Top 3 Best Construction Stocks to Watch
The construction industry could be a common alternative for investors looking to diversify their portfolios.
Having seen quite a decline during the 2020 pandemic, the construction sector is trending upward again.
The construction industry may go through occasional ups and downs, usually keeping up with how well the economy is doing as a whole.
Split into multiple segments, from residential buildings to infrastructure, the construction industry is vast and diversified.
Knowing which construction sub-vertical to invest in, as well as the right moment to invest in, is important when it comes to construction stocks (or cyclical stocks in general, as mentioned further on in the article), given the economic influence.
In this article, we will go through the basics of construction stocks, what you should consider before investing in them, as well as the pros and cons and the best construction stocks to watch.
Sounds interesting? Let’s get started.
Table of Contents
Best Construction Stocks: An Introduction
As mentioned earlier, the construction industry will go through some volatility, just like any other sector.
When the economy is performing generally well, the real estate market tends to follow and hence, so does the construction industry, typically speaking. Additionally, when the government is investing heavily in infrastructure, the construction industry also grows.
On the other hand, when the economy is in a downturn, construction stocks will also follow the same trend. Due to this, constructions are considered cyclical stocks, meaning that they will usually follow the economy’s fluctuation.
Through 2022 and 2023, the construction industry once again found itself on the incline. With the real estate market still on the rise and ambitious infrastructure plans from the Joe Biden administration, the construction industry could possibly benefit from these trends.
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What are Construction Stocks?
Grouping all aspects of construction-related companies under the same umbrella may seem like the simplest train of thought. However, the construction industry is usually split into three segments: buildings, infrastructure, and industrial.
Let’s review these sub-sectors, below:
The buildings segment is the largest one in the construction industry, being further divided into residential and non-residential (or commercial).
This sector encompasses all related to residential and non-residential buildings, ranging from engineering to materials, contractors and subcontractors, as well as maintenance work.
The infrastructure segment, also known as heavy civil engineering, is related to public works.
This includes transportation (such as bridges, subways, highways, railways, and airports) and utilities (sewers, pumping stations, communication, and power distribution, among others).
The industrial segment is related to the exploration and transformation of natural resources; This sector of the construction business includes power plants, factories, oil refineries, offshore constructions, mines, mills, and manufacturing plants, among others.
Advantages and Disadvantages of Construction Stocks
Just like any other investment or business sector, construction stocks come with their own pros and cons. We will now take a look at the advantages and disadvantages of investing in construction stocks.
Advantages of Construction Stocks
- During periods of economic growth, construction stocks will experience potential gains, even outperforming the growth of the market in some cases.
- Construction stocks can be a reasonable investment to choose when the economy is trending upwards, generally speaking. Big construction companies will likely follow that same trend, providing historical insight for investors.
- Some of the biggest names in the construction industry can still turn a profit even when the economy slows down. These stocks may not grow as fast as some others, but they can still be a long-term investment even in economic downturns.
Disadvantages of Construction Stocks
- Construction stocks depend on getting the timing right, in most cases. Investing or trading at the wrong time in the economic cycle can turn a potential profit into significant losses.
- The construction industry is exposed to the commodity market. If you decide to invest in construction stocks, make sure to also monitor commodities prices to best analyse your investments.
- Bigger companies are generally safer investments, however, can also offer smaller returns given they may be more established and hence less volatile. Again, you will have to strike the right balance between risk and reward, according to your investing strategy.
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Top 3 Best Construction Stocks to Watch
Having gone through some of the basics about construction stocks, we will now take a look at some of the best construction stocks to watch.
Caterpillar is one of the biggest, and oldest, companies in this list. Founded back in 1925, the American company is the world’s leading manufacturer of construction equipment.
- Caterpillar has a diversified line of products, which includes heavy industrial and construction equipment, engines and locomotives - to name a few. The company also profits from spare part sales and recently added a financial products branch.
- As one of the biggest names in the construction industry, Caterpillar faces heavy exposure to the commodities market. Problems in the supply chain may potentially hurt the company.
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Nucor is the largest steel producer in the US and is also among the largest in the world. NUE set itself apart by investing in the more advanced electric arc furnaces (EAF) to melt scrap steel, instead of the traditional blast furnaces used to melt iron.
- Due to its direct investment in emerging technology, Nucor can remain competitive even when there is a drop in demand for steel.
- Nucor faces serious competition from overseas, which usually offers steel at a lower cost.
Below you can view the Daily fluctuations of NUE shares via the Trading View widget:
*Past performance is not representative of future results.
United Rentals is the world’s largest company in the industrial equipment rental segment. URI offers a wide range of products, going from forklifts and homeowner equipment to compressors, trucks, and even earth movers.
- United Rentals isn’t restricted to renting equipment to the construction industry. The company’s other services include trench safety training, renting power generators, renting trailers stocked with tools, and renting out portable toilets. United Rentals also offers radio and drone services.
- United Rentals does not pay dividends, offering share buybacks as a return to investors.
How to Buy Construction Stocks
One option for investing in the best construction stocks to watch is via a regulated online broker. A trusted and regulated broker like Admirals will provide you with access to the construction stocks available in the market, among other financial instruments.
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MetaTrader 5 is the world’s #1 multi-asset platform, used by investors from all over the globe. With MetaTrader 5, you can trade both long and short, invest in shares directly, and use a variety of tools at your disposal.
- MetaTrader 5 is easy to use, offering a wide range of features:
- Access to personalized charts.
- Free market news and data.
- Educational tools.
- AI trading robots and automated trading.
Best Construction Stocks to Watch: Conclusion
Construction stocks can be a potential addition to diversifying a trading portfolio, but you need to take a few things into consideration.
The construction industry is directly tied to the current economic scenario. If the economy is booming, then construction stocks could offer potential returns.
However, keep in mind that construction stocks can take some heavy losses once the economy slows down. The sector’s demand will naturally drop, which means that you should understand the importance of timing with cyclical and industry-specific stocks. Investing in construction stocks at the wrong moment could potentially lead to losses.
As always, you should consider the pros and cons of construction stocks before investing. Take your investing strategy into account, and then decide whether or not they are a good option.
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What are the best construction stocks to invest in?
Subjectively speaking, some of the top 3 best construction stocks to invest in include:
- Caterpillar Inc (CAT)
- Nucor Corp (NUE)
- United Rentals Inc (URI)
What is the fastest growing construction market?
It is projected that over the next 5 years, the fastest growing construction market will be the multifamily housing construction segment (apartments).
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