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ISM Services Index Remains Robust in February: 5 Top Picks

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On Mar 5, the Institute for Supply Management (ISM) announced fresh figures for its service index for the month of February.  Notably, the reading exceeded expectations. The ISM Services index clearly reflects that the U.S. economy has sustained its momentum going into the first quarter. Notably, services sector constitutes around 75% of the U.S. GDP.

Service-oriented businesses remain strong in February, witnessing improvement for 109 consecutive months. Gains were broad-based and observed across all 18 industries. At this stage, it will be a prudent move to invest in stocks from the services sector with a favorable Zacks Rank and strong growth potential.

Strong February Readings

The ISM reported that its service index came in at 59.7% for the month of February, surpassing the consensus estimate of 57.3%. February’s reading was also higher than the January’s reading of 56.7%. Moreover, February’s non-manufacturing index was the highest since November 2018. Notably, any reading above 50% indicates expansion of the services sector and a reading of above 55% reflects outstanding performance by the services sector.

The Non-Manufacturing Business Activity Index jumped to 64.7% from the January reading of 59.7%, reflecting growth for 115th consecutive month. Additionally, the New Orders Index hit 65.2% in February compared with 57.7% in January. This was the sub-index’s highest reading since August 2005.

ISM chair Anthony Nieves said “The non-manufacturing sector’s growth rate rebounded in February after cooling off in January. Respondents are concerned about the uncertainty of tariffs, capacity constraints and employment resources; however, they remain mostly optimistic about overall business conditions and the economy.”

Economic Fundamentals Remain Solid

On Feb 28, the Department of Commerce reported that U.S. GDP for the fourth quarter of 2018 grew 2.6%. This figure was better than the consensus estimate of growth of 2.4%. Notably, U.S. consumer spending was $13,044.25 billion in the fourth quarter of 2018, reflecting its all-time monthly high during the of 1950 to 2018 period.

Conference Board’s Consumer Confidence index for February surged to 131.4, its highest level in four months. The consensus estimate was 124.8. Moreover, the Future expectation index (which track consumer’s expectations for next six months) jumped 103.4 from 89.4.

The U.S. economy added 304,000 jobs in January 2019, significantly higher than the consensus estimate of 154,000. These gains come despite indication that the economy is near full employment for several quarters.

Our Top Picks

A substantial expansion in the services sector is indicative of its continuing attractiveness as an investment option. Additionally, encouraging economic data, like the latest report on non-firm pay-roll, exhibits the optimism expressed by respondents in the ISM survey. This impressive result was predominately buoyed by a strong U.S. economy which is currently on the verge of completing 10th year of expansion.  

This is why it makes good sense to add stocks from this sector to your portfolio. We have narrowed down our search on five such stocks each carrying a Zacks Rank #1 (Strong Buy) and strong growth potential. You can see the complete list of today’s Zacks #1 Rank stocks here.

Clean Harbors Inc. (CLH - Free Report) is a leading provider of environmental, energy and industrial services in North America. The company has expected earnings growth of 32.3% for current year. The Zacks Consensus Estimate for the current year has improved by 7.1% over the last 60 days.

Core-Mark Holding Co. Inc. (CORE - Free Report) is one of the largest marketers of fresh and broad-line supply solutions to the retail industry in North America. The company has expected earnings growth of 12.2% for current year. The Zacks Consensus Estimate for the current year has improved by 5.4% over the last 60 days.

Hilton Worldwide Holdings Inc. (HLT - Free Report) owns leases, manages, develops, and franchises hotels and resorts. The company has expected earnings growth of 34.5% for current year. The Zacks Consensus Estimate for the current year has improved by 21% over the last 60 days.

Anthem Inc. (ANTM - Free Report) operates as a health benefits company in the United States offering managed care plans to the large and small employer, individual, Medicaid and senior markets. The company has expected earnings growth of 20.4% for current year. The Zacks Consensus Estimate for the current year has improved by 8.8% over the last 60 days.

America's Car-Mart Inc. (CRMT - Free Report) operates as an automotive retailer in the United States primarily selling older model used vehicles and provides financing for its customers. The company has expected earnings growth of 73.6% for current year. The Zacks Consensus Estimate for the current year has improved by 6.5% over the last 60 days.

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