By Sam Stovall
Newly posted to the list of industries with top Standard & Poor's is the employment-services group. Signs of improvement in the U.S. labor market -- especially a strong February employment report -- recently prompted S&P analyst Todd Rosenbluth to take a more positive stance on this industry. (Michael Jaffe has since assumed coverage of this industry after Rosenbluth moved to S&P's telecom group.)
In the past, demand for employment services -- which include temporary staffing, placement, and human resource functions -- began to increase at the beginning of an economic rebound. S&P believes that the U.S economy is now in the early stages of a recovery and, indeed, may never have been in a recession.
Layoffs, which occurred throughout the second half of 2001, have slowed, and the U.S. unemployment rate improved to 5.5% in February, down slightly from 5.6% in January. While S&P expects that it will rise to around 6% this summer after the seasonal factors that strengthened the February report have dissipated, it should resume its downward trend in the fall.
The lower jobless rate signals increasing demand for workers, says Rosenbluth. During downturns, companies trim staff by first cutting temporary and contract workers. The analyst notes that when the economy recovers, temp agencies have historically seen improved demand, as businesses will not make permanent hires until they're sure that a rise in inventory orders is going to last. Rosenbluth thinks that this may not occur until late 2002.
The analyst was encouraged by the February employment data, the second strong report this year. Health-care, education, and retail-service industries continued to add new hires, though manufacturing payrolls have stayed weak. In 2001, staffing companies' margins narrowed as conversion rates of temporary employees into full-time staff slowed, reducing their fees from corporate clients. This, along with fixed costs, remained a hindrance to earnings growth, warns Rosenbluth. The trend is likely to persist until late 2002.
RISING IN ANTICIPATION.
Though the stocks in the employment-services group are trading at p-e ratios near historically high levels, Rosenbluth thinks the shares should climb on an improved economic and jobs outlook. While full-scale hiring will likely not occur until the second half of 2002, investors' anticipation that demand for workers will increase should outweigh the slow earnings growth S&P sees for the early part of the year.
Rosenbluth tends to favor staffing outfits that offer a wide array of industry expertise. His top picks right now: Industry leaders Manpower (MAN ) and Robert Half (RHI ). Rosenbluth raised his opinion on both these stocks to 4 STARS (accumulate), from 2 STARS (avoid) in February.
S&P Relative Strength Rankings
These industries carry six-month relative strength rankings of "5" as of Mar. 22, 2002 -- meaning that they're in the top 10% of the 115 industries in the S&P Super 1500 (the combined S&P 500, S&P MidCap 400, and S&P SmallCap 600) based on prior six-month price performance.
*S&P's ranking system for the appreciation potential of stocks over a 6- to 12-month period: 5 STARS (buy), 4 STARS (accumulate), 3 STARS (hold), 2 STARS (avoid), 1 STAR (sell).
Stovall is chief sector strategist for Standard & Poor's