The Fed Must Like Staffing Stocks


The decision by the Federal Reserve to maintain the full level of its large scale asset purchase program at the September 18 FOMC meeting is a sign monetary policy will remain fully behind the goal of normalized labor market conditions.  Although non-farm payrolls have been expanding at a 1.5% to 1.6% year over year rate in recent months, the pace of growth and labor market conditions are not meeting the Fed’s goal. 

Furthermore, average hourly earnings of production and non-supervisory workers have begun to rise, but remain low adjusted for inflation. Wages were up 2.23% year over year in August compared to a recent low of 1.33% year over year in the summer of 2012. The consumer price index is up about 1.5% over the last year.  A healthy labor market recovery would likely see a meaningful rise in inflation adjusted wage growth.

Monetary policy targets job growth:

There is a great debate about the effectiveness of monetary policy in creating economic growth and employment, but the Fed’s mandate is aimed at maximizing employment and generating stable low inflation. With inflation calm, the Fed has the ability to focus its policy on job growth.  Real job creation is more likely to come from fiscal policy changes in Washington, but the inability of political leaders to craft a plan and the placement of ideology above job creation leaves the Fed the main policy lever for improving labor market conditions.  

Assuming the Fed will work wholeheartedly to bolster job growth, it might be worth focusing on staffing stocks.  These stocks are likely to perform well in an expanding job market, and the sector may have the tailwind of Fed policy at its back. 

Payroll growth and labor stock trends:

The graphic below displays the relationship between the year over year change in payrolls and the average price of five labor service stocks – Korn Ferry International (KFY), Manpower (MAN), TrueBlue (TBI),  Insperity (NSP), and Kforce (KFRC).   The stocks were able to perform strongly between the summer of 2002 and early 2006 and between early 2009 and early 2012 when the labor market was showing expanding growth.  The stocks have also been able to trade well in recent months on the back of very steady job growth. 

View gallery


It should be noted that the deceleration in payroll growth tended to lead to lower labor services stock prices in 2000 and again in 2006.  The lead on the upswing was more mixed with labor services stocks following the gain in job growth in 2003, but ahead of job growth in 2009.

Unemployment claims and staffing stocks:

The graphic following highlights the relationship between staffing stocks and initial unemployment claims.  Although job creation has been steady according to the BLS payroll data,  unemployment claims have been declining and are near reaching the cycle lows seen in the late 1990’s and mid 2000’s.  Staffing stocks were firm in this time period. The claims data is inverted to show strong (weak) staffing stock prices occurring with a drop (rise) in unemployment claims.  

View gallery


One might draw the conclusion that labor stocks could trade with a firm tone if unemployment claims range in the 300,000 to 350,000 area for a prolong period and in a similar fashion to the 2004 to 2007 period.   

Although the expansion in the labor market looks mature, the mid 2000 period could service as an analog.  Staffing stocks rose, while claims ranged at relatively low levels.  Let’s take a look at staffing stocks and try to come up with a potential winner or two.

Diving into the stocks:

There are a number of stocks in the staffing company universe. The table following displays a list of staffing names, their Zacks Rank, and revisions to earnings per share for the current fiscal year over the past 30 days.  The table is focused on Zacks Rank #1 (Strong Buy) and Zacks Rank #2 (Buy) stocks, but Kforce, Zacks Rank #3 (Hold), was included for comparison purposes.

View gallery


KFY has the most positive trend in earnings estimates revisions.  MAN is a distance second, while the other names have seen no activity.  The up move in estimates for KFY seemed to come in the wake of its profit results. 

The company was able to produce a 10% positive earnings per share surprise in the quarter ending July. Market share gains and industry positioning are two factors at work in upward guidance.  There has not been a material enough change in economic conditions to spark mass revisions, and the majority of the staffing companies have not provided great insight into operations.  This has kept analysts from changing their earnings estimates.

The growth outlook:

Looking at outlook for sales growth, On Assignment (ASGN) is expected to post the strongest results followed by NSP and KFRC. On earnings, TBI and KFRC are projected to see the most vibrant EPS growth.   

View gallery


The valuation picture:

Three measures of valuation were examined for each stock.  The table following displays the 12 month forward PE ratio, PEG ratio, and Price to Sales ratio.  Generally, valuations are on the rich side of the historical norm.  Let’s look at each measure:

View gallery


(click table to enlarge)

The median 12 month forward PE for the group is 19.45 against a long term median of 17.99.  The average premium is 6.4%.   KFY is trading at the biggest discount to average and the peer group followed by KFRC and NSP. 

The median 12 month PEG ratio for the group is 1.63 against a long term median value of 1.11.  The average premium for the group is 47.8%.  The sector seems expensive based on its PEG ratio.  All the companies with the exception of KFY are trading at a premium PEG ratio to their median.    This makes KFY a clear stand out.  For review, the PEG ratio is the ratio of a stock’s price to earnings ratio to its earnings per share growth rate.   Stocks are seen as “cheap” (“expensive”) if they are trading with a PE ratio below (above) the growth rate.

