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Even as market panic grows, fueled primarily by inflationary fears, it is easy to forget that the economy remains on a firm footing. Recently released ISM services data provides ample proof of this fact, with the index hitting a 12 and a half year high. This was a significant improvement over the last two months of readings and was likely a product of optimism emanating from recently announced tax cuts.

Moreover, the outlook of the business services sector is firmly tied to the broader economy. It is widely expected that the business-friendly approach of the Trump administration will provide a further boost to the U.S. economy.

Further, earnings and revenues from the sector are likely to improve in the fourth quarter, which makes it a good idea to pick up select business services stocks which are also slated to outperform their earnings estimates.

ISM Services Gauge Touches Record High

In January, the ISM Services Index increased by 3.9% to 59.9%, exceeding the consensus estimate of 56.8%. This is the highest level since August 2005 when it hit 61.3. Any level above 50 signifies expansion for the sector and going by that benchmark, this is the 96th consecutive month of expansion.

Further, the New Orders Index increased by 8.2% to 62.7%. Additionally, the Prices Index and the Employment Index gained 5.3% and 2% to hit 61.6% and 59.9%, respectively. The surge in orders was attributable to recent tax cuts and a strong economy. Only three services industries contracted, with 15 reporting expansions. These gains are particularly noteworthy since they come after two months of declines.

Strong Economy, Trump Administration to Boost Sector

Currently, the U.S. economy exhibits signs of improvement with a rise in GDP, an improving employment scenario, inflation approaching 2%, easing of the U.S. dollar and momentum gained by oil prices. The Trump administration remains focused on improving the ease of doing business, exemplified by recently passed tax cuts. It is widely expected that it will pursue its agenda of deregulation aggressively.

Moreover, total Q4 earnings for the sector are expected to be up 13.1% on 5.7% higher revenues as of Feb 2, 2018. That’s far better than the more vaunted consumer discretionary and conglomerates sectors, earnings for which are expected to decline by 3.7% and 14.3%, respectively, during the fourth quarter. Overall, total Q4 earnings are expected to be up 13% from the same period last year on 7.7% higher revenues. (Read: Earnings Estimates Going Higher)

Our Choices

The Trump administration’s business friendly approach and a strong economy are likely to provide a major fillip to the business services sector in the months ahead. Taken together, these factors ensure that business services stocks remain a strong investment option in 2018.

Earnings ESP is our proprietary methodology for identifying stocks that have high chances of surprising with their next earnings announcement. It shows the percentage difference between the Most Accurate estimate and the Zacks Consensus Estimate. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

You could further narrow down the list of choices by looking at stocks that have a favorable Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold). You can see the complete list of today’s Zacks #1 Rank stocks here.

Our research shows that for stocks with this combination, the chance of a positive earnings surprise is as high as 70%.

WEX Inc. (WEX - Free Report) provides physical, digital and virtual corporate card payment solutions.

WEX has beaten the Zacks Consensus earnings estimate in all of the last four quarters with an average positive earnings surprise of 1.5%.

Powered with the right combination of the two key ingredients – an Earnings ESP of +0.81% and a Zacks Rank of 1 – our proven model shows that an earnings beat is expected for WEX in the to-be-reported quarter as well.

The company is expected to report fourth-quarter 2017 results on Feb 21.

Heidrick & Struggles International, Inc. (HSII - Free Report) serves the executive talent and leadership needs of the world's top organizations as the premier provider of leadership consulting, culture shaping and senior-level executive search services.

Powered with the right combination of the two key ingredients – an Earnings ESP of +3.18% and a Zacks Rank of 1 – our proven model shows that an earnings beat is expected for Heidrick & Struggles in the to-be-reported quarter as well.

The company is expected to report fourth-quarter 2017 results on Feb 26.

ServiceMaster Global Holdings, Inc. (SERV - Free Report) provides outsourcing services for residential and commercial customers.

ServiceMaster has beaten the Zacks Consensus earnings estimate in three of the last four quarters with an average positive earnings surprise of 4.8%.

Powered with the right combination of the two key ingredients – an Earnings ESP of +2.07% and a Zacks Rank of 2 – our proven model shows that an earnings beat is expected for ServiceMaster in the to-be-reported quarter as well.

The company is expected to report fourth-quarter 2017 results on Feb 22.

Houghton Mifflin Harcourt Company (HMHC - Free Report) is a global provider of education solutions, delivering content, technology, services and media to students in over 150 countries worldwide.

Houghton Mifflin has beaten the Zacks Consensus earnings estimate in all of the last four quarters with an average positive earnings surprise of 15.9%.

Powered with the right combination of the two key ingredients – an Earnings ESP of +35.34% and a Zacks Rank of 2 – our proven model shows that an earnings beat is expected for Houghton Mifflin in the to-be-reported quarter as well.

The company is expected to report fourth-quarter 2017 results on Feb 22.

Broadridge Financial Solutions, Inc. (BR - Free Report) provides investor communications and technology-driven solutions for the financial services industry worldwide.

Broadridge Financial has beaten the Zacks Consensus earnings estimate in three of the last four quarters with an average positive earnings surprise of 12.8%.

Powered with the right combination of the two key ingredients – an Earnings ESP of +1.45% and a Zacks Rank of 2 – our proven model shows that an earnings beat is expected for Broadridge Financial in the to-be-reported quarter as well.

The company is expected to report second-quarter 2018 results on Feb 8.

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