5 Construction Stocks That Crushed The Market In 2017

As we bid adieu to 2017, let’s take a look at how the construction sector fared this year and what’s in store for 2018.

Overall, 2017 was a great year for the construction sector buoyed by robust gains from home building investments and a rebounding U.S. economy. Especially, optimism surrounding the construction sector grew manifold post President Donald Trump’s victory, since one of his key priorities was driving infrastructure investments. This optimism is likely to continue in the near term, thanks to the long-awaited tax cuts, which are likely to be passed this week.

In total, spending on construction increased 4.1% year over year in the first 10 months of the year, per the latest report from the U.S. Census Bureau. Although spending on government projects declined 3.4% year to date, it grew 3% in October, the biggest one-month gain in three years, with spending at the federal, state and local levels rising. Government project spend is expected to increase in 2018 with the Trump administration’s $1-trillion infrastructure spend program, which is yet to materialize. On the other hand, residential spending increased 6.6% in the first 10 months of 2017. While a few projects like multifamily housing are gradually losing ground, others like office buildings, education facilities, and transportation terminals are in high demand.

Insights Into the Sector’s Prospects for 2018

U.S. construction starts are expected to climb slightly in 2018, according to Dodge Data & Analytics’ 2018 Dodge Construction Outlook. A 3% increase to $765 billion is expected, following a similarly modest 4% rise to $746 billion, is estimated for 2017.

The forecast further entails 3% increase in public works construction spending, higher than 1% growth in 2017. Highways and bridges projects are likely to get a boost as federal funding is rising owing to the FAST Act. Again, reconstruction efforts related to hurricanes Harvey and Irma are also adding to the expectations.

Also, residential construction activities stepped up this year and the trend is expected to continue in 2018, courtesy of improving economy, modest wage growth, low unemployment levels, positive consumer confidence, a tight supply situation and escalating rent costs. Per the study by Dodge Data & Analytics, 4% gain is expected for residential building, 2% for nonresidential building, while nonbuilding construction is expected to stabilize following two years of decline.

However, a few market pundits are of the opinion that the Trump administration’s efforts toward overhauling the tax code could undermine any potential improvements in affordability in the housing market and make housing less attractive. The GOP tax bill allows interest payment deductions on mortgage debt up to $750,000, down from the current $1 million.

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That said, the December reading of the confidence level of homebuilders speaks of the industry’s strength. The confidence level among the nation's homebuilders ended 2017 on a high note as the housing market index (HMI) was at 74 in December. This marks the highest reading since 1999.

Builders seem to be shaking off worries related to the Republican tax plan, and apparently believe that the business incentives in the plan are likely to offset the negatives. The legislation promises many practical changes in a number of areas, but it will surely have a major positive impact on corporate profitability.

Per the Zacks Earnings Trends, earnings for the construction sector are likely to witness 20.3% growth in 2018, up from the expected 14.9% increase in 2017. Revenues are likely to improve 9% in 2018, compared with 9.5% growth estimated for 2017.

Strong Economy and Labor Market Act as Catalyst

Trump had vowed to double economic growth through an ambitious stimulus program featuring tax cuts, deregulation and higher infrastructure spending. Both markets and investors responded positively to this. The aura exists, as is evident from the broader market’s performance.

The S&P 500 index topped the milestone of 2,500 for the first time in mid-September, surpassing the 266% rise during the 1949-56 run, per Bloomberg. Notably, the surge came in the aftermath of hurricanes Harvey & Irma, depicting strong complacency in the stock market. Again, the Dow Jones Industrial Average has moved up 5,000 points this year — the biggest annual gain in its history — and is moving closer to another major milestone of 25,000.

The world’s largest economy expanded at an annual rate of 3.3% in the July-September quarter (2nd estimate), marking the fastest pace since the third quarter of 2014 and up from the second quarter's 3.1%. Again, further decline in unemployment (4.1% in November) will keep the momentum alive for the construction sector. The November figure came in the lowest since December 2000.

All these positive factors have helped the construction sector to grow more than 24% this year, higher than the broader market’s (S&P 500) rally of 20.1%. We note that the construction sector has been a major contributor to the S&P 500’s growth story.

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Written By: Zacks Investment Research