Construction Jobs on the Rise
What did I find most encouraging about the December ADP
private payroll and Federal government jobs reports?
- A revival in construction jobs. Although ADP said
rebuilding after Superstorm Sandy likely lifted their December
construction jobs gain, this is nevertheless the seventh month
in a row for adds to construction. The +39,000 ADP job adds in
construction was the best number since February 2006.
- ADP financial activities were up +14,000, a 16th month
straight positive run. This was the best financial activities
job add number since March 2006.
This pair of sectors moves together: one finances projects, the
other builds them. What a nice positive feedback loop. It
takes the overall macro economy system up in a cyclical
A serial pick-up in jobs means strong underlying
profits. Firms don't hire workers unless they make strong
profits by doing so. This led me to the
to look for stock picks.
Zacks Industry Classifications
To look for picks, start at the top. Our expanded
industry classification provides a fairly granular view of
industries by tracking more than 250 different groups. The Zacks
Industry Rank, which derives its predictive power from the
time-tested Zacks Rank, then helps us identify the industries
that are expected to outperform others.
The top 1/3rd of the Zacks Industry Rank qualify as industries
with 'Good' prospects, the bottom 1/3rd have 'Bad' prospects, and
middle 1/3rd as 'Neutral.'
The definition of size that matters here is not the total
sales or market capitalization, but the number of companies in
the 'industry.' Many of these 'industries' have just a few
companies in them. It's not particularly noteworthy if a single
small industry shows up doing well. A single firm with good news
can propel a one- or two-firm industry to the top (or bottom) of
It is interesting when you see a cluster of similar industries
close to the top of the list. This is where we find the
construction industries now. The same holds true for the bottom
of the list.
Zacks #1 Rank (Strong Buy) Construction Firms
In evaluating Zacks Industry Ranks, you want to see two
things: a good overall score (low, meaning more Zacks #1 and #2
Rank stocks than #4 or #5 Rank stocks) and some improvement the
relative position from the prior week.
It also helps to understand exactly what the Zacks Industry
Rank is. The Zacks Industry Rank is the un-weighted average of
the individual Zacks ranks of the firms in that industry. It does
not matter if the stock is the 800-pound gorilla that dominates
the industry or some very small niche player in the space -- they
have the same influence on the Industry Rank.
Also, that means the bigger the industry in terms of number of
firms, the less influence any given company has on the Industry
Rank. It also implies small industries, with just two or three
firms, should be the ones found at either the top or the bottom
of the list. Thus, we do not always focus on the very
highest-rated industries, but on the highest-rated ones in which
there are a large number of firms.
Zacks breaks up the construction sector into ten groups of
companies. One falls in the retail/wholesale industry, the rest
make a product or provide a service. Nine of the ten Zacks
industry groups showed up in the top 1/3rd of all industries,
meaning they have 'Good' prospects.
Three very small industries, by number of companies, ranked
very high in Zacks Industry Ranks in the first week of January
- Manufactured Housing/Recreational Vehicles (3 names, #2
Zacks Industry Rank, unchanged),
- Paint and Related Products (4 names, #6 Zacks Industry
Rank, up +7 in past week),
- Building Products - Air and Heating (4 names, #18
Zacks Industry Rank, up +33 in past week).
The next six groups fell into ranks from #35 to #72, in the top
1/3rd of all industries. But these groups had more
companies, which means these Zacks Ranks probably mean something
more here, even at a lower rank.
- Building - Cement (9 names, #26 Zacks Industry Rank, up +8
in past week)
- Building Products - Retail/Wholesale (8 names, #49 Zacks
Industry Rank, up +41 in past week)
- Building - Residential (16 names, #49 Zacks Industry Rank,
up +2 in past week.
