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A gauge of the U.S. service sector activity rose to the highest level last month in almost a year, primarily led by measures of business activity, new orders and employment. Thanks to the uptick, the service sector, covering the bulk of economic activity, has enough reasons to continue expanding in the near term.

Service sector activity has now expanded for eighty straight months, boosting an economy that has registered dismal growth this year. The service sector employs the vast majority of workers and covers an array of industries like retail, healthcare, finance, agriculture and construction. Given such promising trends, it will be prudent to invest in stocks in such sector.

ISM Gauge Hits a New High in 11 Months

According to the Institute of Supply Management (ISM), its non-manufacturing index climbed to 57.1 in September – the highest since Oct 2015. It’s a big improvement from August’s reading of 51.4, the lowest since Feb 2010. Any reading above 50 indicates expansion. Notably, 14 industries out of 18 registered growth.

Anthony Nieves, chairman of the ISM non-manufacturing survey, said that “It’s a rebound from the prior month”. He confirmed that there is strong growth in the service sector, a key segment of the economy. The economy has already expanded at a 1.4% pace in the second quarter, while it is positioned to gain traction in the final half of the year (read more: Econ Outlook: Strong GDP Growth in Q3).

Business Activity High, More Orders Flow In

The business activity index, which parallels the ISM’s factory production gauge, rose to 60.3 in September, the highest since Oct 2015. On the other hand, the August reading of 51.8 was the weakest since the beginning of 2010. Nevertheless, business activity improved for the eighty-sixth consecutive month in September.

Industries that reported an increase in business activity confirmed that they have received more orders from clients. September also represented growth in new orders for the eighty-sixth successive month. The ISM’s new order count jumped to 60 in September from 51.4 in August, its highest monthly jump since Apr 2009.

Orders for services and other non-manufacturing activities to be provided outside the U.S. also grew in September, following a decline in the preceding month. New Export Orders index was 56.5 in September, way above 46.5 reported in August.

Employment Activity Rise

Employment activity also grew in the service sector for the fourth consecutive month in September. The ISM’s measure of service employment advanced to 57.2 last month, its highest since last October. In August, the gauge was at 50.7. The 6.5 points jump turned out to be the biggest monthly gain since 1997.

This provides a reassuring sign ahead of the Labor Department’s non-farm payroll report for September due on Friday. Meantime, private job additions of 154,000 last month fell short of analysts’ expectations of 173,000. However, such additions still look healthy as the labor market is nearing full employment levels (read more: ADP Provides 'Goldilocks' Jobs Number).

6 Services Stocks to Buy Now

The service sector ranging from restaurants to housing vaulted to an 11-month high in September, with reading on business activity to new orders to employment all signaling expansion. A similar report from Markit also showed that its final U.S. services purchasing managers’ index rose to 52.3 in September from 51 in August.

Banking on such promising data, investing in stocks from these sectors will be judicious. However, it is crucial to pick winning stocks in order to reap maximum gains.  

This is where our VGM score comes in. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three scores. Such a score allows you to eliminate the negative aspects of stocks and select winners. However, it is important to keep in mind that each Style Score will carry a different weight while arriving at a VGM score. 

We have narrowed down our search to the following stocks based on VGM score of ‘A’ or ‘B’ and a Zacks Rank #1 (Strong Buy) or 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

InnerWorkings Inc. (INWK - Free Report) provides marketing execution solutions in North America. The company sports a Zacks Rank #1 and a VGM score of ‘A’. InnerWorkings’ estimated earnings growth rate for this year is 33%. The company also witnessed a rise in estimates from 32 cents per share three months ago to 33 cents right now.

INNERWORKINGS Price and Consensus

 

Viad Corp (VVI - Free Report) provides experiential services in the exhibition and events, and travel and recreation industries primarily in the U.S. The company has a Zacks Rank #1 and a VGM score of ‘B’. Viad’sestimated earnings growth rate for this year is 55%. The company also witnessed a rise in estimates from $2.23 per share three months ago to $2.26 right now.

VIAD CORP Price and Consensus

 

Xerox Corporation (XRX - Free Report) provides business process and document management solutions. The company has a Zacks Rank #1 and a VGM score of ‘A’. Its estimated earnings growth rate for this year is 15.1%. The company also witnessed a rise in estimates from $1.08 per share three months ago to $1.13 right now.

XEROX CORP Price and Consensus

 

Convergys Corporation (CVG - Free Report) provides customer management services to communications and media, technology, financial services, retail, and healthcare industries. The company has a Zacks Rank #2 and a VGM score of ‘A’. Its estimated earnings growth rate for this year is 8.8%. The company also witnessed a rise in estimates from $1.89 per share three months ago to $1.91 right now.

CONVERGYS CORP Price and Consensus

 

Cardtronics plc (CATM - Free Report) provides automated consumer financial services through its network of automated teller machines. The company flaunts a Zacks Rank #1 and a VGM score of ‘A’. The company’s estimated earnings growth rate for this year is 12.9%. The company also witnessed a rise in estimates from $2.88 per share three months ago to $2.95 right now.

CARDTRONICS PLC Price and Consensus

 

Gee Group Inc. (JOB - Free Report) provides staffing services in the U.S. The company has a Zacks Rank #2 and a VGM score of ‘A’. Its estimated earnings growth rate for this year is 112.9%. Gee Group also witnessed an improvement in estimates from a loss of 4 cents per share three months ago to earnings of 4 cents right now.

GEE GROUP INC Price and Consensus

 

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