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Three Growth Stocks in the Strongest Sector

There are a few growth stocks in a red-hot housing sector I'd like to recommend today. And I recently discovered first-hand just how red-hot this particular sector is…

My wife and I bought our house in June 2009 (pretty good timing if I do say so myself), so we're getting on nearly seven years in our place. That's not terribly long, of course, but during that time, we've redone two bathrooms, put on a new roof, had the house painted and made countless small improvements. And that's on top of the two bundles of joy that arrived in 2010 and 2014-the biggest changes of all.

Given all of that-time, kids, the many projects done-we're feeling ready for something new. I can't say we're dying to move, but we've been poking around some open houses in our town, seeing what's out there and seeing if any opportunities exist. This is the first time in a few years we've really paid much attention to the local housing market.

What I've learned: The market is hot! Sure, some expensive places that require lots of work are sitting on the market, but I've seen plenty of nice houses in nice locations-even if they're priced "high"-go under agreement literally within a few days. One house we were excited to check out came on the market on a Tuesday and had an open house scheduled for that coming Sunday. It went under agreement on Friday!

Obviously, my small town north of Boston is not representative of the entire USA. But I wasn't surprised to see the action; my screens in Cabot Top Ten Trader-an advisory that specifically searches for the strongest growth stocks in the entire market-has been uncovered a growing number of housing stocks that are acting excellently!

And it's not just housing, either-construction stocks in general, especially those tied to infrastructure (whether it's residential, commercial or municipal), have been thriving since the market put in its early February low.

"Yeah Mike," I can hear skeptics saying, "many of these stocks were crushed last year and are bouncing back like everything else. Can any of them actually turn into big winners from here?"

I believe so, for one simple reason: The Great Recession (and its aftermath) took such a toll that, based on long-term historical trends, the current level of activity remain below even the average levels of the past 30 to 50 years. Thus, this recovery still appears to be in its early to mid-stages, leaving plenty of upside ahead.

The most dramatic example is the level of housing starts. Below is a long-term (since 1960!) chart of housing starts in the U.S.

You can see that the average of the past 55 years has been a rate of 1.5 million or so housing starts per year. But the Great Recession was so deep that even after years of steady recovery, housing starts are 20%-ish below average levels! And this is despite record low mortgage rates and a rising population.

This situation-there's been a steady increase in demand in recent years, but because of the steepest plunge in 50-plus years in 2008-2009, overall construction activity is at below-average levels-is seen across the construction industry.

Housing Chart

Three Growth Stocks in the Strongest Sector

So what are my favorite construction-related stocks? In no particular order:

Vulcan Materials ( VMC ) is a growth stock we've owned for a couple of months in Cabot Growth Investor, and I have high hopes for it. The company is the leading maker of construction aggregates-crushed stone, sand, gravel and more-that are used in all kinds of construction. Management has specifically laid out the argument that demand is increasing but still in the early innings, and believes cash flow and earnings can more than double in the years ahead. The stock has been notching new highs of late. Earnings are likely out in early May.

VMC Chart

HD Supply ( HDS ) is a growth stock you should be familiar with-I mentioned it in my last Cabot Wealth Advisory when I wrote about tight charts. The company has its hands in just about every infrastructure cookie jar, distributing more than a million individual products for water infrastructure, facilities maintenance and building and construction materials. Sales growth is slow but steady, and the leverage in the business model is fantastic, with free cash flow and earnings booming; analysts see earnings up 46% this year and another 20% in 2017. Shares remain very tight right now, though there is some old overhead to deal with. You could start a position here and average up if you develop a profit. Earnings aren't out until June.

HDS Chart

KB Home ( KBH ) , a mid-sized homebuilder (about $3 billion in revenue last year), is one of the first in its group to show excellent strength-shares have rallied nine straight weeks off their lows as investors anticipate great growth ahead. The company focuses on first-time and first trade-up buyers, with most of its operations in California, Colorado and Texas. Earnings have turned up sharply in the past two quarters, while backlog (up 29% in December from the year before) indicates plenty of growth is ahead. I think dips of a point or so are buyable.

KBH Chart

All of Cabot Growth Investor's market indicators are now positive, and we just received a strong buy signal from a rare blastoff indicator-that means higher prices are very likely to continue! I hope you won't miss this opportunity to profit from the best stocks.

Sincerely,

Mike Cintolo

Chief Analyst of Cabot Growth Investor and Cabot Top Ten Trader

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.

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