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U.S. Service Sector Grows for 98th Straight Month: 4 Picks

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The U.S. service sector expanded for the 98th consecutive month in March, albeit at a slower rate, supported by growth in new orders and business activity coupled with an increase in employment. Though the report hints at a slight slowdown in the service industry, overall sentiments surrounding it are bullish against the backdrop of solid consumer confidence, strong employment picture and a favorable economic growth.

Thus investing in stocks from the service sector seems wise to generate strong portfolio returns.

Service Sector Expands

Per the Institute for Supply Management (ISM), the non-manufacturing index (NMI), which measures the service sector performance, came in at 58.8% in March, missing the consensus of 59.0% by a hair. The same was down from February’s reading of 59.5%.

The non-manufacturing sector, however, saw continued growth for the 98th consecutive month and compared favorably with the average level of 57% in 2017. The NMI data which is widely followed to get an idea about economic performance indicated that the broader economy is on track for steady growth this year. Notably, the non-manufacturing sector accounts for nearly 90% of the economy, and any reading above 50 indicates that the sector is expanding.

On the other hand, an NMI reading above 49%, over a period of time, points at an expansion of the overall economy. In this regard, the March data reflects the 103rd consecutive month of growth in the broader economy and corresponds to a 3.6% increase in U.S. GDP.

Moreover, the seasonally adjusted IHS Markit U.S. Services Purchasing Managers’ Index (“PMI”) recorded a reading of 54 in March compared with 55.9 in February. But the average PMI reading for the first quarter of 2018 was more or less in line with the 2017 rate of expansion. The key findings of the HIS Markit report were that service sector output and new order growth eased, but rates of expansion remained robust overall and an upturn in employment reached a seven-month high.

Strong Performance Across Industries

Strong performance was witnessed across industries with 15 out of 17 on an expansion mode. The growth in order was witnessed in Mining; Transportation & Warehousing; Agriculture, Forestry, Fishing & Hunting; Retail Trade; Real Estate, Rental & Leasing; Wholesale Trade; Finance & Insurance; Management of Companies & Support Services; Professional, Scientific & Technical Services; Accommodation & Food Services; Public Administration; Construction; Health Care & Social Assistance; Other Services; and Utilities. Only education services and information industries were the outliers.

Let’s take a look at some of the important sub indexes – Business Activity, New Orders, Employment, which are part of the NMI index.

Business Activity Grows for 104th Consecutive Month

The business activity index came in at 60.6% in March, down 2.2 percentage points from the February reading of 62.8%. This showed an uptick in business activity for the 104th consecutive month, but at a slower rate. Confidence in business activity remained intact as 13 industries reported increased business activity, and only one saw decreased activity. Positive comments from market participants included “business is increasing” and "New Business gained.”

A cut in the corporate tax rate to 21% from 35% by President Trump must have buoyed business activity.

New Orders Grew for 86th Consecutive Month

The index for new orders came in at 59.5% and represented growth for 86th months in a row. Participants made positive comments, “new business contracts’” and “many new productions are reaching new markets”. The same, however, moderated from the February reading of 64.8%, which was the highest since August 2005.  Notably, the measure of order backlogs climbed to 56.5% from 56% in February.

Employment Up

Companies jacked up hiring in March as reflected by the non-manufacturing employment index of 56.6% which came in higher than the February reading of 55%. As many as twelve industries reported an increase in employment while just two saw a pull back. The increase in this measure came as businesses hired more to process increased volumes.

The Labor Department is expected to release March’s employment report on Apr 6, while the estimate is job growth of 175,000. In February 313,000 jobs were added.

In Essence

Economists brushed aside the slight decline in the NMI’s index, which still remains at near-historic recent highs. The ISM nonmanufacturing reading reflects that the economy is performing quite well, with most of the industries witnessing expansion. The services gauge’s three-month average of 59.4% is the best for a quarter in records dated back to 1997, according to data compiled by Bloomberg.

A strong employment scenario coupled with solid consumer confidence is acting as a catalyst to services demand. A concern, however, is the ensuing trade war between the two biggest world economies — the United States and China — which might further push up raw material prices. Trump’s tariff on aluminum and steel might hurt the manufacturing sector and the effect of this might boil down to the industries directly related to manufacturing such as transportation and warehouse. Also, tariffs imposed by China on the United States on a number of food products might disrupt the agriculture industry.

However, overall sentiment with regard to the service sector remains robust. We thus pick up some stocks from the Other Services industry (other than warehousing, transportation and agriculture), which should perform well in the coming months.

4 Attractive Bets

We have, thus, selected four stocks that should make meaningful additions to your portfolio. These stocks flaunt a Zacks Rank #1 (Strong Buy) or 2 (Buy). The search was also narrowed down with a VGM Score of A or B. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three metrics. Such a score allows you to eliminate the negative aspects of stocks and select winners.

The Interpublic Group of Companies, Inc. (IPG - Free Report) is one of the world's leading organizations of advertising agencies and marketing services companies. The company has a Zacks Rank #2 and a VGM Score of A. The Zacks Consensus Estimate for its current-year earnings rose 6.3% in the last 60 days. The stock’s expected growth rate for the current year is 20.7% versus the industry’s projected rally of 6.8%. The Interpublic Group has outperformed its industry in six month’s time (+11.5% vs. -8.12%).

Insperity, Inc. (NSP - Free Report) provides an array of human resources and business solutions. The company has a Zacks Rank #2 and a VGM Score of A. The Zacks Consensus Estimate for its current-year earnings rose 2.7% in the last 30 days. The stock’s expected growth rate for the current year is 33.3% versus the industry’s projected rally of 22.5%. Insperity has outperformed its industry in the past year (+66.3% vs. +31.5%). You can see the complete list of today’s Zacks #1 Rank stocks here.

Nomura Research Institute, Ltd. (NRILY - Free Report) provides research, business consulting and systems services. Its operating segment consists of Consulting, Financial Information Technology Solutions, Industrial IT Solutions, IT Platform Services and Others.  The stock has a Zacks Rank #2 and a VGM Score of B. The Zacks Consensus Estimate for its current-year earnings increased nearly 7% in the last 90 days. The company’s expected growth rate for the current year is almost 35.7%, in contrast to the industry’s projected growth of 30.6%. Nomura Research Institute, has outperformed the broader industry in last six months (+19.4% vs. -13.6%).

CBRE Group, Inc. operates as a commercial real estate services and investment company. The stock has a Zacks Rank #2 and a VGM Score of A. The Zacks Consensus Estimate for its current-year earnings increased nearly 2.7% in the last 30 days. The company’s expected growth rate for the current year is almost 13%, in contrast to the industry’s projected decline of 4.9%. CBRE Group has outperformed the broader industry in the past year (+21.6% vs. +1.7%).

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