Primary Mortgage Market Survey. The decline in rates might have helped boost home sales to some extent in the final months of 2018.

Overall, increased construction spending is expected to have contributed to overall growth in the last few months of 2018 despite rising interest rates and trade-related woes. Defying the multiple odds, the Zacks Construction sector has gained 0.4% over the past three months against the S&P 500 Composite’s 0.3% decline.

Picking a handful of construction stocks that are poised to beat earnings this quarter seems like a profitable strategy at the moment. An earnings beat will also pave the way for stock price appreciation.

Which Are the Right Picks?

Given the headwinds of Q4, it is not easy to find stocks with the potential to trump Q4 earnings estimates. Here, the Zacks methodology comes in handy as it helps identify stocks that not only boast solid fundamentals but are also poised to beat estimates this earnings season.

An easy way is to consider stocks that have a solid Zacks Rank accompanied by a favorable Earnings ESP. The combination of a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) with a positive Earnings ESP usually hints at an earnings beat. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

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

Earnings ESP is our proprietary methodology for determining stocks that have the best chance to pull a surprise in their next earnings announcement. It shows the percentage difference between the Most Accurate Estimate and the Zacks Consensus Estimate.

Winning Stocks

For investors willing to adopt this strategy, we have highlighted four construction stocks that may stand out this season.

Our first choice is Meritage Homes Corporation (MTH - Free Report). This homebuilding company topped earnings estimates in three of the trailing four quarters, the average beat being 16.9%.

It looks poised to beat expectations in the fourth quarter as well when it reports on Jan 30. The company carries a Zacks Rank #3 and has an Earnings ESP of +1.08%. The Zacks Consensus Estimate for earnings per share is pegged at $1.51 with an expected EPS growth rate of 12.7%.

Meritage Corporation Price and EPS Surprise

Meritage Corporation Price and EPS Surprise | Meritage Corporation Quote

Our second choice is a Scottsdale, AZ-based public homebuilder — Taylor Morrison Home Corporation (TMHC - Free Report). The company surpassed earnings estimates in the trailing four quarters, the average positive surprise being 15.2%. It looks poised to beat expectations in the fourth quarter too. The company carries a Zacks Rank #2 and has an Earnings ESP of +25.00%. The Zacks Consensus Estimate for earnings per share is pegged at 46 cents.

Taylor Morrison Home Corporation Price and EPS Surprise

Corporation Price and EPS Surprise | Taylor Morrison Home Corporation Quote 

Our third choice is Installed Building Products, Inc. (IBP - Free Report) — a leading installer of insulation and complementary building products. Although the company missed earnings estimates in all of the trailing four quarters, it looks poised to beat expectations when it reports fourth-quarter 2018 results.

For the upcoming release, Installed Building has a Zacks Rank #3 and an Earnings ESP +0.31%. The Zacks Consensus Estimate for the to-be-reported quarter earnings per share is pegged at 64 cents with an expected EPS growth rate of 23.1%.

Installed Building Products, Inc. Price and EPS Surprise

Installed Building Products, Inc. Price and EPS Surprise | Installed Building Products, Inc. Quote

Lastly, we have picked Forterra, Inc. (FRTA - Free Report), a leading manufacturer of water and drainage infrastructure pipes and products in the United States and Eastern Canada. Although the company missed earnings estimates in two of the last four quarters, with an average miss of 2.16%, it looks set to beat expectations in the fourth quarter. For the upcoming release, Forterra has a Zacks Rank #2 and an Earnings ESP +8.99%.

FORTERRA INC Price and EPS Surprise

FORTERRA INC Price and EPS Surprise | FORTERRA INC Quote