Job Gains Lure Investors to Employment-Services Stocks

Employment-services companies are attracting investors who are betting the U.S. labor market will keep up its steady pace of job creation.

The Standard & Poor’s Supercomposite Human Resources & Employment Services Index -- which includes Robert Half International Inc. and Manpower Inc. -- has risen 19 percent since Oct. 15, compared with a 1.5 percent increase for the S&P 500 Index. The outperformance coincides with nonfarm payroll data for October and November that exceeded economists’ forecasts.

The better-than-projected reports are generating interest in companies that provide services such as recruitment, back-office administration and human-resources management, said Jeff Silber, a senior analyst in New York at BMO Capital Markets. Even though their businesses are tied more to the need for temporary workers, their near-term stock performance is driven by total hiring, he said.

Job growth that’s “not too hot and not too cold is actually great for these stocks,” because demand for temporary positions remains strong enough to drive earnings, Silber said. “We’re in a Goldilocks-type environment.”

Gains of about 100,000 to 150,000 a month will be “pretty good” for companies such as On Assignment Inc. and TrueBlue Inc., Silber said. Nonfarm payrolls expanded by 150,000 in December, based on the median estimate of economists surveyed by Bloomberg. That would mark six straight months at more than 100,000, according to data from the Labor Department, which is scheduled to release the figures tomorrow.

‘Great Opportunity’

These stocks “could offer a great opportunity” for investors who believe the recent improvement is sustainable, said Jack Ablin, who helps oversee about $66 billion as chief investment officer of BMO Private Bank in Chicago. As a “high - beta, cyclical group that’s lagged behind the market,” these shares are starting to “play catch-up.” A stock with a high beta tends to rise or fall more than the broader market.

The relative outperformance of the human-resources and employment-services index since October signals a sentiment shift, suggesting investors are more optimistic about the outlook for jobs, said Jim Stellakis, founder and director of research at Greenwich, Connecticut-based research company Technical Alpha Inc. and a chartered market technician. This rally broke a downtrend that began in April 2012, when “disappointing” job reports fell below forecasts for several months, he said.

Holding Back

Even though recent employment data are encouraging, “the composition of job gains may be holding back some investors,” said Ablin, who doesn’t currently hold any of these companies.

Industries that aren’t as likely to hire temps -- construction, manufacturing and government -- experienced the most growth through October compared with the prior year, he said. Meanwhile, professional-services openings, where adding workers on a temporary basis is more common, have been “virtually flat.”

Still, there are other signs of improvement. The economy expanded at a 3.1 percent annual pace -- more than previously reported -- in the third quarter, the 13th consecutive rise since the 18-month recession ended in June 2009. In addition, the unemployment rate, at 7.7 percent in November, was the lowest since December 2008.

More investors are contacting Silber about this industry, as the improving labor market and historically low valuations make it more attractive, he said. A BMO Capital Markets index of temporary staffing companies is trading at a multiple of about 16 times 2013 estimates, though it “should be closer to 18, assuming we’re in the middle of a cycle,” he said.

While these stocks outperformed the market early in prior recoveries, “it might be different this time” because they “do well when economic expectations are getting stronger,” Silber said.

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