In this article, we discuss 10 construction stocks that billionaires are buying.
According to Oxford Economics, global construction output is anticipated to experience a growth of 1.9% in 2023. The primary driving force behind this expansion is expected to be the Asia-Pacific region, which is predicted to observe a construction output growth of 6.4%. Meanwhile, the Americas and Europe are set to experience a contraction in construction output growth of 3.9% and 1.1%, respectively. Over the next 15 years, it is estimated that construction work worth $4.7 trillion will be performed, resulting in a total of $13.9 trillion in construction activity in 2037. This prediction assumes an average annual growth rate of 2.78% during the period.
The long-term expansion in the construction industry is expected to be driven by the growing economic activities in China, India, and the United States. However, in the short term, the construction industry in developed economies is facing a challenging outlook due to high levels of economic uncertainty. There is a strong probability of an economic recession due to high commodity prices and rising interest rates, which have adversely impacted the growth outlook for this year. The tighter monetary policy has limited the buying power of households, leading to a reduction in demand for new buildings for housing facilities. To combat inflation, the US Federal Reserve has raised benchmark interest rates ten times since March 2022. The increase in benchmark interest rates resulted in monthly mortgage payments observing a year-over-year (YoY) increase of 38% for a median-price new home in the US, assuming a down payment of 20%. The higher cost of a mortgage has resulted in the demand for mortgages plummeting to a 26-year low, according to the Mortgage Bankers Association. Experts believe that the residential construction market will remain depressed as the Federal Reserve is expected to increase benchmark interest rates further.
Opportunities for Growth
It is important to note that the construction industry does not face an entirely gloomy outlook. There is a significant backlog of construction work due to supply chain disruptions over the last year, presenting an opportunity for the industry to work on delayed projects and achieve growth. The conflict between Russia and Ukraine, along with the 2023 earthquakes in Turkey and Syria, is also expected to result in a reconstruction effort of $1 trillion in the next 15 years. In addition, the growing demand for data centres by leading technology companies like Alphabet Inc. (NASDAQ:GOOGL), Amazon.com, Inc. (NASDAQ:AMZN), and Meta Platforms, Inc. (NASDAQ:META) is driving large-scale construction projects. Furthermore, public investment in infrastructure projects is also expected to drive growth in the construction industry. Governments are trying to boost their economies following the COVID-19 lockdowns by taking major infrastructure initiatives. For instance, the Federal Highway Administration (FHWA) revealed in January 2023 that it intends to invest $2.1 trillion to improve the bridge infrastructure across the US. The rising investment is likely to present opportunities for construction companies, resulting in a positive impact on some of the best construction stocks such as Caterpillar Inc. (NYSE:CAT), Builders FirstSource, Inc. (NYSE:BLDR), and Lennar Corporation (NYSE:LEN).
The move towards sustainability has emerged as a key theme in the construction industry, driven by the global goal of achieving net-zero emissions by 2050. The Inflation Reduction Act (IRA) introduced by the US Federal Government in August 2022 intends to divert $500 billion in federal spending towards cutting down carbon emissions by executing projects that enhance the transition towards cleaner energy and promote sustainable construction. According to the International Energy Agency (IEA), the construction industry is responsible for using 36% of global energy and contributes 40% to the global carbon emissions. Major production facilities related to the construction industry still use conventional fuel sources for energy, and the global cement sub-industry is alone responsible for 8% of global carbon emissions. These figures emphasize the construction industry’s significant role in carbon emissions and its potential for environmental improvement. The public sector, including government agencies and institutions, plays a vital role in driving sustainability initiatives within the construction industry. An example of this is the National Highways in the UK, which has announced that it intends to cut construction activity-related carbon emissions in half by the end of this decade.
Photo by scott-blake on Unsplash
Our Methodology
We used Insider Monkey’s database of billionaire-owned stocks to shortlist the construction stocks that attracted the highest number of billionaire investors during Q1 2023. The best construction stocks have been ranked in ascending order of the number of billionaires holding a stake in them. We have also included information regarding the total number of hedge fund investors in these companies as of the first quarter of the year.
10 Construction Stocks Billionaires Are Loading Up On
10. Terex Corporation (NYSE:TEX)
Number of Billionaire Investors: 11
Dollar Value of Billionaire Holdings: $76,652,750
Number of Hedge Fund Holders: 28
Terex Corporation (NYSE:TEX) is a Westport, Connecticut-based manufacturer of machinery and equipment for the construction industry. The product range of the company includes cranes, aerial work platforms including boom lifts, scissor lifts, telehandlers, material handlers, and compact construction equipment.
