4 stocks to buy if construction spending spikes in September

Spending on construction projects, up only a few months ago, has fallen. The residential construction industry has been the biggest victim of the Fed’s aggressive rate hike policy, which has seen a steady decline in spending on construction projects.

However, construction spending rose unexpectedly in September, indicating that inflation may ease. The increase was mainly due to spending on non-residential structures such as mining and oil well drilling and government projects. Given this scenario, actions like EMCOR Group, Inc. EME, Granite Construction Incorporated GVA, James Hardie Industries plc JHX and United Rentals, Inc. URIs should benefit from this in the short term.

Construction spending rises despite challenges

The US Census Bureau said on November 1 that spending on construction projects rose 0.2% to a seasonally adjusted annual rate of $1,811.1 billion in September after falling 0.6% in August. Economists expected construction spending to fall 0.5%.

In addition, year-over-year construction spending rose 10.9% in September. At the end of the third quarter, or the end of the first nine months of the year, spending on construction projects totaled $1,353.7 billion, or 11.4% more than the same period the last year.

Spending on private construction projects rose 0.4% in September after falling 0.7% in August. However, the residential construction sector, which has mainly driven spending on construction projects for months, continued to decline.

Spending on residential construction projects remained unchanged month over month in September, with spending on single-family homes falling 2.6%. Spending on multi-family housing projects rose 0.3% in September.

The residential construction market suffered the most, as mortgage rates continued to climb due to interest rate hikes imposed by the Fed in its fight to rein in soaring inflation. However, economic data released last week suggested a decline in inflation. The personal consumption expenditure (PCE) index rose 0.3% month-on-month in September and 6.2% on an annual basis, unchanged from August.

This gave people the feeling that inflation might come down and that the Fed might ease its aggressive monetary policy after its rate hike in November. The Fed is expected to raise interest rates another 75 basis points after its two-day policy meeting, which begins Nov. 2. Investors believe this could be the last of the Fed’s major rate hikes.

If the Fed slows its next rate hikes, the homebuilding industry will likely benefit the most. That said, construction spending in September was led by private non-residential structures such as gas and oil well drilling, which rose 1%. In addition, spending on state and local government construction projects rose 0.6%.

Our choices

Given this scenario, it will be prudent to invest in stocks with a favorable Zacks rating that are poised to benefit from rising construction spending. We limited our research to four such stocks. Each of these stocks carries either a Zacks rank of #1 (strong buy) or 2 (buy). You can see the full list of today’s Zacks #1 Rank stocks here.

EMCOR Group, Inc. is a leading provider of mechanical and electrical engineering, industrial and energy infrastructure, and construction services to a wide range of businesses. EME serves commercial, industrial, utility and institutional customers.

EMCOR Group’s expected profit growth for the current year is 9.9%. The Zacks consensus estimate for current-year earnings has improved 0.4% over the past 60 days. EME currently has a #2 Zacks rank.

Granite Construction Incorporated is one of the largest infrastructure contractors and building materials producers in the country. GVA specializes in complex infrastructure projects, including transportation, industrial and federal contracts, and is a recognized leader in delivering alternative supply projects.

Granite Construction’s expected profit growth for the current year is 46.7%. The Zacks consensus estimate for current-year earnings has improved 46.7% over the past 60 days. GVA currently has a #2 Zacks rank.

James Hardie Industries plc pioneered the development of fiber cement technology in the 1980s. JHX has many product applications, including exterior cladding, trim and fascia, ceiling cladding and flooring, room dividers, decorative columns, fences and drainage pipes.

Expected earnings growth for James Hardie Industries for the current year is 19.4%. The Zacks consensus estimate for current-year earnings has improved 0.6% over the past 60 days. JHX currently has a #1 Zacks rank.

United Rentals, Inc. is the largest equipment rental company in the world, with an integrated network of 1,390 rental locations in the United States, Canada and Europe. URI operates in 49 states and all Canadian provinces. United Rentals offers 4,500 classes of equipment for rent at a total original equipment cost of $17.43 billion (as of September 2022).

United Rentals’ forecasted profit growth for the current year is 46.9%. Shares of URI have gained 18.9% over the past 30 days. United Rentals currently has a No. 2 Zacks rank.

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