Recently, while sorting out the rankings of construction stocks, I noticed a pretty interesting phenomenon. Looking back at the rebound in construction stocks in 2024, it truly stands out as a textbook-style example of sector rotation.

Do you remember how, in early 2024, construction stocks were sluggish for more than two years, only suddenly starting to pick up at the end of February? At that time, tech stocks had already surged significantly, and capital began searching for new opportunities—construction stocks then became the representative of domestic-demand stocks. The recovery in the real estate market and the government’s introduction of the new “Qing’an” housing loan policy were all catalysts.

Construction stocks can actually be divided into two factions. One is purely engineering and construction—companies such as Runhong, Daxin Construction, and Genji. These take on contracts for projects, with relatively stable profits but a clearly limited ceiling. The other is broader construction development, covering the entire process from land development, design, construction, to sales. Companies such as Huaguo, Zongtai, Huangxiang, and Yaxin fall into this category, with a much wider scope of operations.

If you look at the rankings and dividends of construction stocks in 2024, Dali had the highest yield, reaching 5.99%, and its EPS was also 5.08 yuan. Yongxin Construction, Huaguo, and Guochan also had dividend yields of 5% or above—these are indeed stocks that combine both growth and cash flow. Huaguo rose from about 82 yuan at the end of February to more than 170 yuan, essentially doubling. Changhong and Xingfufang also rose by more than 50%.

The logic behind that wave of market movement was very clear. In Huaguo’s case, the real estate market was active, with a wave of pre-sale property handovers coming soon. Changhong’s completed-project volume is expected to reach a peak this year, and the company has more than 1500 billion yuan in projects it is pushing—future performance will be supported over the coming years. Xingfufang has continued to acquire land in seven key areas, and its completed-project volume is expected to reach as much as 4485 billion yuan over the next 4 to 5 years—these are tangible growth drivers.

Construction stocks in the U.S. market are also interesting. The U.S. government is investing 1 trillion USD in infrastructure projects—this is a long-term opportunity. Caterpillar, as the world’s largest construction machinery manufacturer, reported revenue of 67.1 billion USD in 2023, up 13% year over year; earnings per share were 20.12 USD, up 37%. For steel mills such as Nucor, although net profit fell 40% in 2023, its cost control capability is among the best in the industry. United Rentals is even more direct—when construction activity is strong, contractors need large amounts of equipment rentals. Over the past decade, the company’s revenue has grown at a compound annual growth rate of 14%, and its EPS has grown at 28%.

That said, no matter how high the ranking, you still need to watch the risks with construction stocks. Construction costs have been rising continuously, and profit margins on public projects are being squeezed thin. There are signs of a decline in demand for commercial and factory construction, and exports are also slowing down. Policy changes can have a major impact on the housing market—adjustments to policies such as purchase restrictions and loan limits can alter the supply-demand relationship. For individual companies, project management, cost control, and financing ability are also key; once project delays occur or there are problems with the capital chain, the stock price is likely to fall.

So the logic for investing in construction stocks is this: during cycles when the economy is improving and the housing market is recovering, these stocks typically offer high dividend yields and also have decent growth potential. But you should diversify your investments and closely monitor policy developments and the financial conditions of individual companies. After all, while these stocks may not double overnight, they can provide steady cash flow and relatively reliable growth.