It’s Time to Make Hay with This Trillion Dollar Recovery

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Spring has officially sprung here in Rhode Island. The birds wake me up at 4:30 a.m., the forsythia is bursting and I can feel our hydrangeas coiling back, getting ready to launch their massive green leaves.

Back when I was a building and painting contractor during the construction boom days, April was the time to nail down the summer’s schedule. With my crews booked for the period from May to September, I could focus on managing projects, and not estimating and scheduling.

Summer was time to crank out the work and make hay while the sun was shining. And the sun burned pretty bright indeed for a while there.

Of course, it all came crashing down in spectacular fashion.

At the peak of the residential construction boom in November 2005, 1.8 million single-family homes were being built annually. When the market finally bottomed in March 2009, the pace of construction had fallen by 80% to an annual rate of 353,000 single-family homes.

Luckily, I had scaled back my business and was helping small tech companies develop business plans and go after venture capital funding by the time 2009 rolled around. So I watched the Great Recession sweep the country from a keyboard instead of a tower of scaffolding. Though I’m not sure that perspective made it any less painful.

Nevertheless, as I look around right now it’s easy to forget the dark days of the housing and construction market. Because the only thing bursting with more intensity than spring blossoms right now are construction projects.

In downtown Newport, the International Tennis Hall of Fame and Museum is undergoing a massive $15 million renovation and expansion. The 2.1-mile-long Pell Bridge, which crosses high above Newport’s famous harbor, just had a concrete barrier installed. A huge motel down the street is being razed to make room for a bigger and better hotel overlooking the ocean.

These are just a few of the projects that I’ve watched progress this spring. All over town there is evidence that federal, state and private funding for infrastructure projects has been unlocked. Residential construction, not to be left behind, is apparent all over town, too.

Look around where you are and I’m sure you’ll see the same thing, because the recovery in construction is well underway across most of the country. And I think the recovery is solid enough that even the most gun-shy investor can wade back into construction-related stocks again.

There’s a lot more evidence to support this assertion than just my anecdotal observations around my neck of the woods, of course.

Homebuilder confidence is surging. The best measure of this indicator is the National Association of Home Builders’ Housing Market Index (HMI).

This index measures three metrics reported by home builders: current single-family home sales volume; projected single-family home sales volume for the next six months; and current buyer foot traffic.

Generally speaking, a reading above 50 is bullish for home builders, while a reading below 50 is bearish.

Check out the chart of the HMI below, which includes the most recent reading from April 15, 2015. Note just how low builder confidence was from 2008 through 2011, before finally breaking through the 50 barrier in June 2013. After a reversal in early 2014, the HMI crossed 50 again in July 2014 and has stayed in bullish territory for 10 consecutive months.

HMI-index

The latest reading came on April 15, when the index rose 4 points to 56. All three components of the HMI registered gains.

The HMI includes the rate of single-family home starts. But I like to look at this trend separately, since it tells us exactly how many homes are being built relative to other times in recent history.

As this chart shows, the recovery in single-family home construction is well underway.

single-family-housing-starts

Residential construction is certainly not anywhere close to where it was back in the good old days. But considering how badly it was clobbered in the middle of the decade, I’d say the relatively steady uptrend that began in 2012 is a very good sign.

The latest reading from March 2015 shows that the annual rate of residential construction now stands at 618,000 single-family homes, a 75% improvement over the rate of 353,000 at the market’s bottom.

As the chart shows, we have a long way to go before getting back to an annual rate of 1 million or more, but that’s not what matters right now. What’s important is that the residential construction market has returned to growth. And that is great news for shares of construction and homebuilding-related stocks.

Of course, single-family homes are only part of the much larger construction industry. Let’s not forget to include commercial and public construction, too.

If we look at the dollars being spent on total U.S. construction – including residential, commercial and public – we see a recovery even more robust than in the residential market.

Total Construction Spending, Millions of Dollars,

Seasonally Adjusted (1/1/2000 – 2/1/2015)

total-construction-spending-chart

U.S. Census figures from February put the annual rate of total construction spending at $967.17 billion. That’s a 28% improvement from the low of $754.97 billion in February 2011. But more importantly, the upward trend in construction spending is very stable, with normal slowdowns occurring during the winter months.

At this pace of recovery, total construction spending could easily eclipse the trillion dollar mark before the end of 2015.

I think that possibility is on the table, and that the improving trend in the construction market is going to continue. And I think it’s wise that investors have some exposure.

One of my favorite ways to play it is with individual stocks of suppliers to the construction industry.  These are the companies that supply items such as fasteners, countertops, lumber, sheetrock and thermally formed concrete products.

I’ve played the construction trend with two small companies in my Game Changers advisory service. They’re doing well so far, delivering respective gains of 26% and 45% to subscribers. You can read about them in my Special Report, Building Profits, by clicking here.

You can try and play the trend with ETFs, too. The iShares U.S. Home Construction Index Fund (NYSEArca: ITB), SPDR S&P Homebuilders (NYSEArca: XHB) and PowerShares Dynamic Building & Construction Portfolio (NYSEArca: PKB) will all give some exposure to a mix of homebuilders, materials manufacturers and retailers.

And all are outperforming the S&P 500 year-to-date, with gains of 7.8%, 5.8% and 9.6%, respectively, versus 1.8% for the broad market index.

But personally I prefer to go with individual names to play this trend. Housing and construction-related companies that have been able to grow over the past few years, despite a very weak economy, are only going to do better as the overall housing climate improves.

The right supply companies are selling their products in practically every new build and renovation happening around the country. And I’d rather forgo the diversification of an ETF to gain the more rapid growth achieved by standout companies in the space.

I have more to say on this subject, and I want to talk about a couple of specific stocks. But I’m out of room today. In early May I’ll pick up the conversation where I left off today. We’re even talking about holding a webinar on the subject, during which I’ll get into more details on the recovery trend, and how to pick out individual stocks to play it.

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Published by Wyatt Investment Research at