5 Construction Stocks Set to Continue Winning Streak in 2022

As the year 2021 is close to wrapping up, the construction sector looks fairly strong, buoyed by solid housing market and infrastructural activities despite coronavirus-related despairs, lingering supply-chain disruptions and shortage of skilled labor. Year to date, the construction sector has surged 28.9%, outperforming the broader market’s (S&P 500) rally of 25.7%.

Optimism surrounding the construction sector grew manifold post Biden’s infrastructural bill and sustained residential momentum. Although spending for non-residential projects was not that encouraging in 2021 owing to the lack of funding, the residential sector was an outlier and sustained positive momentum over the course of the last two years. Markedly, existing home sales continued to trend upward in October, marking the highest level since the start of the year, according to the National Association of Realtors or NAR.

Meritage (NYSE:MTH) Homes Corporation MTH, Toll Brothers (NYSE:TOL), Inc. TOL, James Hardie (NYSE:JHX) Industries plc JHX, Comfort Systems (NYSE:FIX) USA, Inc. FIX, and Altair Engineering Inc. ALTR are expected to continue their winning streaks next year buoyed by residential gains and administration’s infrastructural push.

Insights Into Sector Prospects for 2022

Moving into 2022, headlines on a new COVID variant — Omicron — will make coronavirus a continuing operational risk for the industry. The pandemic continues to rage, defying the relaxations owing to vaccination drives. More transmissible new COVID-19 variants may lead to a further wave of lockdowns and supply chain disruptions.

Nevertheless, according to Dodge Data & Analytics’ 2022 Dodge Construction Outlook, total U.S. construction starts will rise 6% in 2022. Although this indicates a decline in growth from this year, which Dodge predicts will be at 12%, the report is predicting a "bright and busy future" for the industry. Chief economist for Dodge, Richard Branch, highlighted during their quarterly economic forecast event, “We expect total starts to be above 2019 levels in 2022, mainly due to the residential sector." He further added, "Quarterly growth rates will be slow over the course of the next year however. It represents an economy that is getting off a sugar high and getting in to a more sustainable growth pattern."

Residential: Slower Sales, Lower Inflation, Modest Price Growth

The housing market will normalize in 2022 on account of its various facets comprising rising interest rates, lower unemployment level, slower inflation and modest home-price growth. Fed Chairman Jerome Powell said in his post FOMC statement that it would end its pandemic-era bond purchases in March and expects three quarter-percentage-point interest rate hikes by the end of 2022 as the economy nears full employment. This will be followed by another two rate hikes in 2023 and 2024.

Importantly, the Fed will follow its existing benchmark lending rate of 0-0.25% “until labor market conditions have reached levels consistent with the Committee’s assessments of maximum employment.” Encouragingly, it expects the unemployment rate to fall from an estimated 4.3% in 2021 to 3.5% in 2022. Furthermore, policymakers forecast that inflation would run at 2.6% in 2022, reflecting an increase from the 2.2% projection in September, but then fall to 2.3% in 2023 and 2.1% in 2024.

Hence, the National Association of Realtors or NARs predicts existing home sales to decrease slightly to 5.9 million in 2022, given higher mortgage rates. With a tight labor market, housing starts are expected to modestly increase in 2022, thereby leading to modest home prices growth below 5%.

Non-Residential: More Spending for Infrastructural Enrichment

Apart from residential gains, the government's endeavor to boost investment in infrastructure construction — mainly in subsectors like transportation (roads, ports, and bridges), water and sewerage, and telecommunications — should aid the overall sector. Also, the companies are well positioned to gain from the renewable energy drive of the pro-environmental Biden administration. Development and deployment of technology solutions across the full spectrum of decarbonization efforts, including carbon management mitigation and compliance consulting as well as all facets of infrastructure for providing carbon-free energy solutions will benefit the companies going forward.

Investing in the Zacks Construction sector might sound profitable right now as it falls within the top 31% (5 out of 16 sectors) of the Zacks Sector Rank, which hints at further growth.

5 Winning Construction Stocks

Investors can keep an eye on the following construction stocks that have performed well despite pandemic-related woes and are expected to continue the winning streak in 2022.

We have shortlisted five construction stocks with the help of the Zacks Stock Screener that carry a Zacks Rank #1 (Strong Buy) or 2 (Buy), have a market cap of more than $1 billion and have gained more than 20% so far this year. You can see the complete list of today’s Zacks #1 Rank stocks here.

Meritage Homes: Based in Scottsdale, AZ, Meritage Homes is one of the leading designers and builders of single-family homes. Its focus on entry-level LiVE.NOW homes has been a major driving factor. The company is particularly focused on increasing gross margin and maximizing profits on every sale. To this end, it is making homes out of speculations that promise faster delivery at a lower cost. Meritage Homes’ strategic shift to a pure-play entry-level and first-move-up builder is expected to yield higher absorptions, aided by an improving community count growth trajectory.

Meritage Homes currently sports a Zacks Rank #1 and has gained 33.1% year to date (YTD). Earnings are expected to grow 22.2% in 2022.

Image Source: Zacks Investment Research

Toll Brothers: This luxury homebuilder’s strategy of broadening the product lines, price points and geographies will drive growth going forward. The company has been strategically adding more affordable luxury communities in view of the current demographic trends, and expanding footprint and customer base. TOL has been expanding geographically via selective acquisitions.

Toll Brothers currently sports a Zacks Rank #1 and has gained 56.2% YTD. Earnings are expected to grow 46.3% in fiscal 2022.

James Hardie Industries: Based in Dublin, Ireland, the company is one of the leading producers and marketers of high-performance fiber cement and fiber gypsum building solutions. The company’s all three regions continue to gain momentum on executing the global strategy of driving high value product mix penetration. Markedly, it marked the 10th consecutive quarter of delivering growth above market and strong returns during the fiscal second quarter. Its three key strategic initiatives — market directly to homeowners, penetrate and drive profitable growth in existing and new segments (mainly in Repair & Remodel), and commercialize global innovations by expanding into new categories — has been making excellent progress and will continue to do so in the near term.

James Hardie currently carries a Zacks Rank #1 and has gained 35.2% YTD. Earnings are expected to grow 34% in fiscal 2022 and 18.8% in fiscal 2023.

Comfort Systems USA: This company is a national provider of comprehensive heating, ventilation, and air conditioning installation along with maintenance, repair, and replacement services. It has been benefiting from strong construction activity levels and higher investments in productivity made earlier. The company has been increasingly gaining from substantial ongoing investments in training, productivity and technology. Also, acquisitions have increased its scale, expanded recurring service revenues, and enhanced FIX’s expertise in complex markets including industrial, technology, and life sciences.

Comfort Systems sports a Zacks Rank #1 and has gained 78.1% YTD. Earnings are expected to grow 14.6% in 2022.

Altair Engineering: Based in Troy, MI, this is a global technology company that provides software and cloud solutions in areas of simulation, high-performance computing, data analytics and artificial intelligence. ALTR’s products and services and business models have been driving market share growth. It continues to evolve its product portfolio with a combination of sustaining and disruptive innovations and recently announced the 2022.2 product update.

Altair Engineering currently carries a Zacks Rank #2 and has gained 21.5% YTD. Earnings are expected to grow 12.3% in 2022.