When an industry decides to go on a hiring spree, you better bet on the respective firms' overall management to expect a surge of demand - and, therefore, profits - coming right around the corner. How can you get ahead of the trend and catch this early wave in a world full of data?
You can head over to the Employment Situation Summary report, provided by the U.S. Bureau of Labor Statistics every month (also known as the NFP report), and digest all the tables that come with it. Or, you can rely on your neighborhood-friendly MarketBeat feed to save a ton of time and number crunching.
You can take this statistic to the bank. Out of the 336 thousand jobs added, a significant chunk of 11 thousand (or 3.3%) went straight into construction, namely residential buildings. On a net addition basis, only some other industries come close to this one, so it is worth looking at a strategy for riding the coming activity momentum.
Before anything even gets approved for construction or a project gets underway, builders need to set a proper budget for materials to get their proformas and banks to give them a construction loan. With this in mind, Builders FirstSource (NYSE: BLDR) stands in the front of the line for profit reaping.
Without the momentum of jobs and demand coming into the scene, this stock sports an average ROIC (return on invested capital) of roughly 23%. This metric is critical for a value play since stock performance mimics ROIC over the long term.
The market seems disconnected from the approaching freight train, considering the stock has entered what Wall Street defines as a 'bear market,' as it has declined over 24% from its 52-week high; providing an attractive discount.
According to the company's latest 10-Q filing, containing the second quarter 2023 results, revenues suffered a 34.6% decline. However, this may be better considering the real estate cycle may have found its bottom cylce.
Tied directly to the past twelve months of United States building permits activity, revenues are set to recover shortly as permits are looking to rebound in the coming quarter. This may explain the latest vote of confidence coming from management insiders.
Diving into the company's financials, you can find out that management allocated up to $1.4 billion to buy back the stock, giving markets the ultimate vote of confidence into a potential undervaluation of the company.
Additionally, analysts are coming together to agree on a $149.7 price target for this company, further amplifying the upside insiders have already spotted, with a net 26.2% upside from today's prices.
Once builders have the budget for materials or have them on hand to begin construction, profits float to this value chain section. Sporting a similar - though less severe - discount of 15%, PulteGroup (NYSE: PHM) serves as the second piece to this three-piece puzzle.
Following in the same beat of the drum, Pulte has seen some of its main KPIs (key performance indicators) recover during the past run in the real estate cycle. All of these golden nuggets are within the 10-Q SEC filing as well.
One of them is the rate of new orders that have come in, a figure that acts as a confirming indicator of the new demand wave that is coming.
New orders were reported to have risen by as much as 24% to 7,947 homes for a value of $4.3 billion, a figure which will be converted into revenue once the projects are finished and sold. Backlog, on the other hand, that's a different level.
Unit backlog came in at 13,558 homes for a total value of $8.2 billion, massively pushing the upside potential for the developer and encouraging analysts to give it some favorable ratings.
With a consensus price target of $86.3 a share, an implied upside of 18% from today's prices is not bad for a link in this construction wave chain.
Despite the momentum the stock has seen in 2023, it is still relatively cheap at a 6.0x P/E multiple, which pales compared to its pre-pandemic valuation of up to 20.0x.
Logically, after the building process is the ownership and management of the finished property, where REITs (real estate investment trusts) shine. For this one, Equity Residential (NYSE: EQR) is one of the best choices in this list.
As one of the strong suites of REITs, dividends are at the front and center for the final piece in this strategy. Currently offering a 4.4% dividend yield on top of one of the lowest price-to-book valuations since COVID-19 sell-offs.
With an inflation-beating dividend yield, alongside a net upside of 13.3% from today's prices, according to analysts' price target of $68.0 a share, this is one surefire way to boost your portfolio for the coming industry activity.