On May 3, Stanley Elliot at Stifel increased the price target on Terex Corporation from $62 to $64 and reiterated a Buy rating on the stock following the company’s Q1 2023 results. The analyst appreciated Terex Corporation’s better-than-expected Q1 2022 results as they reflected strong plan execution by the company in a tough macroeconomic environment. Terex Corporation’s (NYSE:TEX) strong business fundamentals make it one of the best construction stocks to purchase.
9. Martin Marietta Materials, Inc. (NYSE:MLM)
Number of Billionaire Investors: 11
Dollar Value of Billionaire Holdings: $153,626,665
Number of Hedge Fund Holders: 47
Martin Marietta Materials, Inc. (NYSE:MLM) is a Raleigh, North Carolina-based company that specializes in the production and distribution of construction materials. It is one of the largest suppliers of aggregates, asphalt, ready-mixed concrete, and cement in the US. The company is at ninth position on our list of the best construction stocks attracting billionaires.
In a report issued to investors on May 10, an analyst at DA Davidson increased the price target on Martin Marietta Materials, Inc. from $450 to $465 and reiterated a Buy rating on the stock. The analyst highlighted that the Q1 2023 results were solid and shared that the organization has a constructive view of its end markets. The financial services firm anticipates significant momentum in the infrastructure-based construction markets.
Here’s what TimesSquare Capital Management said about Martin Marietta Materials, Inc. in its Q4 2022 investor letter:
“Martin Marietta Materials, Inc. (NYSE:MLM), a supplier of aggregates to the construction industry, edged forward by 5%. Its third quarter results were in line with Street estimates. Pricing for aggregates and cement were higher than expected while volumes were strong. While management lowered near-term guidance, they gave a positive outlook for 2023 with further aggregate pricing improvement and flattish volumes. Demand is projected to be higher in public infrastructure and commercial activities, though weak within the single-family residential segment.”
8. PACCAR Inc (NASDAQ:PCAR)
Number of Billionaire Investors: 11
Dollar Value of Billionaire Holdings: $663,793,837
Number of Hedge Fund Holders: 33
PACCAR Inc (NASDAQ:PCAR) is a Bellevue, Washington-based company that focuses on the design, manufacture, and distribution of heavy-duty trucks, engines, and related parts for the construction industry.
In an investor update issued on May 9, David Raso at Evercore ISI highlighted that the broader weakness in the North American construction industry is more factored into PACCAR Inc as opposed to its competitors. The analyst recommended going long on PACCAR Inc as the company has strong business fundamentals, making it one of the best construction stocks.
Here’s what Madison Investments said about PACCAR Inc in its Q1 2023 investor letter:
“Heavy duty truck manufacturer PACCAR Inc (NASDAQ:PCAR) has quietly been one of our best performers over the past year. It, too, has surprised us to some extent, with the resiliency that it’s showing in a slowing trucking market. We think there’s a decent chance that weakness in its end markets will eventually catch up with PACCAR, but we believe the stock is cheap, and its steady parts business will act as a moderate stabilizer in such a scenario.”
As of Q1 2023, 33 hedge funds held a stake in PACCAR Inc.
7. ChampionX Corporation (NASDAQ:CHX)
Number of Billionaire Investors: 12
Dollar Value of Billionaire Holdings: $64,908,021
Number of Hedge Fund Holders: 25
ChampionX Corporation (NASDAQ:CHX) is a Sugar Land, Texas-based provider of speciality chemicals and services that offers solutions for water management and treatment relevant to oil and gas drilling sites. The company also provides industrial cleaning solutions applicable to certain construction sites.
Experts think ChampionX Corporation has been able to transfer the rising costs to the end customer, allowing it to protect its margins. Gates Capital Management was the biggest hedge fund investor in ChampionX Corporation as of Q1 2023, with a stake of $130.6 million.
Alger Capital made the following comments on one of the best construction stocks in its Q4 2022 investor letter:
“ChampionX Corporation (NASDAQ:CHX) provides equipment and services that assist in the drilling. completion and production phases of well drilling. The company also provides production and reservoir chemicals, along with highly engineered equipment and technologies, such as artificial lift and drill bit inserts, for the oil and gas industry. Notably, ChampionX has a global footprint and favorable product mix, where its chemicals and artificial lift businesses are tied to the production phase of the life of a well. We believe this produces lower earnings variability and potentially stronger operating results. Shares outperformed during the quarter as the company reported strong fiscal third quarter results and gave better-than-expected fourth quarter guidance. Moreover, the company expanded its capital return program by committing to return 60% of its free cash flow (FCF) to shareholders through opportunistic buybacks. Management also raised its share buyback authorization program from $250m to $750m over next 2 to 3 years. We believe the company is well positioned to deliver strong revenue growth, driven by their production focused Performance Chemicals business, which may lead to margin improvement and FCF generation.”
