Share prices for the top companies have soared since the beginning of the year. Contractors have averaged 40% rises and housebuilders 25% (see table).
Contractor Kier led the way with a 68.9% increase and, of the top 26 companies, only contractor Costain reported a fall in its share price, down –2.3% to 10.75p.
Investors have been buying large numbers of shares in the traditionally unloved sector, attracted by cheap valuations, strong results and good prospects for many of the companies.
Analyst John Carnegie, from Schroders Salomon Smith Barney, said this process started last year but had grown in momentum since the beginning of 2001.
He said: "This is as good as it gets. Interest in the stocks is as strong as I've ever seen it." Many firms have recently hit their all-time highs.
Analysts point to a strong housing market, low interest rates, good order books and PFI contracts as the major reasons for the upsurge in interest. The stocks are also at bargain prices after years of neglect. Many investors have been looking for steady stocks with good underlying value after the collapse of the IT and telecom markets.
A large number of housebuilders' shares are still undervalued despite this year's dramatic increases, whereas contractors' prices are more in line with their true worth.
Further evidence of interest in the sector has been provided by major institutional investors' positive reaction to a recent series of construction conferences. At the events, which are organised by investment houses, bosses of some of the biggest companies explained their businesses to investors.
This is as good as it gets. Interest in the stocks is as strong as I’ve ever seen it
John Carnegie, Schroders
Two weeks ago, Schroders Salomon Smith Barney organised a conference that attracted 60 investors. Berkeley managing director Tony Pidgley, Wimpey chief executive Peter Johnson, Colin Busby, chief executive of Kier, and Balfour Beatty chief executive Mike Welton spoke to the group.
Pidgley talked about modern development and regeneration.
He later told Building: "There was a good audience. I was very impressed. I thought it was well worth it."
Carnegie said he was surprised by the turnout from investors and their reaction. He said: "A year ago, nobody wanted to know about these companies, now we get calls about them all the time. The change is incredible."
Teathers and Greenwood analyst David Taylor agrees. At a recent conference organised by Taylor, 37 institutional investors came to hear Wimpey's Johnson, Steve Rosier, managing director of Prowting, and Carillion finance director Chris Girling. He said: "It was very well received and there is genuinely more interest out there for these shares."
Girling spoke to the investors about the benefits of PFI. He explained how PFI contracts worked and their risks and opportunities. Girling said he believed that understanding among investors about PFI was growing.
He said: "Twelve months ago, PFI was not understood and because of that, its value wasn't reflected in the stocks. Now there are far more detailed questions and PFI is starting to appear in the share price. There is a growing awareness from the City of what PFI means to profits."
Girling put the growing attractiveness of contractors' stocks down to two factors. First, the fall from grace of IT and telecom companies has left investors looking for a steady sector to pump their cash into.
