Investing in Construction Stocks

These are boom times for construction. Towering cranes have become a fixture of city skylines. New housing developments are popping up left and right. And the U.S. government has committed to spending $1 trillion on infrastructure to fix aging roads and modernize public transportation.

For investors, all this building represents an opportunity. Construction projects are complicated and can take years to complete. There is a wide range of potential investments in companies that source raw materials, manufacture components, do the actual building, and manage projects from start to finish.

Construction companies, like many industrial stocks, are usually classified as slow and steady income stocks that are more likely to return money to shareholders than to double in value overnight. While it is true that most (but not all) of the companies listed below pay a dividend, there are some construction-related companies that are well positioned to grow faster than the economy as a whole, thanks to their exposure to long-term spending trends.

For those interested in investing in this growth, here are some standout stocks to choose from.

Top construction stocks to buy

Top construction stocks to buy

Companies 1 - 3

Caterpillar

Caterpillar is the manufacturer behind some of the biggest vehicles on the planet. The company is the world's leading maker of construction and mining equipment, as well as diesel and natural gas engines, industrial gas turbines, and diesel-electric locomotives.

When construction demand is booming, Caterpillar has a lot of ways to win. The company sells heavy equipment for construction sites, and it also benefits from the corresponding boost in demand for raw materials that pushes mining companies to buy new equipment. Caterpillar also has a large financing arm, and the company makes billions annually on services and spare part sales.

United Rentals

When construction activity is brisk, a lot of small to mid-sized contractors need a lot more equipment than what they have on hand. United Rentals is the solution to that problem, offering a wide range of equipment from a network of more than 1,600 branches across North America and Europe.

United Rentals is North America's largest equipment rental company, but it still has just 15% of a highly fragmented market. The company benefits from renting to a broad range of markets, including construction and utilities, helping it generate steady results regardless of fluctuations in demand from individual sectors.

The company pays a dividend and has a long history of returning excess cash to investors via share buybacks. United Rentals has reduced its share count by 31% over the past decade, meaning that each share an investor owns is worth more of the overall company now than it would have been a decade ago.

Vulcan Materials

Vulcan is the country's largest producer of construction aggregates, primarily crushed stone, sand, and gravel, as well as a major producer of construction materials, including asphalt and concrete.

This is a business where scale really matters. It isn't cost-effective to ship sand and stone thousands of miles to a job site. Vulcan’s network of more than 400 aggregates facilities, as well as 70 asphalt facilities and 140 concrete sites, is spread across the U.S., giving it nationwide exposure to construction activity and road building.

Companies 4 - 6

Nucor

Steel is the basic building block of a lot of heavy construction, and few are more efficient at making steel than Nucor. In the 1960s, the company revolutionized the steel manufacturing process, replacing the huge, inefficient blast furnaces traditionally used to blend metals with a cheaper process that melts scrap into usable steel bars.

Today, Nucor ranks among the largest U.S. steel manufacturers and has a reputation as one of the few that can remain profitable when demand wanes.

The steel industry has been the source of a lot of investor heartbreak over the years, with the industry forced to restructure under pressure from lower-cost foreign competition. There's little Nucor can do about changes in demand for steel, but the company has a proven formula to keep costs low that has made investing in steel a good option for the first time in a generation.

Fluor

Fluor is a century-old engineering and construction company that has grown from humble beginnings as a Texas-based builder of oil rigs into a multinational giant. Fluor offers a range of services, from project design and management all the way through to actual construction.

Buying into Fluor provides investors with exposure to commercial and private sector construction around the world, emphasizing megaprojects such as New York State’s replacement of the Tappan Zee Bridge.

NV5 Global

Think of NV5 Global as a scaled-down version of Fluor. NV5 is focused on the industrial engineering side of the business, providing professional and technical consulting services for government and business clients.

These services can include everything from environmental impact assessments and code compliance to civil engineering and permit management. The company also manages projects, ensuring that buildings are completed on schedule and as designed.

NV5 is smaller than some of its rivals, but that also gives it more growth-stock potential as it races to expand and take share.

Construction ETFs

Buy a construction basket instead

For those interested in construction stocks but who prefer not to buy individual equities, the Global X U.S. Infrastructure Development (BATS:PAVE) ETF provides exposure to a portfolio of construction companies, including many of the names listed above.

Related investing topics

Should you invest?

Are construction stocks right for you?

This list consists of a lot of different companies doing a lot of different things, and, indeed, construction is a broad sector. But all these companies share exposure to commodity prices and business cycles.

There are a number of reasons why construction stocks are a worthy investment:

• Massive demand: Between the need for more housing and the government’s ambitious infrastructure renewal program, there should be a lot of business for construction companies in the years to come.
• Stable and predictable cash flows: Construction stocks don't tend to soar the way tech stocks do, but they do offer some stability to balance out higher-risk growth stocks.
• Barriers to entry: It takes a lot of capital, equipment, and expertise to manage a construction site. That limits the ability of start-ups to gain share and provides some pricing power to the major construction companies.