6. Toll Brothers, Inc. (NYSE:TOL)
Number of Billionaire Investors: 12
Dollar Value of Billionaire Holdings: $284,726,153
Number of Hedge Fund Holders: 37
Toll Brothers, Inc. (NYSE:TOL) is a Fort Washington, Pennsylvania-based company that has the distinction of being one of the biggest home construction companies in the US. The company specializes in building luxury homes and operates in multiple states across the country.
On May 31, Joe Ahlersmeyer at Deutsche Bank commenced coverage of Toll Brothers, Inc. stock with a Buy rating and a target price of $94. Ahlersmeyer initiated coverage on nine homebuilder stocks as investors question whether these stocks will experience a period of consolidation following their 40% to 80% rally from their lows in October 2022. The analyst believes that the demand outlook for the industry will continue to improve, making Toll Brothers, Inc. an appealing stock in terms of valuation.
Baron Funds shared its stance on Toll Brothers, Inc. in its Q4 2022 investor letter. Here’s what the firm said:
“Toll Brothers, Inc. (NYSE:TOL) is the leading luxury homebuilder in the U.S. with a capable management team as well as a large and valuable owned land portfolio. Toll Brothers is more insulated than its peers from elevated mortgage rates because 20% of the buyers of Toll homes pay 100% in cash.
At its year-end 2022 price of only $49.92/share, the company is valued at only 0.83 times our estimate of 2023 tangible book value of $60/share. Historically, Toll Brothers’ shares have been valued, on average, at 1.4 times book value and a peak multiple of approximately 2.0 times tangible book value. If the shares recover in the next few years and trade only to the company’s long-term average multiple of 1.4 times book value, Toll Brothers’ share price would increase 82% to $91 per share.”
In addition to Toll Brothers, Inc., Caterpillar Inc., Builders FirstSource, Inc., and Lennar Corporation are among the best construction stocks billionaires are investing in as of Q1 2023.
5. Builders FirstSource, Inc. (NYSE:BLDR)
Number of Billionaire Investors: 12
Dollar Value of Billionaire Holdings: $290,106,077
Number of Hedge Fund Holders: 51
Builders FirstSource, Inc. is a Dallas, Texas-based company that operates as a supplier and manufacturer of building materials and offers construction services. It is one of the leading suppliers to the residential construction and remodelling markets in the US. The company has secured fifth place on our list of the best construction stocks billionaires are purchasing.
On May 24, Matthew Bouley at Barclays increased the target price for Builders FirstSource, Inc. from $150 to $160 and maintained an Overweight rating on the stock. The analyst highlighted that even though the housing market may be facing challenges, the new construction segment is experiencing improvement and is in a much stronger position.
Here’s what Black Bear Value Partners said about Builders FirstSource, Inc. in its Q4 2022 investor letter:
“Builders FirstSource, Inc. (NYSE:BLDR) is a manufacturer and supplier of building materials with a focus on residential construction. Historically this business was cyclical with minimal pricing power as the primary products sold were lumber and other non-value-add housing materials. Since the GFC, BLDR has focused on growing their value-add business that is now 40%+ of the topline. BLDR can pre-assemble components such as a roof truss and deliver it to the homesite. This allows homebuilders (their end-users) to shorten their construction time and have higher returns on capital. The company has modest leverage and has been using their abundant free-cash-flow to buy in over 30% of the stock in the last 18 months.
While mortgage rates are higher, they are not unusual versus history. The low rates of the last 5-10 years are the outlier. We have a structural shortage of housing in the USA. With existing homeowners locked into low rate mortgages, the aspiring homeowner may increasingly need to find a home from a homebuilder. The next 6-12 months could be rocky as people adjust to the increase in pricing and rates. Eventually the housing market should adjust to the new normal (or rates could go down). We do have a large credit short which benefits if rates continue to go up.
Normalized free-cash-flow per share looks to be in the range of $8-$12 per year. At year end pricing of ~$65 that implies a free-cash-flow yield of 12-18%. If we owned this business privately and someone offered us a teens annual cash-flow yield, we would be jumping at it! The pessimism surrounding housing, interest rates and recession fears provides some of the reasons why this opportunity exists.”
4. The Home Depot, Inc. (NYSE:HD)
Number of Billionaire Investors: 12
Dollar Value of Billionaire Holdings: $709,345,601
Number of Hedge Fund Holders: 65
The Home Depot, Inc. (NYSE:HD) is an Atlanta, Georgia-based home improvement retailer founded in 1978. The company operates a chain of stores selling a wide range of home improvement and construction products.
