Construction activity suddenly booming, 3 stocks you can't miss

Key Points

• The construction industry has seen a breakout from its previous levels in the past quarter, calling for Buffett to allocate some of his assets. 
• Recent developments have created a dynamic where these select stocks are set to bring you double-digit returns, or so analysts point out. 
• A larger economy agrees with the plan. Will you give a green light to these winners?

They say when the FED lowers rates, bubbles almost become inevitable as cheap money races in every direction to find high-risk, high-reward investments or trades. But you are not the average investor; you actually care about building wealth, which requires low-risk, high-reward investments. 

MarketBeat has done the homework to bring you a list of stocks that fit that description. You'll be pleased to know that they can be found in the construction sector, which Buffett deemed worthy of receiving some of his investment dollars. And it should be no surprise that he is, once again, right on target.

Going up and down the construction value chain, you will soon find out why names like MYR Group NASDAQ: MYRG and MasTec NYSE: MTZ will likely come out swinging from the newest developments in the industry. And judging by the SPDR S&P Homebuilders ETF (NYSEARCA; XHB), there's plenty of room left.

The Buffett genius

According to the Intercontinental Exchange NYSE: ICE, most outstanding mortgages in the United States today carry an interest rate below 3.25%, which were obviously acquired during the rock-bottom periods of 2020 and 2021. These are significantly below today's 7.5% rate.

Why is this important? Well, go figure; if you were able to lock in a 3.25% (or lower) mortgage rate, would you be looking to sell your home today only to have to shop for a new one at more than double your previous financing rate? Yeah, not a good idea.

Following this dynamic, you can quickly conclude that the market will run at a standstill if not pivoted. If nobody is looking to sell their homes because their rates beat the market's, and nobody is looking to buy homes because their prices and mortgages are unaffordable, what happens then?

Well, if you look at the Case-Shiller home price index, you can see how prices have gone up in the past decade, and despite fears of the FED raising rates, they have remained higher still. This is because of the above dynamic, one that Buffett successfully spotted months ago.

The only way to incentivize buyers to come in and to bring the price of homes to more reasonable levels is to increase the existing supply of homes. And unless real estate laws have changed, you can only do that by building!

No wonder the oracle of Omaha has been buying home builders like D.R. Horton NYSE: DHI and Lennar NYSE: LEN. However, these firms couldn't stay in business without suppliers like MasTec and MYR Group.

Tailwinds surprise

The construction industry has suddenly broken out of its previous stance. According to the ISM Services PMI index, it was the fourth-largest expanding industry in November! You bet Buffett is sitting smiling behind his desk at the news. 

Behind this breakout comes market validation; after all, the short-term fate of stocks comes down to a popularity contest most of the time. According to the polls, MYR and MasTec have nothing but clear skies ahead.

With a price target of $159.0 a share, MYR is overdue for a 17.1% rally from today's prices, and its earnings per share are expected to grow by 23.7% in the next twelve months. Analysts are well aware of the dynamic brewing underneath the hood of real estate markets.

MasTec brings a more aggressive stand to the mix, with analysts pushing for a $101.5 share price target, which implies a massive 51.3% rally from where the stock sits today. When it comes to earnings, boldness takes over with a projected bump of 52.1%.

Not only is one of the biggest investment legends in history backing the story behind the growth of these stocks, but analysts have left their fears behind and stuck their necks out to promote the high potential these names can bring to your portfolio before the end of the year.

Going back to how the industry is being perceived, you can find one more piece of evidence to back up these claims. The Homebuilders ETF has outperformed the broader S&P 500 by as much as 23.7% on a year-to-date basis, bringing you lots of price action to keep pushing the bargains to a fair price.

During times of a low VIX, you cannot ignore the upside momentum that the industry - and this group of stocks - has built, for it will carry them even higher come 2024.