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4 Stocks to Buy on Continued Growth in Services Sector Activity

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Economic activity in the U.S. business services sector has been steadily growing ever since the economy reopened after the COVID-induced lockdown in 2020. The services sector was already doing good before that and although the pandemic kept people indoors for months, the sector continued to grow.

According to the latest report from the Institute of Supply Management (ISM), business activity increased in the United States again in April, proving that the economy is on track for growth. Given this situation, stocks of staffing firms like Kforce Inc. (KFRC - Free Report) , KornFerry International (KFY - Free Report) , TD SYNNEX Corporation (SNX - Free Report) and Tyler Technologies, Inc. (TYL - Free Report) are likely to benefit in the near term.

Services Sector Activity Grows

According to the latest reading from the ISM, the services purchasing managers’ index (PMI) recorded a reading of 57.1 in April, reflecting growth in services activity for the 23rd consecutive month. A reading of anything above 50 suggests an increase in service activities.

Although the reading came in slightly lower than 58.3 in March, the solid growth shows that despite low investor sentiment owing to rising rates and continued geopolitical concerns, the services sector has remained relatively unaffected.

The Business Activity Index came up with a reading of 59.1%, reflecting an increase of 3.6% compared to the March reading of 55.5%. Also, New Orders Index climbed 54.6% in April, although it was slightly lower than the 60.1% recorded in March. The Employment Index rose to an impressive reading of 54 from 48.5 recorded in February.

The Supplier Deliveries Index came up with a reading of 65.1% in April, up 1.7% from March's 63.4%.

The ISM report also mentioned that 17 industries registered growth in April, led by Construction; Utilities; Management of Companies & Support Services; Public Administration; Real Estate, Rental & Leasing; Accommodation & Food Services; Professional, Scientific & Technical Services and Educational Services.

Services Sector on Track for Growth

The services sector accounts for over two-thirds of all economic activity in the United States and continued growth for the past 23 months proves that the economy is on solid ground. Services activity has now increased in 145 out of the past 147 months.

These two months were when economic activity almost came to a standstill owing to the COVID-induced lockdown. However, since then, the services sector has been on track and has expanded in all the months.

Rising costs and interest rates coupled with labor shortage have been a major cause of concern lately but at the same time, personal income and expenditure are also on the rise, which is helping the business sector. Moreover, as the economy continues to reopen, people are also getting back to offices, and businesses have started operating at their optimum level. 

In addition, restaurants, and other places of recreation have begun to operate at full capacity. This has resulted in an increase in job openings, which has resulted in a significant increase in hiring.

The United States added 247,000 jobs in April. Although the number is lower than the March figure of 431,000, there have been steady job additions over the past few months. Also, the unemployment level fell to 3.5% in April, the lowest since the pandemic hit in 2020.

Although rising inflation has been a cause of concern, more jobs coupled with rising income are likely to help the business sector in the coming days.

Our Choices

We have shortlisted four business services stocks that are likely to benefit in the near term. Each of these stocks carries a Zacks Rank #1 (Strong Buy) or 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Kforce Inc. and its subsidiaries provide professional staffing services and solutions to clients on both a temporary and permanent basis through its Technology and Finance, and Accounting segments. KFRC’s Tech Segment provides both Flex and Direct Hire services to clients, focusing primarily on areas of information technology such as systems/applications architecture and development, data management, business and artificial intelligence, machine learning and network architecture and security. Kforce Inc.’s FA segment provides both Flex and Direct Hire services to clients in areas such as accounting, transactional finance, financial analysis and reporting, taxation, budgeting, loan servicing, professional administration, audit services and systems and controls analysis and documentation.

Kforce’s expected earnings growth rate for the current year is 24.2%. The Zacks Consensus Estimate for current-year earnings has improved 3.8% over the past 60 days. KFRC has a Zacks Rank #2.

KornFerry International is the world's leading and largest executive recruitment firm with the broadest global presence in the executive recruitment industry. KFY provides executive recruitment services exclusively on a retained basis and serves the global recruitment needs of our clients from middle to executive management. KornFerry International’sclients are many of the world's largest and most prestigious public and private companies, middle-market and emerging growth companies as well as governmental and not-for-profit organizations.

KornFerry International’s expected earnings growth rate for the current year is more than 100%. The Zacks Consensus Estimate for current-year earnings has improved 5.5% over the past 60 days. KFY has a Zacks Rank #1.

TD SYNNEX Corporation is a leading business process services company. SNX provides a comprehensive range of distribution, logistics and integration services for the technology industry and outsourced services focused on customer engagement to a broad range of enterprises. TD SYNNEX Corporation, which is part of Fortune 200, operates in numerous countries across North and South America, Europe and Asia-Pacific.

TD SYNNEX Corporation’s expected earnings growth rate for the current year is 22.1%. The Zacks Consensus Estimate for current-year earnings has improved 3.8% over the past 60 days. SNX has a Zacks Rank #2.

Tyler Technologies, Inc. is a leading provider of integrated information-management solutions and services for the public sector. TYL’s clients consist primarily of federal, state, county and municipal agencies, school districts, and other local government offices. In counties, Tyler Technologies’ clients include the auditor, treasurer, tax assessor/collector, county clerk, district clerk, county and district court judges, probation officers, sheriff, and county appraiser.

Tyler Technologies’ expected earnings growth rate for the current year is 8.1%. The Zacks Consensus Estimate for current-year earnings has improved 1.2% over the past 60 days. TYL has a Zacks Rank #2.