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Why the James Hardie share price can outperform in the near-term

The James Hardie Industries plc (ASX: JHX) share price outperformed the market on Friday and there are reasons to believe the building materials supplier can run further ahead.

The James Hardie share price jumped 1.1% to $24.28 when the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index inched up 0.4% on the last trading day of the week.

The stock may be outperforming because of the latest earnings results from US home builders. Morgan Stanley believes that housing construction in the world’s largest market has picked up since the second half of this calendar year and that the trend is likely to continue.

US home construction on the rebound

“US homebuilders have reported strong order growth with Lennar Corp 3Q19 new order growth increasing 9% vs the pcp [previous corresponding period], KB Home 3Q19 new order growth increasing 24%, and a two month update from Meritage Homes highlighting that new orders for the first two months of its 3Q19 had increased 24%,” said Morgan Stanley.

“We note that August 2019 US housing starts increased +6% vs the pcp, while single family starts were +2%. We note single family starts for 2H19 are cycling softer comps, with [single family] starts in 2H18 declining 1% vs the pcp,and 7% declines in 4Q18.”

This is good news for James Hardie given its significant exposure to the US market and it’s the biggest beneficiary of the rebound in residential activity.

However, it isn’t the only one that leveraged to the trend. Other ASX stocks that’s exposed to home construction include fellow construction material group Boral Limited (ASX: BLD), plumbing solutions company Reliance Worldwide Corporation Ltd (ASX: RWC) and steel products supplier BlueScope Steel Limited (ASX: BSL).

The best stock to ride the trend

The problem with Boral though is management’s poor track record, which was underscored by its recent profit downgrade, while Reliance Worldwide is arguably more exposed to plumbing emergencies (like burst water pipes) than to new home construction.

Further, BlueScope has somewhat limited exposure to single family homes as such homes don’t require much steel, even though roofing and beams may be made from the material. BlueScope is more impacted by commercial, infrastructure and high density building and construction.

Luckily for BlueScope, the stock is trading on a relatively low valuation and any positive surprise can provide a significant boost to sentiment.

Having said that, it’s not surprising that the James Hardie share price is the top performer in the group with a 21% increase over the past year, while the rest are down between 22% and 33%.

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Brendon Lau owns shares of BlueScope Steel Limited, and James Hardie Industries plc. Connect with him on Twitter @brenlau.

The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Reliance Worldwide Limited. The Motley Fool Australia has recommended Reliance Worldwide Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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