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4 Stocks to Buy on Growth in Services Sector Activity

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Growth in the U.S. services industry, which has slowed lately has once again started gathering steam up on higher orders. This indicates that people have once again started spending more on services than on goods.

One of the main reasons for this acceleration in services activity was that price pressures and supply bottlenecks somewhat eased lately, indicating that the economy may not be in recession, although output has been declining. Given this situation, business services stocks like Target Hospitality Corp. (TH - Free Report) , FactSet Research Systems Inc. (FDS - Free Report) , SPS Commerce, Inc. (SPSC - Free Report) and Arcos Dorados Holdings Inc. (ARCO - Free Report) are likely to benefit in the near term.

Services Sector Continues to Grow

The Institute for Supply Management said on Aug 3 that its services sector Purchasing Managers’ Index (PMI) increased to 56.7 in July from a reading of 55.3 in June, ending a three-month decline. Economists had forecast the non-manufacturing PMI to decrease to 53.5.

A reading of anything above 50 suggests an increase in service activities. The services sector has now grown for the 26th consecutive month. Given that manufacturing output has been declining with people spending more cautiously owing to soaring commodity prices, a jump in services activity proves that the economy may still not have succumbed to inflationary pressures.

Moreover, the Business Activity Index was equally solid, improving from 56.1% in June to 59.9% in July, reflecting an increase of 3.8%. The New Orders Index came up with a reading of 59.9, reflecting a 4.3% jump from June’s figure of 55.6.

The Prices Index came up with a reading of 72.3%, marking a decline of 7.8% from June. Prices have now declined for the third consecutive month, which has been boosting activity.

High Orders, Lower Prices Help Service Sector

Lower prices have been driving orders for the services sector. Also, supply bottlenecks have lately eased, pushing orders. Growth in services activity amid rising costs once again indicates that the economy may not be in as poor a shape as is being projected by many.

The government said last week that the economy contracted 1.3% in the second quarter. Rising costs have been a concern but this has also eased lately, which is an indication that the prices won’t soar further and the worst may just be over.

Also, people have once again started spending more on services than goods. People had been spending more on goods during the pandemic, which slowed down business activity in the services sector. However, services activity started gaining traction once the economy started reopening.

This may be another reason that the retail and manufacturing sector is witnessing a slowdown. Business activity is expected to increase further in the coming months as demand is high. Moreover, a decline in prices will further aid the sector.

Our Choices

Given this situation, it makes for an ideal opportunity to invest in these four stocks.

Target Hospitality Corp. is the holding company for Target Lodging, Signor Lodging and their respective subsidiaries. TH, through Target Lodging and Signor Lodging, builds, owns and operates customized housing communities for hospitality solutions including culinary, catering, concierge, laundry and security services as well as recreational facilities. Target Hospitality primarily serves the oil and gas, energy and government sectors.

Target Hospitality’s expected earnings growth rate for the current year is more than 100%. The Zacks Consensus Estimate for current-year earnings has improved more than 100% over the past 60 days. TH has a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

FactSet Research Systems Inc. is a leading provider of integrated financial information, analytical applications and industry-leading service for the global investment community. FDS, through its analytics, service, content, and technology, offers information to investment professionals like portfolio managers, wealth managers, research and performance analysts, risk managers, research professionals, investment research professionals, investment bankers, risk and performance analysts, wealth advisors and fixed income professionals.

FactSet Research Systems’ expected earnings growth rate for the current year is 20.4%. The Zacks Consensus Estimate for current-year earnings has improved 3.7% over the past 60 days. FDS has a Zacks Rank #2.

SPS Commerce, Inc. is a provider of on-demand supply chain management solutions, providing integration, collaboration, connectivity, visibility and data analytics to its customers worldwide. SPSC delivers its solutions over the Internet using a Software-as-a-Service model to improve the way suppliers, retailers, distributors and other customers manage and fulfill orders.

SPS Commerce’s expected earnings growth rate for the current year is 18.1%. The Zacks Consensus Estimate for current-year earnings has improved 3.4% over the past 60 days. SPSC carries a Zacks Rank #1.

Arcos Dorados Holdings Inc. operates as a franchisee of McDonald's, with its operations divided in Brazil; North Latin America division; South Latin America and the Caribbean division. ARCO also runs quick-service restaurants in Latin America and the Caribbean.

Arcos Dorados’ expected earnings growth rate for the current year is more than 100%. The Zacks Consensus Estimate for current-year earnings has improved 20.5% over the past 60 days. ARCO has a Zacks Rank #2.