Is everything lost for housing and construction industry? Most probably not

Housing starts and MBA's purchase application index - the two indicators that investors await eagerly to know the status of construction industry have disappointed investors and others alike.

Housing starts in September 2009 rose 0.5%, following a revised 1.0% decline in August. The September pace of 0.590 million units annualized was down 28.2% year-on-year and fell short of the consensus forecast for 0.615 million units.

MBA's purchase application index has been moving backward the last two weeks, down a steep 7.6% in the Oct. 16 week. The unadjusted index, reflecting the Columbus Day holiday, fell 16.7%. The refinance index also fell in the week, down an adjusted 16.8%. Mortgage rates all moved higher including for 30-year fixed loans which rose 5 basis points to 5.07%.

Is all lost for housing and construction industry? Most probably not – why is that so? After running up to a 2009 high in mid-September, the Philadelphia Housing Sector Index (HGX) on Tuesday fell 1.2% to 103.73, still up nearly 21% in the year to date. Out of 98 stocks in the construction sector (Building - CMT & CNT & AG -8, Building - Heavy Construction -20, Building - Maint & Service -7, Building - Mobile Homes & RV -6, Building - Residential & Comm -18, Building - Residential & Comm -20, Building Prdcts - Air Heating -5, Building Prdcts - Air Heating -1, Building Products - Ltg FX – 4, and Building Products – Wood -8), only 20 stocks showed a YTD price decline as of October 22, 2009.

Lifting tide – extension of tax credit

The American Recovery and Reinvestment Act of 2009 which provides qualified first-time homebuyers with a tax credit of up to $8,000 when they close on their home after is  set to expire on December 1, 2009. However, the Isakson-Dodd proposal seeks to extend the Homebuyer Tax Credit to June 30, 2010. So, the construction industry stocks can benefit from what I can say a lifting tide which pushes the stock prices up.

Let's sift the stocks to identify those stocks which have the capacity to rise even when the tides recede.

Our stock universe

Our stock universe starts at 68 after removing penny stocks and also those stocks whose YTD price performance was in the negative territory. We will pick the starts abased on the 52 week absolute price appreciation, and average volume of shares traded.

After removing stocks whose average trade volume was under 500,000 we are left with 22 stocks.

United States Lime & Minerals, Inc. (USLM)

United States Lime & Minerals  manufactures lime and limestone products from calcium limestone deposits located in Arkansas, Colorado, Oklahoma and Texas, from where it services markets in the Southwestern and South-Central US.

FirstService Corporation (FSRV)

FirstService Corporation provides real estate related services to commercial, institutional, and residential customers in North America and internationally. It operates in three segments: Commercial Real Estate Services, Residential Property Management, and Property Services.

Foster Wheeler (FWLT)

Foster Wheeler is a global engineering, construction and project management contractor and power equipment supplier. The company operates through two business groups, the Global Engineering and Construction (E&C) Group and the Global Power Group.

Acuity Brands, Inc (AYI)

Acuity Brands, Inc., through its subsidiaries, engages in the design, production, and distribution of lighting fixtures, and related products and services in North America and internationally. Its lighting equipment includes indoor and outdoor lighting fixtures for commercial and institutional, industrial, infrastructure, and residential applications.

Ameron International Corporation (AMN)

Ameron International Corporation, together with its subsidiaries, manufactures and sells engineered products and materials for the chemical, industrial, energy, transportation, and infrastructure industries from its plants in North America, South America, Europe, and Asia. The company's expansion plans, growth opportunities, strong financial fundamentals are exciting. The company's YTD price appreciation was $59.4 or 8.06% .The Company's stock closed Thursday at $66.63 and the 1 year target price is set at $80.5. As of date, the company's intrinsic value per share is over $85. So, it is a definite bull.

EMCOR Group, Inc. (EME)

EMCOR Group, Inc. provides mechanical and electrical construction and facilities services worldwide. It provides services to a broad range of commercial, industrial, utility and institutional customers through approximately 70 principal operating subsidiaries and joint venture entities.

Owens Corning (OC)

Owens Corning, through its subsidiaries, provides composite and building materials systems. The company operates in four segments: Insulating Systems, Roofing and Asphalt, Other Building Materials and Services, and Composite Solutions.

Orion Marine Group, In (ORN)

Orion Marine Group, Inc., together with its subsidiaries, operates as a marine specialty contractor serving the heavy civil marine infrastructure market. It provides a range of marine construction and specialty services on, over, and under the water along the Gulf Coast and the Atlantic Seaboard, as well as in the Caribbean Basin.

Trex Company, Inc.  (TWP)

Trex Company, Inc. manufactures and distributes wood/plastic composite products primarily for residential and commercial decking and railing applications in the United States and Canada. It offers wood-alternative decking, railing, fencing, and trim products under the brand name Trex.

Final seven

Of the above nine stocks, United States Lime & Minerals, Inc and FirstService Corporation could be rejected on average volume traded. The remaining seven give considerable excess value if bought at the current levels.