Construction stocks build on rally

  • Construction materials stocks are up as much as the tech sector in 2019
  • Highway construction particularly strong in recent months
  • More infrastructure spending on the horizon?

Quick—check your phone to see if you have a gravel app on it. Do you subscribe to any concrete- or asphalt-specific podcasts?

That’s the thing about an industry like raw materials: It generally isn’t going to crank out trendy products or services that create media buzz. Which is probably why more people are still talking about the Lyft IPO than they are about construction materials stocks.

Even though the S&P materials sector has been uninspiring so far this year, trailing the S&P 500’s (SPX) return by about a percentage point, the construction materials sub-sector has been rolling, with a 21% year-to-date return that has put it on par with information technology.

The following chart shows three big names in the space—two concrete and gravel suppliers, Vulcan Materials (VMC) and Martin Marietta (MLM), along with industrial/commercial climate control provider Ingersoll-Rand (IR). As of yesterday, all three were up more than 20% on the year:

Vulcan Materials (VMC), Martin Marietta (MLM), Ingersoll-Rand (IR), 12/31/18–4/4/19. Vulcan Materials (VMC), Martin Marietta (MLM), Ingersoll-Rand (IR) price chart. Constructive trading.

Source: Power E*TRADE

With the US housing market still trying to gain traction (although homebuilding stocks have mostly been holding their own so far this year), it may seem a little unusual that VMC, MLM, and IR are enjoying such a solid start to 2019. But there’s a lot more to construction materials than residential building.

Monday’s construction spending report sheds light on the dynamic that may be at work. Overall, it was a strong report: Construction spending in February increased 1%—a huge surprise given the consensus estimate was for a -0.2% decline—and January’s number was revised up from 1.3% to 2.5%. Here are some key takeaways:

●The report confirmed the single-family housing market was still slack.

●Public construction spending, however, was up significantly.

●Highway and street spending was particularly strong, up nearly 23% year-over-year.1

And the construction industry has recently sounded more optimistic about the prospect of public infrastructure spending, citing the current Democratic majority in the House of Representatives as a possible source of increased funding, along with the fact that the Highway Trust Fund has enough funding to cover large expenditures through 2021.2

Vulcan Materials (VMC) and Martin Marietta (MLM), 7/6/18–4/4/19. Vulcan Materials (VMC) and Martin Marietta (MLM). Recent range breakouts.

Source: Power E*TRADE

Big spending on highways and streets translates into a lot of gravel, concrete, and asphalt. Which brings us back to VMC and MLM. The chart above shows both stocks recently broke out of short-term consolidations to make multi-month highs—a bullish sign to many technicians.

If construction spending continues its recent trend, construction materials stocks like these may continue to be attractive plays for long-side traders, especially those who wait to buy them on pullbacks rather than chase them at highs.

Market Mover Update: After Wednesday afternoon’s rally-and-reverse head fake, Facebook (FB) gained more than 1% yesterday, and again pushed above the breakout level noted in “Breakout watch: Stocks on the brink.” Meanwhile, ConocoPhillips (COP) continued to decline, falling below $65.

And speaking of markets at potential tipping points, June gold futures (GCM9) dropped to an important support level yesterday, falling to their lowest level since late December (around $1,285/ounce) before rallying $11 to get back into the green on the day. Sherwin Williams (SHW) added a third day of gains since breaking out of its consolidation (see “The power of pricing”).

Today’s numbers (all times ET): Employment Report (8:30 a.m.), Baker-Hughes Rig Count (1 p.m.) Consumer Credit (3 p.m.).

Today’s earnings include: Greenbrier (GBX), Lovesac (LOVE).


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1 Econoday. Construction Spending Report. 4/1/19.

2 Report: U.S. Infrastructure Spending Outlook Brightens. 1/29/19.

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