Construction Companies Rebuilding

 | Jan 05, 2012 | 7:30 AM EST
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In today's economy, few industries seem more in pain than construction. We all know about the overbuilding that occurred before 2008 and the resulting collapse of the real estate market.

Yet, while the construction industry is still in the doldrums, it is starting to show signs of life. The Commerce Department reports that spending on construction rose 1.2% in November, the third increase in the last four months and the largest increase since August's 2.2% rise. Note that construction spending, according to The New York Times, is at barely half the rate that economists consider healthy: On a seasonally adjusted annual rate, spending on construction in the U.S. is now $807 billion vs. the desired $1.5 trillion.

There is still plenty of room for the construction industry to improve, and some companies -- there are a wide variety of companies within the industry -- are in a position to take advantage of a revival in the industry.

One of these is Primoris Services (PRIM), which provides construction and engineering services to public utilities and energy companies. The company says it is one of the largest specialty contractors and infrastructure companies in the country.

Peter Lynch is one of the greatest of Wall Street's investors, and I have created a strategy that's based on his writings. This strategy gives Primoris very high grades. In particular, Primoris has a very impressive P/E/G ratio of 0.40. This is price-to-earnings relative to growth, and it measures how much the investor is paying for growth. A P/E/G of 1.0 or less is acceptable, and south of 0.50 is impressive; Primoris is well into impressive territory.

Another strategy I use, this one based on the writings of Kenneth Fisher, also indicates that Primoris has the right stuff. This strategy likes the company's modest debt level, positive cash flow per share and strong long-term EPS growth rate. Of particular note is the stock's low price-to-sales ratio. This needs to be below 0.75, and Primoris' is 0.55, which indicates the stock's price is a good value.

Ameresco (AMRC) provides services related to energy efficiency, including upgrades to a facility's energy infrastructure. My strategy based on the work of James P. O'Shaughnessy indicates that Ameresco is likely to continue to shine brightly. The strategy requires the company to have a minimum market cap of $150 million (Ameresco's is $591 million), it must have generated earnings per share that has increased in each of the last five years (which holds true for Ameresco), and it must have a price-to-sales ratio below 1.5 (Ameresco's is 0.82).

As a final step, the strategy takes all the stocks that pass the previous criteria and then looks at relative strength (how well the stock has performed in the past 12 months vs. all the other stocks in the market). It picks the top 50 companies, and Ameresco makes the cut.

Aegion (AEGN) is the parent company of an array of infrastructure companies, including Insituform, which is well known for its trenchless technologies used to repair and rehabilitate underground sewer, water and other pipes. The Lynch strategy likes Aegion. The company's P/E/G ratio is a very acceptable 0.85, which is the result of having a P/E of 21.88 and a growth rate of 25.67%, based on the average of the three-, four- and five-year historical EPS growth rates. And debt is moderate.

Sure, the construction industry is still on shaky ground, so buying into it now is no guarantee that your investments will grow. But the signs are strong that construction is starting to come around, and these companies, all of which are performing well and have reasonably priced stocks, are well positioned to take advantage of any uptick in the construction business.

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