In this article we present the list of 10 Construction Stocks Hedge Funds Like as Spending Slumps. Click to skip ahead to see the 5 Construction Stocks Hedge Funds Like as Spending Slumps.
Caterpillar Inc. (NYSE:CAT), United Rentals, Inc. (NYSE:URI), and Vulcan Materials Company (NYSE:VMC) are some of the construction stocks that hedge funds have the most faith in this year.
Rising interest rates and inflation are keeping many prospective homebuyers on the sidelines, which has contributed to a recent slump in construction spending. After overall spending rose by just 0.1% month-over-month in May, it fell by 1.1% from those levels in June, surprising analysts who had been predicting another 0.1% rise in spending. On a year-over-year basis, overall spending rose by 8.3%.
Residential construction spending was one of the biggest culprits, declining by 1.6%, while spending on private construction projects dipped by 1.3%. Public construction project spending fell by 0.5%, while spending on state and local government construction projects was down by 0.6%.
And despite sky-high oil and gas prices, there was a 0.5% drop private non-residential structures spending, which includes gas and oil drilling projects. The long bright spot in the construction spending firmament was federal government spending, which rose by 1.2%.
After contracting by 1% in 2021, the U.S construction industry is off to an even worse start in 2022, with real output falling by 6.6% year-over-year in the first quarter. That was followed up by residential spending having its worst quarter growth-wise in two years during the second quarter.
A small bright spot for some players in the construction industry is the strength of the Canadian market, which is expected to grow by 4% this year on the heels of solid growth in 2021. And things are expected to look up for the North American construction market next year, when growth is projected to be 3.7% according to GlobalData.
Nonetheless, with construction spending currently in a bind, many construction stocks have had a rough go of it this year, with construction materials stocks falling by 20.2% and homebuilders dropping by 26.5%. Home improvement retailers have also been hit hard, sliding by 27%. Construction machinery and heavy trucks stocks have fared better, falling by just 1.4%.
With construction spending under pressure, let’s find out which industry stocks are the absolute cream of the crop according to some of the sharpest investors in the world, and therefore likely to survive or even thrive through leaner periods of spending.
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Our Methodology
These are the most popular construction stocks among the 900 hedge funds tracked by Insider Monkey as of the end of the first quarter of 2022.
10 Construction Stocks Hedge Funds Like as Spending Slumps
10. AECOM (NYSE:ACM)
Number of Hedge Fund Shareholders: 32
Caterpillar Inc. (NYSE:CAT), United Rentals, Inc. (NYSE:URI), and Vulcan Materials Company (NYSE:VMC) rank near the top of the list of construction stocks that hedge funds like, but AECOM (NYSE:ACM) is also a popular choice among many funds. Activist fund Starboard Value, helmed by Jeffrey Smith, owns 7.10 million ACM shares, and has previously pushed the fund to explore its strategic options, including the possibility of putting itself up for sale.
AECOM (NYSE:ACM)’s stock has been a big winner since Starboard got involved, gaining close to 90%.
The fund’s involvement included pushing the company to radically reshape its board, which it did, as seven of its 11 board members had been added within the last year as of late-2021.
A provider of various construction, design, and engineering services, AECOM (NYSE:ACM) has gradually shifted its role in the industry over the years, divesting itself of various construction projects and focusing more heavily on its services business. The changes have made Aecom a much more efficient and profitable company, with trailing 12 month margins at record highs, and its percentage returns on invested capital, equity, and assets all hitting five-year highs.
9. Fluor Corporation (NYSE:FLR)
Number of Hedge Fund Shareholders: 32
Fluor Corporation (NYSE:FLR) grabbed a spot on this list thanks to a 60% surge in hedge fund ownership during Q1, hitting an 8-year high on that front in the process. Jim Simons’ Renaissance Technologies and Joe Milano’s Greenhouse Funds were some of the funds to open new FLR positions in Q1.
Infrastructure and construction company Fluor Corporation (NYSE:FLR) has benefited from rising oil prices thanks to its exposure to the energy industry. Its energy solutions segment pulled in $1.3 billion in revenue last year, which accounted for over 40% of overall revenue. Fluor also has a large mission solutions business that handles nuclear-related projects for the federal government.
While he believes that Fluor Corporation (NYSE:FLR) and other construction companies have encouraging end-market dynamics, Citi analyst Andrew Kaplowitz nonetheless lowered his price target on FLR shares to $27 from $31 in July and has a ‘Neutral’ rating on the stock. Kaplowitz previously cited macro and inflationary concerns as reasons for being on the sidelines when it comes to Fluor.
