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U.S. Service Sector Expands at a Brisk Pace: Top 5 Winners

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The service wing of the U.S. economy picked up in May, recovering from a 20-month low. This provided some relief to an economy that was losing momentum early in the second quarter, thanks to weak reports on consumer outlays, and housing and manufacturing activities, to name a few. Bittering trade relation between the United States and China coupled with impending U.S. tariffs on all goods imported from Mexico isn’t doing any good to the economy either.

Nonetheless, increase in the new order index, a slight uptick in business activity and improvement in employment point to underlying strength in the service sector. Thus, investing in service-oriented companies at the moment seems judicious.

U.S. Service Sector Humming

According to the Institute for Supply Management (ISM), the non-manufacturing index (NMI) came in at 56.9 in May, topping analysts’ estimates of a slight dip to 55.4. It was also higher than April’s two-and-a-half-year low of 55.5. The non-manufacturing sector, thus, saw uninterrupted expansion for the 112th consecutive month, indicating 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, 16 of all 18 non-manufacturing industries reported expansion, led by education services, transportation and warehousing, utilities, real estate, finance & insurance, healthcare, construction, mining, retail trade, and information.

Lest we forget, a NMI reading above 48.6% indicates expansion of the broader economy as well. U.S. GDP expanded at an annual pace of 3.1% in the first quarter of this year, per the Bureau of Economic Analysis. It was way higher than analysts’ expectations of 3% growth. Strong contributions from real gross domestic income drove GDP numbers. Uptick in state and local government spending, increase in exports and improvement in nonresidential fixed investment also helped drive economic growth.

The solid first-quarter GDP report followed 2018’s GDP numbers that matched the growth rate attained in 2015 — the highest since the 2007-2009 Great Recession.

New Orders, Business Activity Rise

The index for new orders jumped to 58.6 in May, an increase of 0.5 percentage points from the April reading of 58.1. New orders, thus, increased for the 118th successive month. The pick-up in new orders suggests that the service sector is poised to gain in the coming months.

Business expectations issued in May continue to be encouraging. The business activity index came in at 61.2, showing an increase of 1.7 percentage points from the April reading of 59.5. This highlights an uptick in business activity for the 118th consecutive month as well.

Employment Subindex Improves

Like expansion in new orders and business activities, companies increased hiring in May. The non-manufacturing employment index came in at 58.1, above the April reading of 53.7.

Market pundits were impressed by the employment report, citing that 12 out of 18 non-manufacturing industries showed increased employment in May. Moreover, most of the economists expect a healthy rise in service sector job growth after the Labor Department releases its May 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.

HCA Healthcare, Inc. (HCA - Free Report) provides health care services. The company has a Zacks Rank #2 and a VGM Score of A. The Zacks Consensus Estimate for its current-year earnings has increased 3.7% over the past 60 days. The company’s expected earnings growth rate for the current quarter is 7.9%, higher than the Medical - Hospital industry’s protected rally of 7.1%.

Magellan Health, Inc. (MGLN - Free Report) provides healthcare management services in the United States. The company has a Zacks Rank #1 and a VGM Score of A. The Zacks Consensus Estimate for its current-quarter earnings has risen 1.2% over the past 60 days. The company’s expected earnings growth rate for the current year is 59.4%, more than the Medical - HMOs industry’s estimated rise of 21.8%.

First Business Financial Services, Inc. (FBIZ - Free Report) provides commercial banking products and services to small and medium-sized businesses, business owners, executives, professionals, and high net worth individuals. The company has a Zacks Rank #1 and a VGM Score of B. The Zacks Consensus Estimate for its current-year earnings has moved 10.7% up over the past 60 days. The company’s expected earnings growth rate for the current year is 22%, more than the Banks - Midwest industry’s expected rally of 8.4%. You can see the complete list of today’s Zacks #1 Rank stocks here.

Chipotle Mexican Grill, Inc. (CMG - Free Report) operates Chipotle Mexican Grill restaurants. The company has a Zacks Rank #2 and a VGM Score of B. The Zacks Consensus Estimate for its current-year earnings has climbed 5.7% over the past 60 days. The company’s expected earnings growth rate for the current year is 43.5%, more than the Retail - Restaurants industry’s protected growth of 6.2%.

Barrett Business Services, Inc. (BBSI - Free Report) provides business management solutions to small and mid-sized companies in the United States. The company has a Zacks Rank #1 and a VGM Score of A. The Zacks Consensus Estimate for its current-year earnings has moved 1.7% north over the past 60 days. The company’s expected earnings growth rate for the current year is 10.4%, whereas the Outsourcing industry’s growth rate is projected to remain flat.

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