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4 Stocks Set to Benefit From the Rebound in Construction

The latest results from the U.S. Census Bureau shows that residential construction is finally on the mend after a prolonged lull — let’s see if the publicly traded homebuilders could see their stocks jump as a result of the jump in construction.

The data
The first question becomes, is construction actually on the mend? When we check the data for three key areas — housing starts, construction employment, and the total number of homes under construction — we see:

Housing Starts Construction Employment Units Under Construction
Maximum 139% 114% 144%
Minimum 29% 80% 42%
July 2013 55% 86% 64%
Maximum Date January 2006 April 2006 January 2006
Minimum Date April 2009 January 2011 August 2011

Source: St. Louis Federal Reserve.

Although we are certainly well below the peaks we saw in 2006, all of those data points have rebounded significantly from the lows seen during the great recession. In all of this, it also must be noted that we are unlikely to see the incredible run seen in the early part of the 2000s, as the percentage of Americans owning homes has fallen from 69% in 2005 to 65% in 2012 as the overall demand for housing has waned.

Toll Brothers Inc (NYSE:TOL)However, the rebound presents encouraging developments in the vitally important housing sector, which, in 2005, contributed to almost 19% of the U.S.’s Gross Domestic Product, and as of the most recent quarter has fallen to under 16% according to the National Association of Home Builders.

While we can see that housing is beginning to mend — the question becomes: Will that tell us if that will be a boon to home builders and their investors?

The stocks
When we look at the stock performance of four of the largest public homebuilders over the last 20 years we see they have all performed well when compared to the S&P 500 even after accounting for their tremendous falls in from 2005 to 2010:

Total return 1/1/1993-9/17/2013

Toll Brothers Inc (NYSE:TOL) 863%
Lennar Corporation (NYSE:LEN) 1160%
PulteGroup, Inc. (NYSE:PHM) 500%
D.R. Horton, Inc. (NYSE:DHI) 1720%

Yet interestingly, if we give equal weight to the three home construction metrics noted above and create an “index” using the Census data and then chart that performance we see something very interesting:

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