Amid a strong economic growth and an favorable environment for investment, the US construction industry is looking at some interesting times. In 2017, the US construction industry added 210,000 jobs, an increase of 35% and construction spending has been growing since the Great Recession and amounted to $1.23 trillion last year, up by 3.8% from 2016. Spending and construction starts are expected to maintain some growth in the near future, as the tax reform allows more companies to invest in facilities. The recent wildfires and hurricanes will aid the construction industry due to rebuilding efforts. At the same time, despite the low unemployment rate, wage growth has also been low and once it picks up pace, it should offset the decline in demand for housing from higher mortgage rates cause by the Fed’s tightening monetary policy. In addition, the US infrastructure is in a bad state, with many roads, bridges, dams and other objects in dire need of repairs. The American Society of Civil Engineers estimated that the US needs around $4.5 billion in infrastructure spending by 2025 to address all these issues.
Given that the US is one of the largest construction markets in the world, construction companies are a good addition to a well-diversified investment portfolio. However, while the overall construction industry is expected to see positive growth at around 5%, individual areas within the industry show a more diverse picture. Construction of retail objects is expected to continue its decline, after construction starts fell by over 16% last year, according to some estimates. The drop is cause by the boom in eCommerce, which has significantly affected the brick-and-mortar retail. At the same time, eCommerce should help the construction of warehouses and logistics centers. Housing will be a big winner, driven by single-family housing, which are estimated to appreciate by around 9%, as millennials change their perspectives towards single-family houses. Other areas of construction expected to do well are commercial (office spaces) and non-building, which includes bridges, roads, and other infrastructure.
When looking at the hedge fund sentiment towards construction companies, we see similar conclusions, as hedge funds have been piling mostly into housing and infrastructure builders, with most popular stocks also ranking among the biggest construction companies in the world in 2017. We assess the hedge fund sentiment by taking into account the number of funds that own shares of individual companies. This allows us to get an idea about the stocks that hedge funds favor the most and, even though we can’t know the exact reasons why a hedge fund invested in a particular company, by looking at the stocks that are the most popular among the hedge funds we track, we can select those that usually perform the best among their peers over the long run.
Assessing the hedge fund sentiment allows us to imitate hedge funds without having to actually invest in them. By compiling data from hedge funds’ quarterly 13F filings, we can identify their most popular stocks and use this information to beat the market. Our small-cap strategy, which focuses on the best small-cap stocks that best-performing hedge funds are collectively bullish on, has outperformed the S&P 500 ETF (SPY) by more than 20 percentage points since 2014. We share the stock picks that are part of our small-cap strategy in our quarterly premium newsletters alongside our monthly activist newsletter, which focuses on one of more than 140 activist funds and presents the best ways to imitate that fund.
When looking at the hedge fund sentiment towards construction companies, we see that many of the most popular stocks have seen a substantial increase in the number of bullish investors over the last year. On the next page, we will focus on five construction companies that not only rank as the most popular among hedge funds, but which also saw the largest increase in sentiment during 2017.