- Building - Heavy Construction (15 names, #65 Zacks Industry
Rank, down -17 in past week)
- Building Products - Wood (6 names, #72 Zacks Industry Rank,
up +42 in past week),
- Building & Construction - Misc. (19 names, #81 Zacks
Industry Rank, up +13 in past week)
A remaining group, Engineering R&D Services (16 names, #215
Zacks Industry Rank, down -17 in past week), fell into the bottom
1/3rd -- a 'Bad' outlook. This is the construction sector
dedicated solely to providing services.
Interestingly, Engineering R&D Services was the
construction group whose leading companies focused on providing
services to government entities. Its two top-ranked
companies were located in California (
National Technical Systems
]. Could the wheels be turning in this bellwether state
I'd like to organize these ten Zacks groups further into five
tighter sets, based on a more coherent and physical vision of a
construction "industry." So I organized the activities of
the top Zacks Rank companies as sub-industries, around nodes of
final activity. And I put each company in upstream and downstream
positions to create a value chain within a given physical
sub-industry. This gives me a more tangible sense of what is
really going on.
Here are Zacks #1 or #2 Ranked construction companies placed
in each of my five physical groups:
I put a star by the company I think looks best in my
(1) PATRICK INDUSTRIES, INC. (
) Market Cap $176M. Patrick Industries is a manufacturer and
supplier of building products and materials to the manufactured
housing and recreational vehicle industries. In addition, they
are expanding as a supplier to certain other industrial markets,
such as furniture manufacturing, marine and the automotive
aftermarket. They manufacture decorative vinyl and paper panels,
cabinet doors, countertops, aluminum extrusions, drawer sides and
*(2) THOR INDUSTRIES, INC. (
) produces and sells a wide range of recreational vehicles and
small and mid-size buses in the United States and Canada as well
as related parts and accessories. The Company also manufactures
axles and suspension systems.
(3) WINNEBAGO INDUSTRIES, INC. (
) is a leading U.S. manufacturer of motor homes, self-contained
recreation vehicles used primarily in leisure travel and outdoor
recreation activities. Motor home sales by the Company
represented more than 87 percent of its revenues in each of the
past five fiscal years. The Company's motor homes are sold
through dealer organizations primarily under the Winnebago,
Itasca, Vectra, Rialta and Luxor brand names.
(1) CHASE CORP. (
) Market Cap $170M. Chase manufactures insulating and
semi-conducting electrical cable tape wrappings, cable filling
compounds, anti-corrosion mastics, reinforced rubber and asphalt
tapes and bridge deck corrosion barrier membranes. Its principal
products are protective coatings and tape products sold in
national and international markets.
*(2) DYCOM INDUSTRIES, INC. (
) is a leading provider of specialty contracting services
throughout the United States. These services include engineering,
construction, maintenance and installation services to
telecommunications providers, underground locating services to
various utilities including telecommunications providers, and
other construction and maintenance services to electric utilities
(3) MASTEC INC. (
) is one of the largest providers of construction services to the
telecommunications industry in the United States. The Company's
principal business consists of the installation and maintenance
of aerial, underground and buried copper and fiber optic cable,
underground conduit, manhole systems and related construction for
local telephone companies, including Regional Bell Operating
Companies such as BellSouth Telecommunications, Inc., U.S. West,
Inc. and SBC Communications, Inc., and non-Bell local telephone
companies such as Sprint Corp., and GTE Corp.
(1) POTLATCH CORP. (
) is an integrated forest products company with substantial
timber resources. It is engaged principally in the growing and
harvesting of timber and the manufacture and sale of wood
products, printing papers and pulp and paper products. Its
timberlands and all of its manufacturing facilities are located
within the continental United States (Zacks Rank #1).
(2) HOME DEPOT (
), LOWES CO. (
) and BUILDERS FIRSTS (
) (all Zacks Rank #2).
*(3) HOVNANIAN (
), MDC HOLDINGS (
), *RYLAND (
) and LENNAR CORP (
) (all Zacks Rank #2). Homebuilders.
