Markets
MAS

Housing Starts Fall in October, Permits Rise; 3 Stocks to Buy

Housing starts declined 11% in October primarily due to a sharp plunge in construction of multi-family units.

However, building permits rose in the month, suggesting a sustainable housing recovery amid an improving economic scenario.

Data released by the U.S. Department of Housing and Urban Development and the U.S. Census Bureau showed that housing starts declined 11% to a seasonally adjusted annualized rate of 1.06 million units in October from the revised September reading of 1.19 million.

The October decline was sharper than market expectations and hit the lowest level since Mar 2015. The storms and flooding hurt construction activity and resulted in production delays in Southern U.S.

Moreover, housing starts declined 1.8% year over year. Single-family housing starts went down 2.4% in the month, while multi-family starts plunged 25.1%.

Partly offsetting the weaker-than expected housing starts is better Permits numbers. The number of building permits - a gauge of future constructions - rose 4.1% in October from the prior month indicating that construction activity may pick up in November. Building permits for single-family and multi-family homes rose 2.4% and 6.8%, respectively. Moreover, permits rose 2.7% year over year.

The modest starts data comes a day after numbers released by the National Association of Home Builders (NAHB) showed that homebuilders' sentiment index slipped three points to 62 in November. Nonetheless, the index was still above 60 for the sixth month, suggesting that overall housing growth remains on track.

The overall fundamentals of the all-important construction sector remain strong and the soft data in November is seen by the market as only a temporary setback. As it is, the fourth quarter is seasonally the slowest for construction activity due to cold weather.

2015 has generally been a good year for the housing market. After a lull in the U.S. housing space in the first quarter, sales picked up in the ensuing months amid an improving economic environment and a better employment picture. Higher job numbers, a recovering economy, moderating home price gains, rapidly rising household formation, affordable interest/mortgage rates, rising rentals, and a limited supply of inventory - all point to continued strong momentum in 2016.

Heightened home construction activity is also spurring demand for homebuilding materials. This is, in turn, boosting the growth prospects of companies manufacturing these products. Construction material companies like Vulcan Materials Co. VMC and Eagle Materials Inc. EXP ; building product makers like Masco Corp. MAS and Headwaters Inc. HW ; equipment rental companies like United Rentals, Inc. URI ; engineering design firms like AECOM ACM and KBR Inc. KBR and security products and solutions provider Allegion plc ALLE are well poised for growth.

3 Construction Stocks for Your Portfolio

We've zeroed-in on three stocks in the construction sector with a Zacks Rank #1 (Strong Buy) or 2 (Buy). These companies are expected to gain from the ongoing housing recovery. We further narrowed down our choices with the help of our new style score system .

Our research shows that stocks with a Growth Style Score of 'A' or 'B' when combined a Zacks Rank #1 or 2 offer the best investment opportunities in the growth investing space.

Lennar Corporation LEN

This Miami, FL-based homebuilder carries a Zacks Rank #2 and a Growth Score of "B."

Lennar beat the Zacks Consensus Estimate for both revenues and earnings in all the three quarters of 2015 reported so far. According to the company, housing recovery continued at a steady pace in the last two quarters and the market is likely to be driven by "strong and consistent demand."

The company is one of the best positioned homebuilders to capitalize on this recovery backed by diverse revenue mix, large land supply and above-average order growth. Moreover, its ancillary platforms - Rialto, Multi-Family, FivePoint and Financial Services - are evolving and should improve further.

Lennar has delivered positive earnings surprises for four straight quarters with an average beat of 16.12%. Its shares also have had a good run so far this year, gaining around 15%.

Masco

This Taylor, MI-based building product maker's first three quarters of 2015 was marked by solid improvement in earnings, revenues and margin driven by improving momentum in the repair/re-modeling and new home construction industry. Strong sales were reported in most of the segments.

The company has delivered an average positive earnings surprise of 10.02% over the past four quarters. The Zacks Rank #2 stock has returned nearly 38% year-to-date supported by a Growth Score of "B." All these point to a bright future for Masco.

KBR, Inc.

Based in Houston, this Zacks Rank #2 engineering, construction, and services company currently has a Growth Score of "A." The company delivered positive earnings surprises in all the three reported quarters of 2015 - a sharp turnaround from negative surprises in the previous three quarters.

Conclusion

A present cause for concern for homebuilders like PulteGroup, Inc. PHM , Lennar and D.R. Horton, Inc. DHI is the shortage of availability of buildable lots and skilled labor. The labor market has tightened with limited availability that arrested the rapid growth in housing production. Limited capital for land and land development has left entitled lands in short supply. The shortage is limiting home production, and thereby lowering the inventory of homes, both new and existing.

Also, there is constant uncertainty over the Federal Reserve's rate hike decision. It is not clear if the Fed will finally announce an up-lift in the Federal fund rate at the meeting next month - though odds are more in favor of an increase.

A hike in the Federal fund rate would push mortgage interest rates up. High mortgage rates dilute demand for new homes, as mortgage loans become expensive. This lowers a buyer's purchasing power and hurts volumes, revenues and profits of homebuilders.

Even if we suppose an accompanying rise in mortgage rates with an interest rate hike, we believe they should still remain reasonable, keeping housing affordable. So, don't miss out on our three stock choices that are superbly poised to grow.

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days.Click to get this free report >>

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

MASCO (MAS): Free Stock Analysis Report

PULTE GROUP ONC (PHM): Free Stock Analysis Report

AECOM TECH CORP (ACM): Free Stock Analysis Report

KBR INC (KBR): Free Stock Analysis Report

VULCAN MATLS CO (VMC): Free Stock Analysis Report

LENNAR CORP -A (LEN): Free Stock Analysis Report

D R HORTON INC (DHI): Free Stock Analysis Report

UTD RENTALS INC (URI): Free Stock Analysis Report

HEADWATERS INC (HW): Free Stock Analysis Report

EAGLE MATERIALS (EXP): Free Stock Analysis Report

ALLEGION PLC (ALLE): Free Stock Analysis Report

To read this article on Zacks.com click here.

Zacks Investment Research

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

In This Story

MAS VMC ACM PHM KBR

Other Topics

Stocks