Higher interest rates were supposed to crush the housing market. However, despite mortgage rates remaining elevated, there isn’t much sign of a serious slowdown in the housing sector. And government stimulus has helped elevate building activity in the infrastructure and renewable energy sectors among others.
All this adds up to a more optimistic outlook for construction stocks. In fact, quite a few companies across the infrastructure, building materials, and architecture and engineering space are at or near new highs. Regardless, there are still good buying opportunities in construction stocks today, with these three particularly standing out.
Summit Materials (SUM)
Summit Materials (NYSE:SUM) produces asphalt, cement and other building materials. On the surface, these may sound like commodity markets. However, due to the heavy weight and logistical difficulties in transporting these goods, they tend to have local monopolies and earn surprisingly high profit margins.
Like many construction stocks in this sector, SUM stock has rallied over the past year. What makes Summit Materials unique, however, is that the company just finished a massive merger.
It acquired the North American assets of Colombian cement company Argos (OTCMKTS:CMTSY). This $3.2 billion deal will allow Summit to have much greater market share and distribution in key markets. Analysts see Summit’s revenues soaring from $2.6 billion last year to more than $4.3 billion this year.
JPMorgan sees great potential in SUM stock. It gave Summit an overweight rating in February, citing higher profit margins as a result of its recent M&A moves. With demand for building materials strong and Summit putting together a more attractive portfolio of assets, this adds up to more upside for Summit’s shares.
Otis Worldwide (OTIS)
Looking for things that go up? Otis Worldwide’s (NYSE:OTIS) business is designed around that; indeed, it is one of the world’s main elevator production and servicing companies.
The company was part of an industrial conglomerate, but was spun off in 2020 to operate independently. Counterintuitively, OTIS stock launched higher in the early days of the pandemic as investors rightly guessed it would benefit from upcoming stimulus packages.
After a couple of quiet years, OTIS stock is climbing again and shares just topped their prior 2021 highs in February. Admittedly, Otis is still seeing slow demand in some markets such as China. But, overall, both residential and commercial construction have held in there despite higher interest rates.
It’s also important to realize that Otis earns a lot of money from servicing existing elevators. This makes the business a strong recurring revenue one and has insulated it from the slowdown in some key markets. That said, a construction boom would help take OTIS stock to an even higher floor.
Latham Group (SWIM)
The last construction stock to buy is a more under-the-radar small-cap pick.
Latham Group (NASDAQ:SWIM) designs, manufactures and markets in-ground residential swimming pools in North America, Australia and New Zealand. It offers its products under the Latham, Narellan, CoverStar and GLI brand names.
The company completed a $437 million initial public offering in 2021 during the height of the pandemic-driven home improvement boom. People were spending tons of money on items to improve their homes, including record demand for swimming pools.
Now, though, demand has reverted back toward normal, and Latham Group’s revenues have declined. However, SWIM stock has taken on far too much water due to this short-term pessimism. Shares are now down 90% from their all-time highs, and the company’s market capitalization is now less than $400 million.
That sets up an opportunity for a big recovery. Latham is generating around $600 million in annual revenues and returned to profitability last quarter. Any sort of upturn in home improvement demand — perhaps tied to interest rate cuts — could send SWIM stock back to the double-digits.
On the date of publication, Ian Bezek held a long position in OTIS stock. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
