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Is the construction boom over?

Economic forecasting agency BIS Shrapnel says engineering construction will be 20% below this year’s peak by 2016-2017 and is not likely to return to another peak for a decade.

This news hits home for some investors that believe the resources boom — which has been driving much engineering construction in the last decade – has ended. Iron ore, a steelmaking ingredient, accounts for 31% of BHP Billiton’s (ASX: BHP) revenue and a staggering 47% of Rio Tinto’s (ASX: RIO).

Many who may be thinking now would be a good time to take profits and leave resource stocks behind, should consider that BHP’s market is much broader than just Australia. The domestic economy accounts for only 7.4% of revenue for the mining heavyweight. Shares in resource-related stocks are trading at premiums whilst financials and our biggest supermarkets can be seen as somewhat expensive.

For example, Fortescue Metals Group (ASX: FMG) which currently trades a P/E ratio 6.94 compared to Wesfarmers’ 21.48. It would seem investors are attracted to healthy trend lines, but buying quality stocks today that other investors will want tomorrow is the best way to make money off the stock market.

Perhaps the company that has been hit the hardest by the slow down in mining construction work is NRW Holdings (ASX: NWH) whose share price has repeatedly dropped for the past three years. This year alone, shares in the specialist mining services company dropped from $4.16 to open today at $1.205. In the midst of the share price sell-off, the company released its FY12 full-year report, which stated that revenue had increased 82% when compared to FY11. In addition, EBIT was up 138%, NPAT was up 136% and the cash balance increased 95% in the same period.

Foolish takeaway

Purchasing stocks in cheap companies is a sure way to make money, but finding them before the market does is imperative to success. Although the construction boom seems over in Australia, it might be the time to invest in some well-run companies that are trading at a low premium.

The transition from mining to retail construction leads some analysts to believe that revenue can remain largely intact if the government can somehow stimulate growth. This could be viable with interest rates set to fall even further this year but the huge demand for mining-related work in the past decade will unlikely be matched by retail development anytime soon.

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More reading

The Motley Fool’s purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Motley Fool contributor Owen Raszkiewicz own shares in Rio Tinto.

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