How to Play the Construction Recovery

In March I learned that our Rhode Island property had increased in value by around 7% since the beginning of 2012. At least that was the increase as far as tax assessment is concerned – we received our property valuation summary from a tax assessor as part of the state’s reassessment program.
I thought the increase sounded pretty low, especially since the average home value in the U.S. has increased by nearly 25% over the same time frame, according to the S&P/Case-Shiller National Home Price Index.
We’re not looking to sell, and I’m not anxious for our taxes to go up. So keeping a lid on the property’s assessed value is just fine by me. I am more than happy to be delusional in my belief that the market value has gone up more than 7%.
I don’t think this is crazy thinking though. Prices appear to have more than stabilized across the country. In fact, according to the aforementioned index, they are up 7.8% over the past year alone.
It’s been a wild ride for property values. The top of the home price bubble came around six months after the residential construction market peaked, when the home price index stood at 184.6 (see chart below).
The actual bottom in prices didn’t occur until March 2011, by which point home prices had fallen by 27%.

Today, home prices across the country have rebounded by nearly 25%. The index sits at 167. And people are buying. In March, existing home sales jumped by 13.5% year-over-year as the spring buying season got underway.
This stabilization in the market is helping realtors, developers, building supply companies and homebuilders. It’s also a significant contributor to a rebound in household wealth and consumer confidence.
Residential and public construction spending is on the rise, single-family home starts are recovering and housing prices are rebounding. It’s almost possible now for many people to forget the dark days of the housing market. Especially if they pause to look at the value of homes across the U.S. (or even their tax assessment).
Obviously some markets are doing better than others, but the general trend here is up. And I think it is good news for the construction industry in particular, since property values are an important consideration for those pondering a new building project or a remodel.
Speaking of remodeling, I have a chart for this too, called the Remodeling Market Index (RMI). Like the Housing Market Index (HMI) that I wrote about on Monday, an RMI reading above 50 is bullish for homebuilders, while a reading below 50 is bearish.
As the chart below shows, the RMI remains above 50, with a first quarter reading of 57. The RMI includes a “home maintenance and repair” component which hit a record high of 64 in the first quarter. That suggests to me that people are catching up on deferred maintenance and appear to care about their properties again – versus viewing them as just money pits like in 2009-2011.

This is all good news for the construction industry. But by no means is construction a rampant bull market yet. It’s just an improving one. And I think that investors can still find decent values in construction-related stocks.
A couple of weeks ago I talked about a few ETFs to play the trend. But you can also play a construction rebound with individual stocks to play niche trends. One place to start digging for ideas is with companies that make advanced materials for today’s modern homes. Many of these products are selling well now, and a sustained recovery in construction should bode well for long-term growth. Especially since many materials are needed for any sort of construction project – a new build, a fix and flip, a remodel, commercial, residential, high budget, low budget – you name it.
Specialized materials are in demand because they help speed up the building process, and contractors want things to go efficiently, to keep costs under control and to avoid headaches caused by inferior products. Other products offer low maintenance for homeowners. And others are just must-haves, like faucets and other fixtures.
There are millions of products out there, so you have to narrow down your ideas to help single out individual stocks. Here are a few high-level areas to start:

Spray Foam Insulation

Northerners love insulation because it shields us from those blustery winters. And southerners crave it because it keeps the air conditioning bill down. Over the last decade, advances in spray foam formulations have brought the cost down to a point where it’s economical for most homeowners to use it in at least part of a new build or remodel.
Spray foam insulation is often so much better than the alternatives – fiberglass or blown-in cellulose – that its use from a performance perspective is a no-brainer. Labor costs can be similar because it’s efficient to spray in foam versus cutting and stuffing fiberglass. These days we also see spray foam insulation used in conjunction with traditional materials to match up the desired (or code mandated) R-value with the homeowner’s budget.
A rebound in home construction could mean significant growth for the chemical companies, such as Dow Chemical (NYSE: DOW) that make these foams. Uses for spray foam also include structural, sculpting and flotation applications, so there is growth potential beyond housing.

Air Barriers and Roofing Underlayment

These are the rolls of materials that make a building look like a neatly wrapped present before siding and roofing materials go on. They come in various forms, but the purpose is essentially the same – to keep water, ice and wind out while allowing the house to breathe from the inside.
I can tell you from experience that good builders are neurotic about using the right materials for these applications – and that’s a good thing, as any homeowner that’s ever seen water pouring in through a sheetrock ceiling knows. A couple stocks here are DuPont (NYSE: DD), the maker of Tyvek, and W.R. Grace (NYSE: GRA).

Paint

A fresh coat of paint has to give the most bang for the buck when homeowners want to improve their house. It’s like a deep clean and a fresh look all at once – not to mention a necessary part of the process in new home construction.
Any sort of uptick in new home construction, fix-and-flips and home improvement projects could lead to a dramatic increase in the amount of paint sold in the U.S. Check out The Sherwin-Williams Company (NYSE: SHW) for a good paint stock.

Fasteners

Have you ever purchased a box of those square headed screws, only to get home and have every single one strip out before it’s all the way in the wood? Or seen every nail bleed through cedar clapboard siding? There are all sorts of fastener-related nightmare scenarios that play out every day because an inferior product was used.
The fastener is the most basic building material, but also one of the most important. And the number of options, and the complexity, is going up exponentially as the variety of building materials increases. Companies that are on the leading-edge of fastener-related technology are doing well now and will only do better if more housing units get built. Take a look at Fastenal (NASDAQ: FAST) as a starting point.
The list of ways to play a construction rebound goes on and on. I’m out of room for now. But later this afternoon I’m going to host a webinar in which I’ll talk about the housing and construction recovery, and I’ll also talk about two specific pure-play stocks to play the construction rebound.
If you’d like to join me, you can sign up here. I’d love to have you.

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