This is not the stock market you were used to seeing since the COVID-19 pandemic; in fact, it may not even be like any market you've witnessed before because, for the first time in a long time, the FED has to fight with two conflicting economies to make decisions. While the United States GDP is growing, which is good for stocks, it shows a deep wedge.
The manufacturing sector of the economy has been in a steady contraction for the better part of a year. In contrast, the services sector has been solely responsible for carrying things forward. So, while one may have contracting inflation and unemployment, the latter has exceeding inflation and a hot labor market; what can you do?
You can side with one of Wall Street's most respected firms and their projections for a breakout in manufacturing, more on that later, and figure out just why MasTec (NYSE: MTZ) can be a worthy addition to your watchlist, one that is piggybacking on Warren Buffett's latest investment thesis.
Breaking it down
Because MasTec operates in the construction sector, it would be beneficial to understand what is happening in that space and identify where the pockets of opportunity lie today. To do this, you can start by pouring through the last quarter of ISM Manufacturing PMI reports, or you can save time by reading what MarketBeat has found for you.
On a quarterly trend, it has been identified that the construction space has been accelerating in its expansion. It can be termed a 'pain trade' since most investors have been ditching construction-related wood manufacturing stocks. Buffett clearly understands that going against the consensus can sometimes pay big.
A hidden trend in the sector is spotted by the Intercontinental Exchange (NYSE: ICE) in that most mortgages held today carry interest rates of 3.25% on average. If you are a homeowner with a 3.25% mortgage, you wouldn't want to sell your home only to buy another one at 7.0% financing, right? Yeah, nobody is doing that today.
At the same time, most homebuyers are looking at today's average home price of $431 thousand, which compares to roughly $320 thousand before the COVID-19 pandemic began. Combining costly homes with rising mortgage rates has driven away potential buyers, so what gives if nobody is buying and selling?
Well, you'd have to build your way out of this situation, so Buffett started buying stocks like Pulte Group (NYSE: PHM) and D.R. Horton (NYSE: DHI) in an expectation of breakouts in construction activity.
Because MasTec operates in the infrastructure construction part of the economy, it's important to remember that residential construction doesn't automatically benefit this stock. However, the job market has something different to say about this.
Bullseye
According to the latest employment situation reports, the economy added 216 thousand jobs, 17 thousand of which went to construction. Now, 3.9 thousand landed on residential construction, while a larger 8.1 thousand went to nonresidential construction (MasTec's turf).
The Goldman Sachs Group (NYSE: GS) analysts expect a breakout in manufacturing activity coming into 2024, which would greatly benefit the construction space. Judging by how the industry is hiring today, companies are looking forward in their budgeting and planning, but there's a specific benefit to MasTec here.
Because the Vanguard Real Estate ETF (NYSEARCA: VNQ) has shaken off its bearish spell and rallied as much as 17.4% in the past quarter, you can safely assume that the market has priced in the new wave of construction and real estate activity, so now it's time to find out which stocks money likes in that space and why.
Because the past financial quarter for MasTec saw interest expenses eating into the company's bottom line, some analysts have become bullish about what the company's future earnings will look like. With lowering interest rates, these interest expenses will be a fraction of what they are now and add significantly to earnings per share.
This may be why EPS projections for the next twelve months stand out from the rest of the group; with a 52.1% expected jump by analysts, MasTec is above the average expected growth of 11.2% for the rest of the industry in the coming year.
No wonder these same analysts have agreed on a $99.4 a share price target for this stock, which implies a 41.3% upside from today's prices; not a bad way to start your year.
Of course, price action will also leave lots of room for this stock to catch up to competitors like Terex (NYSE: TEX), who trade at 88.0% of their 52-week high, while MasTec offers a significant discount trading at 61.0% of its 52-week high today, making it the worst performer with the highest promise in the group.
