Staffing Stocks Poised to Outperform on U.S. Job Gains
Shares of staffing and recruiting companies are beginning to outperform as demand for U.S. labor rebounds.
The newly-created Bloomberg U.S. Employment Services Index -- comprising 17 companies including Robert Half International Inc. (RHI), Insperity Inc. (NSP) and Kelly Services Inc. (KELYA) -- has risen 48 percent since Sept. 22, 2011, compared with a 31 percent gain for the Russell 2000 Index of small-company stocks. This follows almost nine months of underperformance, when stocks of these businesses lagged behind the Russell 2000 by 28 percent.
The economy has added 734,000 temporary and permanent jobs between December and February, the biggest three-month increase since May 2010, based on Labor Department data. The pick-up has been broad-based, which indicates a “firmer recovery” is taking hold, said Gus Faucher, senior economist in Pittsburgh at PNC Financial Services Group Inc.
“We are getting into that self-sustaining cycle, where we have job gains driving income growth, driving further consumer-spending growth, driving job gains,” he said.
Clients of Troy, Michigan-based Kelly Services are feeling less pessimistic than they were a year ago, when many were making plans in case sales “fell off a cliff,” President and Chief Executive Officer Carl Camden said in a telephone interview. Now, their outlooks are consistent with the Federal Reserve, which forecasts a pick-up in business activity in the second half of the year, he said.
“Talking to our customers about their yearlong plans, I do think we’re in a self-sustaining recovery,” Camden said.
A “wide range of indicators” suggests the labor market has been improving, “which is a welcome development indeed,” Fed Chairman Ben S. Bernanke said March 26 at the National Association for Business Economics annual conference in Arlington, Virginia. One of these indicators -- applications for unemployment-insurance payments -- fell by 5,000 in the week ended March 17 to 348,000, the fewest in four years, according to Labor Department data.
The Bureau of Labor Statistics’ employment-diffusion index has been above 50 for two years, which indicates more industries are hiring than firing.
The continued positive trend is encouraging because jobs data “affect sentiment for staffing stocks,” said Andrew Steinerman, an analyst in New York at JPMorgan. That’s because their shares offer a “favorable combination” of secular and cyclical growth, margin expansion and low valuations, he said.
Steinerman maintains an “overweight” recommendation on Menlo Park, California-based Robert Half, which is trading at a multiple of 1.06 times enterprise value to sales for the last 12 months. That is close to the 2001 recessionary trough and a “pretty substantial discount,” he said.
Signs of “incremental improvement” in the U.S. labor market “aren’t being accurately priced into the sector,” said Jonathan Upton, investment strategist at Lamkin Wealth Management. The Louisville, Kentucky-based investment company is “bullish” about staffing, even as industries such as technology and financial services have “garnered more attention from investors recently,” he said.
The Bloomberg staffing index has yet to break through a so-called double-top -- a relative high set in October and January -- because “investors lack conviction in this sector right now,” said Jim Stellakis, founder and director of research at New York-based research company Technical Alpha. If the index surpasses that relative peak, it may see an “accelerated move higher,” he said.
One sign of uncertainty is a decline in the employment outlook for the next six months. The share of Americans who say there will be “more” jobs minus the share who say there will be “fewer” fell to minus 1 percentage point in March, after the first positive reading in a year for February, according to data from the Conference Board, a New York research group.
The so-called temp-penetration rate -- the portion of temporary workers relative to all employees on nonfarm payrolls -- is more positive. It rose in February to 1.86 percent, the highest since November 2007, the month before the recession began, Steinerman said, citing Bureau of Labor Statistics data. The rate is a “leading read” on labor demand and a “bullish concurrent indicator” of the economy, he said.
Shares of staffing companies with domestic exposure are generally “doing better” than those with more business in Europe, said Tobey Sommer, an analyst in Nashville at SunTrust Robinson Humphrey Inc.
On Assignment Inc. (ASGN), which generates about 95 percent of revenue in the U.S. and specializes in technology, is attractive because it’s exposed to the U.S. economy and segment investors “want to be in,” said Sommer, who has a “buy” recommendation on the Calabasas, California-based company.He has the same recommendation on Insperity, based in Kingwood, Texas, which may be a “good bet on small-business job growth,” he said.
Small-business sentiment is rising, which Sommer said is encouraging because these companies make up the largest portion of the labor market. The National Federation of Independent Business Optimism Index rose to 94.3 (SBOITOTL) in February from 93.9 in January, the sixth straight month of gains and second-highest reading since December 2007, association data show.
This optimism was echoed at an annual staffing forum in mid-March, where attendees said they were confident demand would “remain solid this year,” Timothy McHugh, an analyst in Chicago at William Blair & Co. wrote in a March 16 report. Companies at the conference said January and February were “strong months,” and some attendees said that weekly revenue trends have ramped up recently, he wrote.
As companies begin to report earnings next month, Camden said investors should pay attention to the so-called conversion rate: temporary employees hired on a permanent basis. “Staffing firms are seeing an increase in temp-to-perm conversion that is typical at a second stage of a recovery,” he said.
Higher conversion rates would be a “bullish signal that should bode very well for the industry,” Upton agreed.
Even so, the job market “remains far from normal,” and it isn’t clear whether recent improvements “will be sustained,” Bernanke said in Arlington. One interpretation of hiring growth is that it “represents a catch-up from outsized job losses during and just after the recession,” he said. “To the extent that this reversal has been completed, further significant improvements in the unemployment rate will likely require a more-rapid expansion of production and demand from consumers and businesses.”
Long Way To Go
Though there’s still a long way to go to prerecession levels -- the U.S. has lost about 5.3 million jobs since nonfarm payroll employment peaked in January 2008 -- “the economy has definitely gotten past that weakness we had in the middle of 2011,” Faucher said.
Gross domestic product will expand 2.2 percent this year, according to the median estimate of 70 economists surveyed by Bloomberg News from March 9 to March 13. That’s up from 1.7 percent in 2011 and is “conducive” to an industry that’s already looking “very solid,” Steinerman said.
Even though the initial acceleration has been lighter than previous recoveries, Kelly has seen a “small” rebound in demand since Christmas, Camden said.
“All of the dominoes are falling in the correct order, but they’re just taking longer to fall,” he said.
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