Sometimes when you dig deep into a sector you might find something unexpected and surprising. Although the materials sector overall took a hit in 2015, the construction materials sub-industry tucked inside this group closed out the year with a whopping 35% gain, according to S&P data.
Two companies included in this group are Martin Marietta Materials and Vulcan Materials Co, both of which provide materials for residential and non-residential construction. That’s good news in light of the macro fundamental drivers boosting the construction-materials segment, says Sam Stovall, managing director at S&P Capital IQ.
“The unemployment rate is coming down, and wage growth is expected to rise,” Stovall notes.
“Because housing prices continue to improve and investors believe that banks will be more willing to make loans, we are seeing an improvement in demand for companies that provide construction materials.”
Investors exacted a heavy toll on the materials group overall last year. Don’t worry, Stovall says, that decline could be a classic case of “technical versus fundamentals or price trends versus earnings growth expectations” because “their prices have fallen faster than their earnings.”
Moreover, easier comparisons make for a positive earnings outlook ahead. This year the materials group is forecast for a 16% rise in earnings versus a 7.5% rise in the S&P 500, Stovall notes.
But investors may still want to tread carefully in this arena, because international demand is still in question. With the economic cloud hanging over China and uncertain emerging market demand, “One would have to be a contrarian to say now is the time to back up the truck and load up on positions in the materials sector,” says Stovall.
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