The Home Depot, Inc. is the biggest home improvement retailer in the world and has been paying dividends for more than 35 years. In a research report issued on May 19, Brian Nagel at Oppenheimer highlighted that the recent selloff had provided an attractive entry point for potential investors. The analyst assigned The Home Depot, Inc. stock a target price of $350 along with an Outperform rating.
Madison Investments made the following comments on The Home Depot, Inc. in its Q1 2023 investor letter:
“The Home Depot, Inc. (NYSE:HD) provided an update on reducing the environmental impact of its stores. Since 2010, the company has reduced U.S. store electricity use by 50% by implementing LED lighting across all of its stores, buying electricity from large-scale commercial solar farms, and installing rooftop solar farms. The company is now applying its experience to other parts of its operations, including reducing electricity use in its supply chain and water use in store irrigation. Home Depot was also recognized by the U.S. Environmental Protection Agency for being one of the nation’s largest green power users.”
3. Caterpillar Inc. (NYSE:CAT)
Number of Billionaire Investors: 12
Dollar Value of Billionaire Holdings: $2,369,287,903
Number of Hedge Fund Holders: 52
Caterpillar Inc. is an Irving, Texas-based manufacturer of construction and mining equipment, diesel and natural gas engines, industrial gas turbines, and other related products. The company is known for its extensive range of machinery and solutions for the construction industry.
In a note issued to investors on May 9, David Raso at Evercore ISI assigned Caterpillar Inc. a target price of $263 and reiterated an Outperform rating on the stock. As of Q1 2023, 12 billionaires reported owning a stake worth over $2.3 billion in Caterpillar Inc..
Here’s what Diamond Hill Capital said about Caterpillar Inc. in its Q4 2022 investor letter:
“In the case of Caterpillar Inc. (NYSE:CAT), the company reported a better-than-expected Q3 as demand in mining, non-residential construction and energy remained healthy through the year even as recession fears grew. Caterpillar showed strong pricing power and operating efficiency in the face of supply chain constraints and labor shortages, which in turn contributed to better-than-expected share price performance.”
2. Vulcan Materials Company (NYSE:VMC)
Number of Billionaire Investors: 13
Dollar Value of Billionaire Holdings: $167,077,215
Number of Hedge Fund Holders: 49
Vulcan Materials Company (NYSE:VMC) is a Birmingham, Alabama-based company. It is considered one of the biggest producers of construction materials in the US and is also involved in the production and distribution of construction aggregates, primarily crushed stone, sand, and gravel.
On May 10, Brent Thielman at DA Davidson increased the price target on Vulcan Materials Company from $212 to $225 and maintained a Buy rating on the stock. The analyst noted that the company’s Q1 2023 results were better than expected despite facing the adverse impact of cold weather in the western part of the country. Thielman highlighted that the pricing momentum and pricing recovery are working in favour of Vulcan Materials Company.
Billionaires are bullish on Vulcan Materials Company as it is considered one of the best construction stocks. As of Q1 2023, 13 billionaires reported owning a stake in Vulcan Materials Company.
1. Lennar Corporation (NYSE:LEN)
Number of Billionaire Investors: 14
Dollar Value of Billionaire Holdings: $245,357,062
Number of Hedge Fund Holders: 51
Lennar Corporation is a Miami, Florida-based home construction and real estate development company that is considered one of the biggest residential construction companies in the US. The company operates in multiple states and is involved in various aspects of the homebuilding industry.
On May 24, Matthew Bouley at Barclays increased the target price for Lennar Corporation stock from $120 to $135 and maintained an Overweight rating. The analyst believes that Lennar Corporation has favourable growth prospects due to the depressed inventory of residential properties.
Here’s what Baron Funds said about Lennar Corporation in its Q4 2022 investor letter:
“In the fourth quarter of 2022, we increased the Fund’s exposure to residential-related companies by acquiring shares in two best-in-class homebuilders (Toll Brothers, Inc. and Lennar Corporation (NYSE:LEN)) and two best-in-class building products companies (Floor & Decor Holdings, Inc. and The Sherwin-Williams Company).
Lennar Corporation is the second-largest U.S. homebuilder with competitive scale advantages (including materials procurement and labor), an increasingly capital-light business model, a strong balance sheet, a strategic and forward-looking focus on technology investments, and an exceptional management team.
At its recent price, Lennar’s shares were valued at only 1.2 times our estimate of 2023 tangible book value of $77 – a large discount to its historical valuation range of 1.5 to 2.5 times tangible book value.
Despite the company’s strong and liquid balance sheet and a business strategy that generates tremendous cash flow, Lennar’s shares are valued at only 5 to 6 times cash flow versus a homebuilder such as NVR, Inc. which is valued at 15 times cash flow.”
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