It should be noted that TBI has posted the strongest premium, but this may be a function of its outlook for strong EPS growth relative to trend.  Likewise, KFRC is expected to see high EPS growth in the coming fiscal year and has an elevated PEG ratio despite a relatively tame 12 month forward PE ratio.

On a price to sales basis, all the stocks but KFRC and CTP are trading at a premium to their median ratio.   KFRC has a slight discount, while CTP is trading in line with the median. KFY is trading at only at a marginal premium.  ASGN and TBI are trading at the largest premiums.   

Summarizing valuation:

If a position is assigned to each stock based on its valuation measure relative to its peers and the positions are averaged, KFY appears to be the cheapest firm followed by KFRC, MAN, and NSP.   It is a close race between MAN and NSP.  KFY had the lowest forward PE, lowest PEG ratio and third lowest price to sales ratio.  ASGN had the worst valuation composite.

Combining valuation with earnings:

KFY seems to be the most attractive stock based on valuation and the upward revision to earnings.  Furthermore, it is expected to grow its EPS at nearly 19% in the coming fiscal year.

MAN has more attractive valuation than NSP and seems to have stronger upward momentum to earnings estimate revisions (it’s a Zacks Rank #2), but its outlook for earnings growth is less attractive at 11.2%.  NSP is expected to see earnings per share growth of 16.6%.

KFRC, Zacks Rank #3, is not seeing an attractive trend in earnings estimate revisions, but the stocks is attractively valued and is expected to see sharp EPS growth of 24.4% in the coming year.  


Based on the Zacks Rank and valuation, KFY looks like the top pick in the staffing group.  If you think the Fed will be successful in generating job growth, and the cycle of economic growth has further to expand, staffing names could do a good job for your portfolio. 

Read the Full Research Report on MANRead the Full Research Report on KFYRead the Full Research Report on KFRCRead the Full Research Report on ASGNRead the Full Research Report on TBIRead the Full Research Report on NSPZacks Investment Research


View Comments (0)

Recommended for You

  • Tycoon buys 30 Rolls-Royces for Macau hotel

    A Hong Kong tycoon has placed the biggest ever order for Rolls-Royce cars, agreeing to buy 30 Phantoms to chauffeur guests at a luxury resort he's building in the global gambling capital of Macau. Stephen Hung's $20 million purchase surpasses the 14 Phantoms bought by Hong Kong's Peninsula Hotel in…

    Associated Press
  • Our Best-Ever Value Plan for Your Business

    New prices on our Mobile Share Value Plans on the nation's most reliable 4G LTE network.

    AdChoicesAT&T® Small BusinessSponsored
  • Tycoon's arrest sends shock wave through Russia

    Tycoon's arrest sends shock wave through Russia MOSCOW (AP) — The arrest of a Russian telecoms and oil tycoon has sent shock waves through the country's business community, with some fearing a return to the dark days of a decade ago, when the Kremlin asserted its power by imprisoning the country's…

    Associated Press
  • Before You Buy Alibaba, Check Out 4 Top China Stocks

    Before You Buy Alibaba, Check Out 4 Top China Stocks While investors gear up for Alibaba Group 's (BABA) hotly anticipated initial public offering, don't forget about other Chinese stocks that are worth keeping an eye on. Today's Young Guns Screen of

    Investor's Business Daily
  • As Fed takes baby steps, Cramer's trick for profit

    In turn, Cramer says making money in the market, involves looking at the environment through the lens of the Fed. "The trick is to remember that they speak for the common person," Cramer said. "The Fed wants the common person to make money." With that backdrop always in mind, Cramer says it becomes…

  • Play

    Citi, Bank of America Offer Discounted Mortgages

    Citigroup and Bank of America will offer mortgages at discounted interest rates to help borrowers with low incomes or subprime credit. AnnaMaria Andriotis joins MoneyBeat. Photo: Getty.

    WSJ Live
  • "The Retiree Next Door": How successful retirees stretch their savings

    "The Retiree Next Door": How successful retirees stretch their savingsBy the time she hit her late 40s, Toni Eugenia wasn’t sure she would ever be able to retire. Eugenia, 56, a pharmacy technician who lived in Houston, was nearly $200,000 in debt and

    Yahoo Finance
  • Costco Stores in Canada to Stop Taking American Express

    “The credit card relationship between American Express and Costco Wholesale Canada will not be renewed when it expires” on Dec. 31, the company said today in an e-mail to Canadian customers. The message was attributed to Lorelle Gilpin, vice president of marketing and membership for Costco…

  • Enjoy this refreshing Triple Play offer!

    Get FIOS TV Mundo starting at $79.99/mo. w/ no annual contract + 2-yr. price guarantee. Or sign for 2 yrs. & get a $300 prepaid Visa. Click here.

