Shares of employment services companies present an opportunity for investors projecting that U.S. job gains will exceed economists’ forecasts this month, as they did for July.
Nonfarm employers added 118,000 workers in August, according to the median estimate of 16 economists surveyed by Bloomberg News as of today. That follows a 163,000 increase the previous month -- the highest since February -- beating the 100,000 forecast.
A similar labor report on Sept. 7 could push companies including Robert Half International Inc. higher, according to Andrew Steinerman, a business-services analyst in New York at JPMorgan Chase & Co. Their shares are a proxy for investor sentiment about the pace of hiring, making them a “high-beta way to play a recovery in economic activity in the U.S.,” he said. A stock with a high beta tends to rise or fall more than the broader market.
The Bloomberg U.S. Employment Services Index -- made up of 17 companies including Robert Half, Monster Worldwide Inc. and Insperity Inc. -- has lagged behind the Russell 2000 Index by about 14 percent since April 5, the day before March jobs data were released. The staffing index reflects bearish investor sentiment from weaker-than-forecast job gains and disappointing earnings, said Jim Stellakis, founder and director of research at New York-based research company Technical Alpha Inc.
“Amid this backdrop, even a modest improvement in hiring could help push shares of these companies higher,” said Stellakis, a chartered market technician.
Monster, the New York-based Internet recruiting service, fell 14 percent on Aug. 2 to $6.10, a three-year low, after the company estimated earnings for the current quarter will be 2 cents to 7 cents a share. That’s below the 9-cent average analyst estimate, based on data compiled by Bloomberg. Since then, the stock has retraced most of the losses, closing at $7.01 yesterday.
Staffing stocks are attractive because valuations are historically cheap, Steinerman said, noting that this is one reason for his “overweight” recommendation on Robert Half. The Menlo Park, California-based company is trading at an 11 percent discount to a “normal recessionary valuation” on an enterprise-value-to-sales basis, he said.
While these companies are leveraged more fundamentally to demand for temporary workers, their near-term stock performance is driven by total job gains, Steinerman said. As a result, the August labor report “will be telling.”
That will come after today’s report that the U.S. economy expanded at a 1.7 percent annual rate in the second quarter, up from an initial estimate of 1.5 percent, according to revised data from the Commerce Department. The pace was 2 percent in the January-March period.
Russell Price, senior economist at Ameriprise Financial Inc. in Detroit, sees August payrolls missing the median forecast and expanding by 90,000. With the “employment market in a holding pattern,” it’s difficult for monthly gains to reduce the jobless rate, which has been stuck above 8 percent since February 2009, he said.
“Until business leaders are able to get more clarity on the underlying economic environment and fiscal cliff,” job gains could vary month-to-month, said Price, among the top-ranked forecasters of nonfarm-payroll gains based on two years of surveys, according to data compiled by Bloomberg. The U.S. faces higher taxes and reductions in spending on defense and other government programs that will take effect at year-end unless Congress acts.
What matters more than the number of jobs created is how investors respond to a report that’s above or below the consensus, Steinerman said. U.S. hiring missed the median estimate for four consecutive months -- March through June -- causing the staffing index to underperform the market.
The group, now at a “key support level,” could trade below the so-called triple bottom to form a new low if August payroll gains are less than forecast, Stellakis said. This would signal that “sentiment is weakening incrementally” as investors don’t see hiring providing a positive catalyst for expansion, he said.
Even so, the fundamentals of these stocks remain attractive for investors who see continued improvement in the labor market, Steinerman said. With a “permissive economy,” these shares offer a favorable opportunity for outperformance, led by a recovery in U.S. jobs.
“Staffing stocks continue to offer an attractive risk-reward profile for investors,” he said.