Demand for construction products creates gains for these 3 stocks

Investors often follow the latest trends in the U.S. economy and try to align their portfolios with the best sectors, some of which may turn around in the coming months. The construction sector is an example of this, as the ISM Manufacturing PMI index and its cousin, the ISM Services PMI index, indicate a new expansionary trend in the sector.

The Oracle of Omaha, Warren Buffett, has spotted the surge in construction stocks in the third and fourth quarters of 2023. So far, the old value investor has yet to be proven wrong, as the sector pushed its third consecutive month of expansion into the service sector. SMEs. In manufacturing, the wood products sector flattened due to the jump in new orders.

Residential construction creates opportunities for all materials involved in the process, mainly wood and other metals. Likely a trend through late 2024, expanding housing and construction demand may seal potential gains for REITs Rayonier Inc. NYSE:RYN AND Potlatch Deltic Co. NASDAQ:PCHand specialized retailer Flooring & Decor Holdings Inc. NYSE:FND.

After the message from Wall Street

Analysts at The Goldman Sachs Group Inc. NYSE:GS they warned of a manufacturing sector surge in the United States in their 2024 macroeconomic outlook report. While not specific to housing and construction, opinion matters.

This belief stems from expectations of interest rate cuts this year. The Federal Reserve (Fed) expects to see three cuts by the end of the year, and many traders think they could come as early as May or June 2024. Traders’ expectations can be gauged using CME Group Inc. offers NASDAQ: ECM FedWatch Tool.

Since lower interest rates could push mortgage rates lower, it makes sense that a pickup in homebuying activity could soon follow. Knowing this, investors shouldn’t be surprised that Goldman bought Rayonier and Potlatch shares in the last quarter. In March 2024, the investment bank added 22.9% to its position in Rayonier, an investment of approximately $1.7 million. For Potlatch, Goldman saw fit to increase its exposure by 3.7%, or $412,000.

Other well-known asset managers such as the Vanguard Group and the American International Group Inc. NYSE:AIG I thought it was better to choose Floor & Decor. Vanguard’s vote of confidence resulted in a 3.2% increase, with a total increase of $34.5 million. AIG increased its total investment in the stock to $16.2 million, showing Main Street where professionals choose to allocate their capital.

The market agrees, these are the winners

Since these holdings reports reflect the positioning of banks over the past three months, investors could be misled about what is happening. Two ways Main Street can check the market’s view of Wall Street’s moves are through valuations and earnings per share (EPS) expectations.

Today the construction sector is valued at a price-to-earnings (P/E) ratio of 19x. Therefore, any stock trading with a higher valuation can be considered the premium choice. The saying “It has to be expensive for a reason” applies here, making these stocks winners.

Rayonier shares can be purchased for 66.6x P/E, a 250% premium to its peers. Of course, these valuations can only be justified by above-average EPS growth. While the construction sector expects an average EPS growth of 10% over the next 12 months, analysts believe Rayonier can push for 23%.

The story remains the same with Potlatch, as the stock’s 68x P/E represents a 257% premium to the sector. Like Rayonier, analysts believe Potlatch’s EPS could rise 29.4% this year, nearly three times the industry average.

Vanguard’s favorite of the three, Floor & Decor, trades at 62.6x P/E for a premium of 229%. This stock requires the most aggressive EPS expansion of 40%, four times the industry average.

Knowing this, analysts at Bank of America Co. NYSE:BAC they raised their price targets to $140 per share, requiring a 15% upside from the stock’s current price.

The bullish momentum confirms the trend

Since all three of these potentially winning stocks trade at 80% or more of their 52-week highs, investors can connect Wall Street’s fundamental thesis with some technical factors. All three names have bullish momentum confirming the potential new trend in the sector.

Before you consider Rayonier, you’ll want to hear this.

MarketBeat tracks Wall Street’s highest-rated and best-performing research analysts and the stocks they recommend to their clients on a daily basis. MarketBeat identified the five stocks that top analysts are quietly whispering to their clients to buy now before the broader market takes hold… and Rayonier wasn’t on the list.

While Rayonier currently has a “Hold” rating among analysts, top analysts believe these five stocks are better buys.

View the five stocks here