    AdChoicesVerizon FiOS ®Sponsored
  • CNBC Anchor Calls Out Fed-Hater Bill Fleckenstein In Startling Shouting Match

    CNBC Bill Fleckenstein of Fleckenstein Capital appeared on CNBC's Futures Now program on Tuesday. Futures Now host Jackie DeAngelis came out swinging, asking Fleckenstein right at the top if he was willing to admit that he had misunderstood monetary policy. Sounding taken aback, Fleckenstein…

    Business Insider
  • Beanie Babies creator's sentence debated in court

    Beanie Babies creator's sentence debated in court CHICAGO (AP) — Federal prosecutors seeking to put the billionaire creator of Beanie Babies in prison for hiding millions in Swiss bank accounts told appellate court judges Wednesday that the toymaker's sentence of probation threatens to erode the…

    Associated Press
  • Apple to unveil new iPads, operating system on Oct. 21 : report

    The company plans to unveil the sixth generation of its iPad and the third edition of the iPad mini, as well as its operating system OS X Yosemite, which has undergone a complete visual overhaul, the Internet news website said. Trudy Muller, a spokeswoman for Apple, declined to comment. The iPad is…

  • Margaritaville casino owners seek bankruptcy

    The owner of Biloxi's Margaritaville casino has filed for Chapter 11 bankruptcy protection Tuesday, only hours before a hearing where the landlord aimed to seize the property. The filing by MVB Holding LLC in U.S. Don Dornan, a lawyer for landlord Clay Point LLC, said the company had planned to ask…

    Associated Press
  • Embraer to sell 50 E-175 jets to Republic in $2.1 billion deal

    Brazil's Embraer SA, the world's third largest commercial planemaker, said on Wednesday it booked a firm order from U.S. The deal, which will be included in Embraer's order book for the third quarter, is valued at $2.1 billion, the planemaker said in a securities filing. The planes will be operated…

  • Gilead Stock Is Falling On These Drug Setbacks

    Gilead Stock Is Falling On These Drug Setbacks Gilead Sciences (GILD) shares are backsliding Wednesday on news that the patient drop-out rate for hepatitis C drug Sovaldi is quadruple that of clinical trials. In addition, the biotech's Phase 2 study results

    Investor's Business Daily
  • See The Latest Samsung Smartphone: The Galaxy S® 5

    The Galaxy S® 5 Packs A Gorgeous HD Display, A Fast Camera, And Powerful Processors In A Stylish, Water-Resistant Body. View More Details Here.

  • Play

    What the Fed Meeting Means for Bonds

    Janet Yellen & Co. are expected to hint at their timetable for raising interest rates. Here's how investors should prepare ahead of the meeting.

    WSJ Live
  • Here's What Mark Cuban Wishes He Knew About Money In His 20s

    Cuban is the owner of the Dallas Mavericks basketball team. Billionaire investor and entrepreneur Mark Cuban is generous with his advice. When we asked him what he wishes he'd known about money in his 20s, he said:

    Business Insider
  • SHOE COMPANY: Our CEO Just Disappeared And Most Of The Money Is Gone

    "and like that: he's gone." This is an actual headline from a company press release: "CEO and COO disappeared, most of the company's cash missing." (Via FastFT) In a statement, German-based shoe company Ultrasonic said its CFO,  Chi Kwong Clifford Chan, has been unable to reach the company's CEO,…

    Business Insider
  • Don't buy Alibaba stock: 'Dean of Valuation'

    Investors should steer clear of Alibaba , valuation expert Aswath Damodaran said Wednesday. On CNBC's " Fast Money ," Damodaran, a professor of finance at New York University's Stern School of Business, noted that he was looking at Alibaba stock from the perspective of a long-term investor, not a…

  • 10 rock-solid stocks for conservative investors

    10 rock-solid stocks for conservative investors Shares with low volatility can beat their indexes with less risk Bloomberg News/Landov U.S. Bancorp is the cheapest S&P 500 stock

  • Billionaire Investor Says Chinese People Work Harder And Western Companies Could Face Deep Trouble After Alibaba IPO

    Michael Moritz, the chairman of VC firm Sequoia Capital, is a huge fan of Chinese internet companies and reiterated his enthusiasm for the Chinese market in an interview with The Wall Street Journal Wednesday. The billionaire investor described the Alibaba IPO as a “major landmark event” that is as…

    Business Insider
  • A Lot's Changed Since You Graduated High School

    Including the cost of college tuition. Start saving for a child's education today with the Delaware College Investment Plan.

    AdChoicesFidelity InvestmentsSponsored
  • Top Analyst Upgrades and Downgrades: AEP, BHP, GE, Incyte, 3M, Tyco, Under Armour and More

    Top Analyst Upgrades and Downgrades: AEP, BHP, GE, Incyte, 3M, Tyco, Under Armour and More Stocks were firm on Wednesday morning ahead of the FOMC meeting outcome. Tuesday’s rally may have sparked higher interest again, and investors are looking for bargains

    24/7 Wall St.