To put it lightly, construction stocks have been battered so far this year. For instance, the iShares US Home Construction ETF is down over 33% year-to-date. The SPDR S&P Homebuilders ETF is also down around 33%. Investors may want to take a closer look at construction stocks for a possible rebound.

Interestingly, those home construction ETFs had a great run after the onset of the COVID pandemic selloff in 2020. Both ETFs more than doubled from their early 2020 lows before crashing this year. There are a several reasons that construction stocks have fallen this year.

When COVID-related stay-at-home restrictions came into effect in 2020, folks weren’t spending money on dining out, traveling, etc. So, they saved the extra cash. In addition, stimulus checks from the federal government further padded the savings accounts of potential homebuyers. As the stay-at-home restrictions were lifted, those folks entered the housing market with gusto. Now potential homebuyers are faced with new challenges and the new construction market has cooled considerably.

In 2021, the Federal Reserve began to raise interest rate to temper a red-hot economy. As that happened mortgage rates also rose. When mortgage rates rise, the higher mortgage payments make it more difficult for folks to afford new homes.

On top of that, construction stocks are facing the same supply chain issues that every other industry is facing. Since construction stocks aren’t getting the building material they need, they cannot build new homes as fast as they would like.

Here are a few construction stocks that could pay off in a recovery.

Two Best Construction Stocks: Residential Construction

Toll Brothers (NYSE: TOL) and Lennar (NYSE: LEN) are two stocks poised to jump when new home construction rebounds.

Lennar is the largest home builder in the US. In addition to building new homes, the company also originates loans for homeowners, condo owners and apartment building investors. According to its most recent annual report, Lennar is involved in all phases of planning and building in our residential communities, including land buying, site planning, preparation and improvement of land and design, construction and selling of homes. The company builds homes in four regions in the US.

• East: Florida, New Jersey, Pennsylvania and South Carolina
• Central: Georgia, Illinois, Indiana, Maryland, Minnesota, North Carolina, Tennessee and Virginia.
• West: Arizona, California, Colorado, Idaho, Nevada, Oregon, Utah and Washington.
• Texas

Lennar stock trades at a P/E ratio of only 5.3x, which is well below its five-year average P/E ratio of about 10x. In addition, the stock pays a dividend yield of just under 2%.

Toll Brothers is one of the leading builders of luxury homes in the US. According to its website, the company operates its own architectural, engineering, mortgage, title, land development, golf course development, smart home technology and landscape subsidiaries. The company also operates its own lumber distribution, house component assembly and manufacturing operations.

Toll Brothers was named the World’s Most Admired Homebuilder in FORTUNE magazine’s 2022 survey of the World’s Most Admired Companies. It is also the first two-time winner of Builder of the Year from Professional Builder Magazine. Toll Brothers stock trades at a P/E ratio of 5x, which is below its five-year average of 11x. The stock also pays a dividend yield of 1.89%.

Investing in Construction Stocks

United Rentals (NYSE: URI) could be a construction stock to benefit from a boom in 2022. United Rentals is one of the largest construction equipment rental stocks in the US. The company boasts a #1 position with 15% market share. United has nearly 2,000 branches in the US, in addition to branches in Canada and Australia. Its fleet of rental equipment has more than 800,000 units.

The company serves many industries including power, oil and gas, food, paper and biotech. Since equipment rental is short-term in nature, the business can have ups and downs due to lumpy construction cycles. The company’s diverse customer base helps smooth out the ups and downs for United. Other rental businesses cannot say the same thing.

In addition, United has increased its online business. For instance, sales from its website rose about 35% in 2021. On top of that, customers who made up 60% of its fourth quarter sales in 2021 were via digital services. United’s stock is down almost 17% this year and has a P/E ratio of 11x. The stock does not pay a dividend.

The Bottom Line on the Best Construction Stocks

Although this industry has seen a drop off this year after a strong recovery in 2021, it’s well-poised to rebound as the housing market and supply chains recover. However, in the meantime it’s important to do your own research and due diligence before making any investment decisions. And remember, this is just one of a wide world of investment opportunities to be explored.