Why These Residential Real Estate Stocks Soared More Than 18% in July
Pent-up demand burst into the market in June.
When you think construction, you probably think of a guy in a hard hat and a reflective vest on a job site. But the construction industry involves everything from the initial planning of a project all the way through painting the walls. And it’s home to a lot of companies you can invest in. Here are some of the industry’s best and strongest construction stocks.
|Caterpillar (NYSE:CAT)||Equipment manufacturer|
|Nucor (NYSE:NUE)||Steel company|
|D.R. Horton (NYSE:DHI)||Residential homebuilder|
Source: Company websites
Equipment manufacturer Caterpillar (NYSE:CAT) is a massive company. Its size and long track record of producing quality heavy machinery are big advantages, since construction equipment has to be reliable and safe.
Like most construction companies, Caterpillar has had ups and downs over the years. But it has a long history of increasing its dividend nearly every year, during good times and bad.
Caterpillar’s dividend yield -- the percentage rate an investor will earn from the company’s dividend payments alone -- can vary a lot depending on the stock price. Investors should try to buy when the yield is high to maximize their value.
Traditionally, steel companies used huge blast furnaces. In 1968, materials manufacturer Nucor (NYSE:NUE) invented a cheaper process to melt scrap steel into usable steel bars. Today, Nucor is the largest steel manufacturer in the U.S., and one of the most consistently profitable.
Nucor’s shareholder-friendly management has a long history of returning those profits to investors through a generous dividend. It also uses a unique pay structure involving base pay and profit sharing. In the notoriously cyclical steel industry, this keeps expenses low during lean times to avoid excessive debt. As a result, Nucor tends to have very low debt levels compared to its peers.
As the largest residential homebuilder in the U.S. by number of units sold, D.R. Horton (NYSE:DHI) has several of the qualities investors should look for in a construction stock, including a strong reputation.
D.R. Horton has a history of low debt levels relative to its peer group thanks to conservative management. The company often posts impressive profits compared to its rival homebuilders, as well as superior cash flow. It’s one of the few homebuilders to pay a dividend, which it has regularly increased during up cycles (although it did cut its dividend by two-thirds during the Great Recession to avoid excessive debt).
Homebuilders’ fortunes tend to bounce around depending on their inventory in various regions of the country, so D.R. Horton may not always outperform its peers. But for investors looking to buy into the residential construction industry, Horton is a solid pick.
The construction industry consists of three primary sectors:
Not all industry players are publicly traded companies in which you can buy stock. Publicly traded construction companies tend to fall into the following categories:
Some construction companies aren’t part of the construction industry. For example, companies that build oil pipelines are usually considered part of the energy industry.
Things to look for in a construction industry stock include:
The primary risk of investing in construction stocks is that construction markets are cyclical, meaning they go through boom-and-bust cycles.
For example, U.S. construction spending had an extended boom cycle from the 1990s all the way up to 2006 as a result of economic growth. Then spending began to drop, plunging sharply during the Great Recession. In 2011 it began another extended growth cycle. While construction has been considered an “essential industry” by many states during the COVID-19 pandemic, and demand for new residential construction appears to have remained strong, investors should be prepared for a potential slowdown to start at any time.
Before buying any construction stocks, investors need to know where the industry is in its current cycle. A company that’s a buy at the bottom of a cycle may not be worth buying at the top.
Other risks include competition against other U.S. companies for the same customer pool (a concern for both industrial engineering companies and residential homebuilders) and foreign competition (which plagues manufacturers of materials and equipment).
Construction industry stocks come in many shapes and sizes. Because of that, many -- if not most -- investors can find a top construction stock that fits in their portfolio. However, because it’s a cyclical industry, investors should take the time to look into overall industry conditions, as well as each particular company’s prospects, before buying.
Pent-up demand burst into the market in June.
All segments suffered their lowest revenue in years.
Can Caterpillar sustain its dividend after an ugly earnings report?
LGIH earnings call for the period ending June 30, 2020.
The Census Bureau confirms what the builders are seeing.
CAT earnings call for the period ending June 30, 2020.
MTZ earnings call for the period ending June 30, 2020.
Apple beat analyst estimates by a mile with its fiscal third-quarter results, and Caterpillar is suffering a steep drop in demand for its products.
The flight to the suburbs drives record sales growth in May and June
The difference in new home demand between April and June could not be more stark.