8. Masco Corporation (NYSE:MAS)
Number of Hedge Fund Shareholders: 35
There’s been a great deal of volatility in the hedge fund ownership of Masco Corporation (NYSE:MAS) in recent quarters, which is down by 17% from Q4 but up by 21% since Q3. Jim Simons’ quant fund appeared to be bullish on construction stocks in Q1, as it was also loading up on shares of MAS, growing its stake in the company by 3,317%.
Masco Corporation (NYSE:MAS) slightly missed consensus estimates with its Q2 results of $2.35 billion in revenue and $1.14 in EPS, which was driven in part by some weakness in the company’s painting and plumbing segments. Furthermore, the company expects second-half growth to be even more modest than first-half growth, given moderating demand and projected foreign currency headwinds.
Oakmark Fund believes the market isn’t properly rewarding Masco Corporation (NYSE:MAS)’s strong portfolio, sharing its thoughts on the company in its Q2 2022 investor letter:
“We believe the market is failing to properly reward Masco (NYSE:MAS), a leader in home improvement products, for the significant upgrade of its business mix over the past decade. Having previously sold its more cyclical, lower return businesses, such as insulation, windows, and cabinets, what remains are some of the strongest and most recognizable brands in the industry. The company’s portfolio of products-primarily coatings (Behr) and plumbing fixtures (Delta, Hansgrohe)-are more resilient, lower ticket, and higher margin categories. Both segments compete within heavily consolidated industries, exhibit strong pricing power and skew meaningfully toward the less cyclical repair and remodel market. Despite its greatly improved business mix, Masco trades for just 10x next year’s expected earnings, which is a discount to historical levels and comfortably below a market multiple. We believe this dislocation presents an attractive opportunity to invest in a well-managed, high-quality portfolio in a sector that’s currently out of favor.”
7. Martin Marietta Materials, Inc. (NYSE:MLM)
Number of Hedge Fund Shareholders: 36
Martin Marietta Materials, Inc. (NYSE:MLM) is actually tied for fifth in hedge fund ownership, but gets ranked 7th due to having the weakest recent sentiment. Ownership of the stock has dropped each of the past two quarters, falling by 14% during that time. Joel Greenblatt’s Gotham Asset Management was one of several funds to sell off MLM during Q1.
Martin Marietta Materials, Inc. (NYSE:MLM) had a strong Q2 that included record shipments of cement and aggregates, as well as record performance in terms of revenue, gross profit, and adjusted earnings per diluted share. The company believes it can perform even better in the second-half of the year, anticipating record pricing growth that will drive further margin expansion.
The Weitz Investment Management Partners Value Fund is bullish on Martin Marietta Materials, Inc. (NYSE:MLM)’s aggregate volumes and backlogs, sharing its take on the company in its Q4 2021 investor letter:
“Martin Marietta Materials is one of the Fund’s largest quarterly contributors due to solid results and bright outlooks for their prosaic, essential products. Aggregate volumes and backlogs are strong across end markets, pricing momentum is robust, and the federal infrastructure bill adds visibility into the amount of money that will be allocated to infrastructure projects.”
6. KBR, Inc. (NYSE:KBR)
Number of Hedge Fund Shareholders: 36
Finishing off the first half of the list is KBR, Inc. (NYSE:KBR), which had a 5.2% dip in hedge fund ownership during Q1. Jim Simons’ Renaissance Technologies also took a new stake in KBR during the quarter, while Peter Avellone’s Cartenna Capital sold off its shares in the engineering and construction technology and solutions provider.
KBR, Inc. (NYSE:KBR), which provides various maintenance, delivery, operations, and other services, grew its adjusted EPS by 31% year-over-year during Q2 to $0.76, while revenue was in line with estimates at $1.62 billion.
With KBR, Inc. (NYSE:KBR) shares having gained 250% from their pandemic floor, they’re starting to look somewhat expensive at 23x cash flow, 4.44x book, and 51x earnings, all of which come in significantly above both its peers and its 5-year averages.
Check out the second part of this article to see why Caterpillar Inc. (NYSE:CAT), United Rentals, Inc. (NYSE:URI), and Vulcan Materials Company (NYSE:VMC) are the favorite construction stocks among hedge funds.
Click to continue reading and see the 5 Construction Stocks Hedge Funds Like as Spending Slumps.
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Disclosure: None. 10 Construction Stocks Hedge Funds Like as Spending Slumps is originally published at Insider Monkey.
