Building materials stocks make the perfect play for traders who focus on sectors showing relative strength to the broader market. While the large-cap proxy S&P 500 Index wears an eye-catching 20.20% year-to-date (YTD) gain, the Dow Jones U.S. Building Materials & Fixtures Index (^DJUSBD) has returned 33.52% since the start of the year.
The sector received an additional boost Tuesday, July 30, when industry heavyweight Martin Marietta Materials, Inc. (MLM) delivered its quarterly financial results. Although it reported lower-than-expected earnings in the second quarter (Q2), the company's shares surged to an all-time high of $246.48 after the building materials producer raised its 2019 guidance to reflect favorable underlying housing market fundamentals.
The company now expects full-year EBITDA in a range between $1.20 billion and $1.315 billion (previously between $1.17 billion and $1.28 billion) and total revenues in a range of $4.54 billion to $4.73 billion (previously $4.48 billion to $4.68 billion).
Martin Marietta’s encouraging earnings report cements the positive sentiment of earlier upbeat Q2 results from industry stalwarts Vulcan Materials Company (VMC) and Masco Corporation (MAS). Let's take a more in-depth look at each company and discuss trading tactics to capitalize on continuing upside momentum.
Martin Marietta Materials, Inc. (MLM)
With a market capitalization of $15.42 billion, Martin Marietta is one of the largest producers of construction aggregates, such as crushed stone, sand, and gravel. The Raleigh, North Carolina-based company also produces magnesia-based chemical products and dolomitic lime. Q2 earnings per share (EPS) came in at $3.01, missing analysts' estimates of $3.08 per share. Revenue jumped 6.4% year over year (YoY) due to a 10% increase in aggregates shipments and continued pricing momentum. Martin Marietta stock offers a 0.86% dividend yield and has returned an impressive 43.89% year to date (YTD), outperforming the building materials industry average and the S&P 500 by 13.92% and 23.69%, respectively, as of July 31, 2019.
The aggregate producer's share price trended steadily higher between January and April. During that period, the 50-day simple moving average (SMA) crossed above the 200-day SMA to generate a "golden cross" buy signal. However, the price oscillated within a range over the next three months to form a symmetrical triangle as the bulls and bears fought for control. The upside breakout on solid volume finally occurred in Tuesday's trading session after the company issued its favorable 2019 outlook. Those who enter here should consider using a trailing stop to ride bullish momentum as far as possible. A stop could sit at the midway point of yesterday's trading range, or beneath yesterday's low, depending on risk tolerance.
Vulcan Materials Company (VMC)
Vulcan Materials produces and supplies construction materials through four business divisions: Aggregates, Asphalt, Concrete, and Calcium. The company reported Q2 adjusted EPS of $1.48, surpassing expectations of $1.45. Revenue also outpaced forecasts, coming in at $1.33 billion versus a consensus of $1.31 billion. The construction supplies giant registered top- and bottom-line YoY growth of 10.6% and 20.4%, respectively. Vulcan attributes the double-digit growth to a 16% increase in its Aggregates segment gross profit. Trading at $140.32 with a market cap of $18.54 billion and paying a 0.91% dividend yield, the stock is up 42.65% on the year as of July 31, 2019.
After a sluggish start to 2019, Vulcan shares started to trend higher in mid-February after the company released upbeat fourth quarter earnings. Its primary competitor's rosy full-year guidance helped push the price above an area of July consolidation, and Vulcan shares printed a new 52-week high/all-time high at $140.72 in the process. Traders may decide to use a cross of the moving average convergence divergence (MACD) line above the signal line as an entry signal. Those who do take a position should think about setting an initial stop order beneath the July low at $132.51 and moving it higher under each successive swing low to let profits run.
Masco Corporation (MAS)
Masco Corporation manufactures and distributes home improvement and building products globally. The company's plumbing segment sells faucets, showerheads, and other related plumbing components under the Delta and Hansgrohe brands. Its decorative architectural segment markets paints and coatings through the Behr and Kilz brands. Masco posted Q2 EPS of 88 cents, exceeding estimates of 81 cents per share, to deliver an earnings surprise of 8.6%. However, the company's revenue of $2.3 billion over the period fell short of Street expectations by $64 million. The company plans to hike its annual dividend by 13% to 54 cents per share at the beginning of the fourth quarter. As of July 31, 2019, Masco stock pays a 1.15% dividend yield, has a market cap of $12.03 billion, and sports a 43.37% YTD gain.
The company's share price traded roughly within a six-point range between March and June before staging an impressive breakout last week on the back of its robust quarterly earnings. A recent pullback to the top of the previous trading range, which now provides support, offers a high-probability entry point. Those who buy the stock should anticipate a move back to the January 2018 swing high at $45.58. Protect trading capital by cutting losses if price fails to hold above the breakout level at $40.60.