Economic activity in the non-manufacturing sector increased at a solid pace in February, bouncing back from a lackluster January that included the longest partial government shutdown in history. In fact, the increase in the new order index and improving measure of business activity pointed to underlying strength. Thus, investing in service-oriented companies at this moment seems judicious.
Service Sector Sees Robust Growth
According to the Institute for Supply Management (ISM), the non-manufacturing index (NMI) came in at 59.7 in February, topping analysts’ estimates of 57.3. It was also more than the January reading of 56.7. The non-manufacturing sector, thus, saw uninterrupted expansion for the 109th consecutive month and indicated that the broader economy is on track for steady growth this year. After all, the non-manufacturing sector accounts for nearly 90% of the economy, while any reading above 50 indicates that the said sector is expanding.
Notably, all 18 non-manufacturing industries reported expansion, led by education services, transportation and warehousing, utilities, real estate, finance & insurance, healthcare, construction, mining, retail trade, agriculture and information.
Lest we forget, a NMI reading above 49% indicates an expansion of the broader economy. U.S. GDP expanded at an annual pace of 2.6% in the fourth quarter of 2018, per the Bureau of Economic Analysis. It was way more than analysts’ expectations of 1.9% growth. The U.S. economy expanded at a solid 3.4% clip in the third quarter, which followed an even better 4.2% growth in the second quarter.
A slight drop at the end of 2018, however, kept the economy from clocking 3% annual growth rate for the first time since 2005. But GDP for the full year did match the growth rate attained in 2015, which was the highest since the 2007-2009 Great Recession.
New Orders, Business Activity Rise
The index for new orders jumped to 65.2 in February, an increase of 7.5 percentage points from the January reading of 62.7. New orders, thus, increased for the 115th successive month. The pick-up in new orders suggests that the service sector is poised to gain traction in the coming months.
Business expectations issued in February continue to be encouraging. The business activity index came in at 64.7, showing an increase of 5 percentage points from the January reading of 59.7. This showed an uptick in business activity for the 115th consecutive month as well.
Employment Subindex Falls
Unlike expansion in new orders and business activities, companies lowered hiring in February. The non-manufacturing employment index came in at 55.2, below the January reading of 57.8.
But market pundits ignored the overall drop in service industry employment last month, citing that 11 out of 18 non-manufacturing industries showed an increase in employment in February. Moreover, most of the economists expect a healthy rise in job growth of 200,000, once the Labor Department releases its February employment report.
Top 5 Gainers
Given the promising developments in the service sector, investors may consider buying sound stocks from the said sector. We have, thus, selected five 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.
First Western Financial, Inc. (MYFW - Free Report) provides an integrated suite of wealth management services comprising private banking, personal trust, investment management, mortgage loans, and institutional asset management services. The company, currently, has a Zacks Rank #2 and a VGM Score of A. The Zacks Consensus Estimate for current-year earnings has moved 2.8% north in the past 60 days. The company’s expected earnings growth rate for the next year is 50.9%, more than the Banks - Midwest industry’s projected gain of 9%. The company has outperformed the broader industry in the last three-month period (+10.5% vs +5.4%).
CBIZ, Inc. (CBZ - Free Report) provides professional business services that help its clients manage their finances, employees, and insurance needs. The company, currently, has a Zacks Rank #2 and a VGM Score of B. The Zacks Consensus Estimate for current-year earnings has moved 2.6% north in the past 60 days. The company’s expected earnings growth rate for the current year is 9.6%, more than the Consulting Services industry’s projected gain of 6.5%. The company has outperformed the broader industry in the past year (+9.2% vs +5.7%).
BioTelemetry, Inc. (BEAT - Free Report) provides remote cardiac monitoring, remote blood glucose monitoring, centralized core lab services for clinical trials, and original equipment manufacturing services for healthcare and clinical research customers. The company, currently, has a Zacks Rank #1 and a VGM Score of A. The Zacks Consensus Estimate for current-year earnings has moved 4.5% north in the past 60 days. The company’s expected earnings growth rate for the current and next quarters is 8.9% and 3.6%, respectively. The company has outperformed the broader Medical Services industry in the past year period (+99.2% vs +18.9%). You can see the complete list of today’s Zacks #1 Rank stocks here.
Expeditors International of Washington, Inc. (EXPD - Free Report) provides logistics services in the Americas. The company, currently, has a Zacks Rank #1 and a VGM Score of B. The Zacks Consensus Estimate for current-year earnings has moved 3.5% north in the past 60 days. The company’s expected earnings growth rate for the current quarter is 10.3%, in contrast to the Transportation - Services industry’s projected decline of 11.4%. The company has outperformed the broader industry in the past year (+18.9% vs -13.6%).
Core-Mark Holding Company, Inc. (CORE - Free Report) markets fresh and broad-line supply solutions to the convenience retail industry. The company, currently, has a Zacks Rank #1 and a VGM Score of A. The Zacks Consensus Estimate for current-year earnings has moved 5.4% north in the past 60 days. The company’s expected earnings growth rate for the current quarter is 21.4%, in contrast to the Business - Services industry’s projected decline of 69.4%. The company has outperformed the broader industry in a year’s time (+71.4% vs +16.6%).
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