Back to top

Image: Bigstock

U.S. Services Activities Hit Record High in July: 5 Top Picks

Read MoreHide Full Article

Service-oriented industries are flying high buoyed by the great reopening of the U.S. economy.  On Aug 4, the Institute for Supply Management (ISM) announced fresh figures for its non-manufacturing (service) purchasing managers’ index (PMI) for the month of July. The index hit an all-time high, reflecting that the U.S. economy has sustained its momentum despite facing mounting inflationary pressure and a resurgence of the Delta string of COVID-19 infections.

The ISM reported, “The July reading indicates the 14th straight month of growth for the services sector, which has expanded for all but two of the last 138 months.” Substantial expansion in the services sector is indicative of its continued attractiveness as an investment option. This is why it makes good sense to add stocks from this sector to your portfolio.

Services PMI Hits Record High

The ISM reported that the U.S. services PMI hit an all-time high of  64.1% in July compared with 60.1% in June. The consensus estimate was 60.5%. The performance was broad-based as all 17 service-oriented industries, surveyed by the ISM, reported growth in July. Any reading above 50% means expansion in services activities.

The Supplier Deliveries Index increased to 72% in July from 68.5% in June. Any reading above 50% means slower deliveries. The fact is that, slower deliveries are typically associated with economic improvement and growing customer demand. The Business Activity Index came in at 67%, up 6.6% sequentially. Additionally, the New Orders Index gained 1.6% to reach 63.7% while the Employment Index advanced 4.5% to rise to 53.8%.

The report carried more significance in light of the ISM manufacturing index for July, which revealed that the growth of U.S. manufacturing activities decreased for the third consecutive month. Investors were concerned that tepid data for both manufacturing and services sectors will eventually lead to slow economic growth. The services sector accounts for 70% of the U.S. GDP while the manufacturing sector commands around 12% of economic activities.  

A similar type of survey, conducted by the IHS Markit, reported that the final reading of the U.S. Services PMI came in at 59.9%, marginally above 59.8% reported in the initial reading.

Other Positives

The personal savings of Americans are around an astonishing $2 trillion. The sky-high savings are allowing people to indulge in their demands that were pent up during lockdowns and in turn compelling businesses to expand their scale of operations.

The resurgence of the Delta string of coronavirus is unlikely to pose any serious problem to the U.S. economy like in 2020. In the United States, more than 58% of those aged 12 and above are fully vaccinated, while more than 70% have received one dose.

With vaccination rates slowing over the past two months, government officials are looking for ways to incentivize the unvaccinated to reconsider their decisions. This includes offering payments and scholarship opportunities in some states. In fact, the spread of the Delta string may compel unvaccinated Americans to get their shot as fast as possible.

Our Top Picks

At this stage, it will be prudent to invest in stocks from the services sector with a favorable Zacks Rank and strong growth potential. We have narrowed down our search to five such large-cap (market capital >$10 billion) witnessed positive earnings estimate revisions within the last 7 days indicating the market is expecting these companies to do strong business for the rest of this year. Each of our picks carries either a Zacks Rank #1 (Strong Buy) or 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

The chart below shows the price performance of our five picks in the past six months.

Zacks Investment Research
Image Source: Zacks Investment Research

NIKE Inc. (NKE - Free Report) provided a strong guidance for fiscal 2022 and set long-term targets for fiscal 2025, driven by the momentum in its business as it comes out of the pandemic. For fiscal 2022, the company anticipates revenue growth in the low double digits, surpassing $50 billion, driven by strong customer demand across its operating segments.

The company expects to benefit from robust digital growth, scaling NIKE-owned physical retail concepts and growing with partners. This Zacks Rank#2 company has an expected earnings growth rate of 20.8% for the current year (ending May 2022). The Zacks Consensus Estimate for current-year earnings improved 0.5% over the last 7 days.

Deckers Outdoor Corp. (DECK - Free Report) is a leading designer, producer and brand manager of innovative, niche footwear and accessories developed for outdoor sports, and other lifestyle-related activities.

The company’s focus on expanding brand assortments, introducing more innovative lines of products, targeting consumers digitally and optimizing omni-channel distribution have been contributing to its performance. Deckers is targeting profitable and underpenetrated markets, and remains focused on product innovations, store expansion and enhancing e-commerce capabilities.

This Zacks Rank#2 company has an expected earnings growth rate of 16.2% for the current year (ending March 2022). The Zacks Consensus Estimate for current-year earnings improved 4.1% over the last 7 days.

Mohawk Industries Inc. (MHK - Free Report) designs, manufactures, sources, distributes and markets flooring products for remodeling and construction of residential and commercial spaces in the United States, Europe, Russia and internationally. It operates through three segments: Global Ceramic, Flooring North America and Flooring Rest of the World.

Consumers in the United States and abroad are more willing to invest in buying homes with more spaces to accommodate work and education. Furthermore, consumers are continuing to invest in their homes for repair & remodeling activities, and new flooring plays a major role in most remodeling projects. Mohawk has been benefiting from this trend, given the solid U.S. housing market backdrop, massive vaccination drive and the government stimulus package.

This Zacks Rank#1 company has an expected earnings growth rate of 69% for the current year. The Zacks Consensus Estimate for current-year earnings improved 7.5% over the last 7 days.

O'Reilly Automotive Inc. (ORLY - Free Report) operates as a retailer of automotive aftermarket parts, tools, supplies, equipment, and accessories in the United States. The specialty retailer of automotive aftermarket parts is poised to benefit from store openings and distribution centers in profitable regions.

The company has a competitive edge due to a dual market strategy by serving Do-it-Yourself and Do-it-for-Me customers. A customer-centric business model and growing demand for high-quality auto parts are likely to boost O’Reilly’s prospects.

This Zacks Rank#1 company has an expected earnings growth rate of 15.8% for the current year. The Zacks Consensus Estimate for current-year earnings improved 4.6% over the last 7 days.

Sirius XM Holdings Inc. (SIRI - Free Report) provides satellite radio services on a subscription fee basis in the United States. The acquisition of Pandora makes Sirius XM the world's largest audio entertainment company, as it significantly expands the latter’s listener base. The combined entity has more than 100 million listeners in North America.

Sirius XM is also looking to create unique audio packages to boost user engagement levels. The company is also looking to bank on its strength from in-vehicles services and Pandora’s out-of-the-vehicle market to boost subscriber growth.

This Zacks Rank#2 company has an expected earnings growth rate of 20% for the current year. The Zacks Consensus Estimate for current-year earnings improved 20% over the last 7 days.