Growth investors have a love-hate relationship with cyclical stocks because their growth is fleeting and often dependent on factors outside of their control—a dip in energy prices, for instance, can tank an oil stock no matter how productive its wells are. However, some cyclical stocks can move in multi-year booms and busts, allowing for potential big winners over a year or two as earnings and sales expand.
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Construction has always been one of those multi-year movers, and we’re convinced the sector is still in the early stages of a major rebound. Vulcan Materials (VMC) is our favorite play in the sector—as the largest producer of construction aggregates, it has its hands in all areas of the construction sector (state, residential and commercial). Demand has been perking up for a few quarters, yet management believes that the industry isn’t even back to “normal” levels of demand. We think VMC has a bright future.
We may be starting to see the construction boom broaden to the housing market, another industry that’s had sub-par levels of activity for many years. (Housing starts remain 25% below their 50-year-plus average rate of 1.5 million annually.) With mortgage rates taking a dip lower and job growth steady, we’re seeing some bullish numbers from the industry (new home sales hit an eight-year high in April) and housing stocks are beginning to come to life.
D.R. Horton (DHI), the largest homebuilder in the U.S., looks like it will be a big-cap leader if it gets through its earnings report (due out tomorrow) in decent shape. Orders and backlog have been growing at a mid-teens rate, while earnings are expected to rise a bit faster than that. The stock consolidated nicely for three months after a rebound off its February low, and has acted powerfully during the past couple of weeks, spiking to new price highs.
Another name to watch is Beacon Roofing (BECN), the second largest supplier of roofing materials in the U.S.; about half its business is from residential roofing, with the rest non-residential and building products. The firm has been on a big acquisition spree in its highly fragmented sector of more than 1,500 players. Beacon is in the process of swallowing a huge purchase that will boost its branches by nearly 30%! The stock was one of the first to move to new highs following the Brexit shakeout. We’ve placed BECN on our Watch List.
As growth stock investors, we’re never going to have a portfolio dominated by cyclical stocks, but when the opportunity is right, some of them can make big, persistent, longer-term moves. For construction and housing stocks, that time may be now.
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