There are some green shoots appearing in the residential construction industry, so it's a good time to find the top beneficiaries and start to ease into a stake, writes Tyler Laundon of Resource Prospector.
The key to making profitable investments is to narrow your focus down to the very essence of whatever trend you feel compelled to buy into.
Take housing for instance—there appears to be growing optimism regarding the state of the US housing market. But you can't just invest in "housing." That's a nebulous term for a market that has many facets, from commercial real estate to residential housing construction to mortgage-backed securities, to name just a few.
We have to pick a specific investment vehicle. The way I want to play a housing recovery is in construction-related stocks. Specifically, companies selling advanced materials that make a building more comfortable to live in and more efficient to build.
These types of companies represent the lowest-risk yet highest-reward candidates, in my eyes, because their products make sense for any sort of construction project—a new build, a fix and flip, a remodel, commercial, residential, high budget, low budget, and so on.
These materials are in demand because contractors want the building process to go efficiently, to keep costs under control, and to avoid headaches caused by inferior products.
There are more than a few examples of advanced materials—made by publicly traded companies—that fit the bill. Here are just a few that come to mind:
1. Spray Foam Insulation
Northerners love insulation because it shields us from those blustery winters. And southerners crave it because it keeps the air conditioning bill down. Over the last decade, advances in spray foam formulations have brought the cost down to a point where it's economical for most homeowners, whether for a remodel or new construction project.
Spray foam insulation is often so much better than the alternatives—fiberglass or blown-in cellulose—that its use from a performance perspective is a no-brainer. Labor costs can be similar, because it's efficient to spray in foam versus cutting and stuffing fiberglass. These days we also see spray foam insulation used in conjunction with traditional materials to match up the desired (or code-mandated) R-value with the homeowner's budget.
The net result is that while housing starts are way down, the pounds of methylene diphenyl isocyanate, or MDI (the chemical used in polyurethane spray foam), per housing unit is steadily climbing. The trend also suggests that a rebound in home construction could mean significant growth for the chemical companies that make these foams.
Uses for spray foam also include structural, sculpting, and flotation applications, so there is growth potential beyond housing.
2. Air Barriers and Roofing Underlayments
These are the rolls of materials that make a building look like a neatly wrapped present before actual siding and roofing materials go on. They come in various forms, but the purpose is essentially the same—keep water, ice, and wind out while allowing the house to breathe from the inside.
I can tell you from experience (I owned and operated my own contractor business for a decade) that good builders are neurotic about using the right materials for these applications—and that's a good thing, as any homeowner that's ever seen water pouring in through a sheetrock ceiling knows.
Companies that push the limits to make air barriers and underlayments perform better and easier to apply are doing well now. A stronger housing climate will likely mean more rapid growth.
Tickers Mentioned: FAST