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Yellen Doesn’t Surprise, But 2 Business Services Stocks Will
Undeterred by the turmoil in the emerging markets, continued softness in Europe and lesser-than-expected 113,000 job additions in January, Janet Yellen, the new Federal Reserve Chairwoman, vowed to maintain the modest tapering efforts of her predecessor with near-zero interest rates to spur economic growth.
That the economic recovery picked up steam in the latter half of 2013 with real GDP increasing at an average annual rate of over 3.5% in the third and fourth quarters, versus 1.75% in the first and second quarters was strong enough reason for the Fed Chief to validate that the economic hand-holding could be gradually eased. In addition, about 3.25 million jobs were reportedly added since the Fed began its monthly bond-buying program in Aug 2012, although the unemployment rate was yet to achieve the set threshold limit of 6.5%. Inflation had also remained low as both the headline and core personal consumption expenditure (PCE) price indexes rose only about 1% in 2013, which was well below the Fed’s 2% long-term objective for inflation.
Amid these mixed market feelers, most companies in the Business Services industry would aim to hold their purse strings until at least a clearer picture of the economic policy unfurls. The primary growth drivers in this highly fragmented industry hinge on a healthy economy with decent job growth prospects, higher disposable income and new business initiatives. An ideal mix of services, effective marketing strategies and ability to retain and attract new customers serve the perfect recipe for profitability for most of these companies.
However, as the current market conditions remain highly unpredictable with a clouded economic scenario, most companies have curtailed their operating costs, reduced marketing expenses and have deferred new business initiatives. In spite of that, the Business Services sector is expected to outperform the overall equity markets with an earnings growth expectation of 10.7% in the fourth quarter versus 9.1% for the S&P 500 index.
Given the promising forecast, it might be a good idea to zero-in on a handful Business Services stocks that are poised to beat earnings estimates this quarter. An earnings surprise should help these stocks outperform in the near term.
How to Pick?
The Business Services sector covers an array of services that include marketing, consulting, staffing, security, telecommunications, Internet services, logistics and waste handling. In this motley crew of companies, picking the right stock for your portfolio could appear to be a daunting task. An easy way to narrow down the list is to look at stocks that have a solid Zacks Rank and a favorable Earnings ESP.
Earnings ESP is our proprietary methodology for determining which stocks have the best chances of a surprise in their next earnings announcement. The Earnings ESP shows the percentage difference between the Most Accurate Estimate and the Zacks Consensus Estimate.
The combination of a Zacks Rank #1 (Strong Buy), #2 (Buy) or #3 (Hold) and a positive Earnings ESP is usually a harbinger of an earnings beat. For investors seeking to benefit from this strategy, we have mentioned two Business Services stocks below matching these criteria. It can make them potential winners in this difficult earnings season.
Sotheby's (BID - Snapshot Report): Headquartered in New York, Sotheby’s operates as an auctioneer of authentic fine art, decorative art, and jewelry across the globe. The company regularly conducts auctions in salesrooms around the world, including Australia, Hong Kong, France, Italy, the Netherlands, Switzerland, Singapore, New York and London.
The company anticipates a sharp 32.7% year-over-year rise in its fourth-quarter earnings. The Zacks Consensus Estimate is pegged at $1.46. Analysts have revised their quarterly and full year estimates upward, which further support a solid earnings momentum for the company.
Sotheby’s currently has a Zacks Rank #3 along with an Earning ESP of +4.8%. The company is expected to report fourth-quarter 2013 results on Feb 27.
Millennial Media Inc. (MM - Snapshot Report): Mobile advertising and data provider Millennial Media is headquartered in Baltimore, Md. Since its inception in 2006, the company has created a niche market through innovation and a diligent focus on mobile advertising platforms. The business model of the company hinges upon sophisticated data and technology, solid partnerships with global media and application developers across all operating systems, and healthy relationships with leading global brands.
Millennial Media currently has a Zacks Rank #2 along with an Earning ESP of +42.9%. The stock is trading at a forward PE of 134.8x and has a long-term earnings growth expectation of 30.0%. Millennial Media is expected to report its fourth-quarter 2013 results on Feb 19.
As the U.S. stocks are finally looking for a smooth sail after a rocky start to the year, a sneak peek at the space for some possible winners backed by a solid Zacks Rank and a positive Zacks Earnings ESP could be a great idea for investors to gain from this earnings season. The party might just not be over for the U.S. equity markets at large and for the business services sector in particular.