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Employment Stocks May Be Overworked

By Sam Stovall While U.S. job growth remains sluggish, the shares of companies that provide contract and temporary workers have been busy moving higher. The S&P Employment Services index rose 49.3% in 2003, vs. a 27.4% gain in the S&P 1500. The Employment Services index rose 1.5% through Mar. 26, while the 1500 was flat. The group's outperformance has landed it on S&P's industry momentum list.

Despite this, Standard & Poor's analyst Mike Jaffe still has a negative investment opinion on this group. While Standard & Poor's expects the U.S. economy to continue recovering in 2004, it characterizes the overall employment outlook as mixed. To date, temporary markets for unskilled labor have given occasional indications of recovery, but demand for temporary and full-time white-collar workers has not.

DEMAND CYCLE. Based on S&P's jobs outlook, Jaffe sees this subindex underperforming the S&P 500 over the next year, especially since he thinks a stronger labor recovery than S&P expects has been priced into the shares. The Employment Services subindex recently traded at 85 times the earnings forecast for the group for 2004.

S&P believes that the U.S economy has been moving in a positive direction, with labor statistics finally showing limited signs of supporting that belief. Layoffs, which occurred throughout 2001, had slowed for a good part of 2002 but picked up steam again for the first eight months of 2003 (although at a slower rate than in 2001). Yet, since September, nonfarm payrolls increased for six straight months, although the average gain of 61,000 new jobs fell well below levels expected in the midst of an economic recovery. Also, after reaching a seeming peak of 6.4% in June, the unemployment rate fell to 5.6% as of February, 2004.

Jaffe notes that during economic downturns, companies typically trim staff by first cutting temporary and contract workers. When the economy recovers, temporary staffing firms have historically seen better demand. This happens, in Jaffe's view, because companies will not generally take on permanent hires until they're sure that business recovery will be sustained.

STANDOUT STOCK? Demand for nonskilled temporary workers began to increase during parts of the past couple of years, Jaffe says, and a more extended increase seems likely. Signs of a pickup in white-collar hiring have yet to truly emerge, in his view.

Does this group have any attractive investment opportunities? Jaffe says if one were interested in an investment in this industry, he sees companies providing temporary staffing of unskilled workers as the place to look. In particular, he likes Manpower (MAN), which he ranks 4 STARS, or accumulate.

Industry Momentum List Update

For regular readers of the Sector Watch column, here's this week's list of the 11 industries in the S&P Super 1500 with Relative Strength Rankings of "5" (price performances in the past 12 months that were among the top 10% of the industries in the S&P 1500) as of March 26, 2004.




Casinos & Gaming/Consumer Discretionary

Harrah's (HET)


Catalog Retail/Consumer Discretionary

Insight Enterprises (NSIT)

Not Ranked

Consumer Electronics/Consumer Discretionary

Harman International (HAR)


Diversified Metals & Mining/Materials

Phelps Dodge (PD)


Electronic Equipment Mfrs./Info. Tech.

Vishay (VSH)


Employment Services/Industrials

Manpower (MAN)


Fertilizers & Ag. Chemicals/Materials

Scott's Co. (SMG)


Homebuilding/Consumer Discretionary

D.R. Horton (DHI)


Internet Software & Services/Info. Tech.

Yahoo! (YHOO)



Nucor (NUE)


Wireless Telecom Svcs./Telecom Svcs.

Nextel Communications (NXTL)


* S&P's stock appreciation ranking system for the coming 6- to 12-month period: 5 STARS (buy), 4 STARS (accumulate), 3 STARS (hold), 2 STARS (avoid), 1 STAR (sell). Stovall is chief investment strategist for Standard & Poor's

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