Is it time to buy construction stocks?

RELATED QUOTES

SymbolPriceChange
CSR.AX3.76-0.0800
FBU.AX9.03+0.010
GPT.AX3.89+0.030
JHX.AX13.68+0.040

Last week, figures coming from the Australian construction industry have shown that the sector has not grown in the past three years. Perhaps now is the time to grab a cheap stock and ride the inevitable rise of the sector.

The ABC reported that the performance of Construction Index by the Australian Industry Group and the Housing Industry Association remained unchanged in May at 35.3, well below the 50 needed to indicate growth.

The rate cuts passed on by the RBA have done little to reassure the sector and as a result, it’s only softened the downwards spiral the industry finds itself in. Combine that with the downturn in mining investment, it’s no surprise the industry finds itself in a nosedive.

So with all the rate cuts to come and the lull in the market, are there some bargains to be had or is it too early to start buying?

In the search for high-yielding stocks, the local market has unreasonably inflated many stock prices only to drop them in dramatic fashion. Many construction stocks that have been paying high yields were pushed higher by income investors in the past year, but that all went south quickly once companies like Stockland (SGP.AX) and Boral (BLD.AX) declared lower profits for the half-year ended 31 December 2012.

Last year, CSR (CSR.AX) and James Hardie Industries (JHX.AX) both reported poor figures yet the market has, until recently, inflated their share price in expectation of something incredible. CSR is currently sitting at over 26 times earnings but James Hardie Industries’ P/E is around 52. Investors must be expecting its 35% decline in NPAT last year to be a one-off, but even with a better than expected U.S. housing market it may be wise to keep to the sidelines until next financial year.

Foolish takeaway

Trying to predict the moment when a stock or industry is near a turning point is impossible, but setting yourself in a good position to reap the benefits from it doesn’t have to be. Wait until we see a noticeable kick in the right direction before taking on the risk. Most companies will perform better in the booming years if they have managed to do well in the down times. GPT Group (GPT.AX) has recently outperformed the market and recorded huge profits whilst others like Fletcher Building (FBU.AX) has only just kept their head above water. Don’t be fooled into buying high dividend yielding stocks based purely on income.

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Motley Fool contributor Owen Raszkiewicz has no financial interest in any of the companies mentioned.

Market Data

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