Commercial and Industrial Construction Contractors
mainly (also helps apartments and homeowners):
(1) EAGLE MATERIALS INC. (
) is a Dallas-based company that manufactures and distributes
Cement, Gypsum Wallboard, Recycled Paperboard and Concrete and
Aggregates (Zacks Rank #1).
*(2) COMFORT SYSTEMS USA, INC. (
) is a national provider of comprehensive heating, ventilation
and air conditioning installation, maintenance, and repair and
replacement services. They operate primarily in the commercial
and industrial HVAC markets, and perform most of their services
within manufacturing plants, office buildings, retail centers,
apartment complexes and healthcare, education and government
*(3) UNITED RENTALS, INC. (
) is one of North America's largest equipment rental companies
with over branches in the majority of states, several Canadian
provinces and Mexico. The company offers for rent different types
of equipment to customers that include construction and
industrial companies, manufacturers, utilities, municipalities,
homeowners and others.
Engineering R&D Service Providers (least attractive
industry within construction):
(1) WILLDAN GROUP, INC. (
) is a leading single resource provider of specialized outsourced
services to small and mid-sized public agencies located primarily
in California and other western states. Willdan Group, Inc.
assists cities and other government agencies with a broad range
of services, including civil engineering, building and safety
services, geotechnical engineering, financial and economic
consulting, and disaster preparedness and homeland security.
Strategically located throughout California and other Western
*(2) NATIONAL TECHNICAL SYSTEMS, INC., (
) based in Calabasas, California, is a leading provider of
engineering and testing services to the defense, aerospace,
telecommunications, automotive and high technology markets.
Through a worldwide network of resources, NTS provides full
product life-cycle support, offering world-class design
engineering, compliance, testing, certification, and quality
registration and program management. It provides conformity
assessment and management system registration services, as well
as technical personnel for product certification, product safety
testing, and product evaluation. The company offers management
registration and certification services. It operates in the
United States, Japan, Vietnam, Germany and Canada.
I also did three screens on top Zacks Ranked stocks in
construction. First, I wanted to make sure the picks I made
were in the top half on sentiment, measured by the number of
Strong Buy brokerage recommendations. Second, I wanted to
make sure the picks were registering strong profits from a
shareholder perspective, measured by the current return on
equity. I did keep picks here that didn't do as well. Their
profit forecasts going forward were much better. Third, I wanted
to make sure stock markets hadn't priced in all of the good news
by running up stock valuations. So I ranked them by the
price to earnings (P/E) ratio looking forward one year
(F1). Anything below a 15 P/E is pricing beneath the
S&P 500 in historic terms.
You can see I made tradeoffs here. Not all of my picks
cleared all three screens. But the one tradeoff I didn't make was
that each pick comes out of a strong Zacks Ranked Industry; has a
top Zacks Rank for that industry; and the underlying macro
fundamentals of the entire sector are strong and getting
My picks were:
Dycom - DY
Comfort Systems - FIX
Ryland Homes - RYL
United Rentals - URI
Thor Industries - THO
BUILDERS FIRSTS (BLDR): Free Stock Analysis
CHASE CORP (CCF): Free Stock Analysis Report
DYCOM INDS (DY): Free Stock Analysis Report
HOME DEPOT (HD): Free Stock Analysis Report
HOVNANIAN ENTRP (HOV): Free Stock Analysis
LENNAR CORP -A (LEN): Free Stock Analysis
LOWES COS (LOW): Free Stock Analysis Report
MDC HLDGS (MDC): Free Stock Analysis Report
MASTEC INC (MTZ): Free Stock Analysis Report
(NTSC): ETF Research Reports
(PATK): ETF Research Reports
POTLATCH CORP (PCH): Free Stock Analysis
RYLAND GRP INC (RYL): Free Stock Analysis
THOR INDS INC (THO): Free Stock Analysis
UTD RENTALS INC (URI): Free Stock Analysis
WINNEBAGO (WGO): Free Stock Analysis Report
(WLDN): ETF Research Reports
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