On Nov 4, the Institute for Supply Management (ISM) announced fresh figures for its non-manufacturing (service) purchasing manager’s index for the month of October. Notably, October’s reading exceeded expectations and returned to the growth trajectory after a significant decline in the previous month.
The ISM Services index clearly reflects that the U.S. economy has sustained its momentum despite lingering trade conflict and global economic slowdown. Gains were broad-based and occurred in 13 out of the total 18 industries.
Service-oriented businesses remained strong in August, improving for 117 consecutive months. Substantial expansion in the services sector is indicative of its continued attractiveness as an investment option. This is why it makes good sense to add stocks from this sector to your portfolio.
Better-Than-Expected Services Index in October
The ISM reported that its service index came in at 54.7% for the month of October, beating the consensus estimate of 53.6% and previous month’s reading of 52.6%. September’s reading was the lowest in three years. Notably, any reading above 50% indicates expansion of the services sector and a reading of above 55% reflects outstanding performance by the services sector.
A strong bunch of 13 industries expanded in October. The Business Activity Index came in at 57%, up 1.8% year over year. Notably, the index has increased for 123 consecutive months. Additionally, the New Orders Index gained 1.9% to reach 60.3% while the Employment Index advanced 3.3% to rise to 53.7%. The ISM mentioned that the respondents are mostly optimistic about overall business conditions, but concerns remain about tariffs and employment resources.
The report carried more significance in light of the ISM manufacturing index for October, which revealed that U.S. manufacturing contracted for the third consecutive month. Investors were concerned that tepid data for both manufacturing and services sectors will eventually lead to a recession. Notably, the services sector accounts for 70% of the U.S. GDP while the manufacturing sector commands around 12% of economic activities.
Consumer Spending Remains Strong
Consumer spending remained firm and is driving the U.S. GDP. In the third quarter of 2019, the U.S. economy grew 1.9%, surpassing the consensus estimate of 1.6%, primarily buoyed by a 2.9% increase in consumer spending. Two recently released consumer-centric data — consumer confidence and consumer sentiment — clearly reflected that most Americans are happy with current economic conditions.
The Department of Labor reported that the non-farm payroll in October came in at 128,000, surpassing the consensus estimate of 88,000. Average hourly wage rate in October grew 0.2% compared with 0% in September. The figure also matched the consensus estimate. Year over year, wage rate increased 3%, faster than household inflation, which grew 1.8%.
Our Top Picks
At this stage, it will be prudent to invest in stocks from the services sector with a favorable Zacks Rank and strong growth potential. We have narrowed down our search to five such stocks that skyrocketed year to date and still have upside left. Each of our picks carries a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
The chart below shows price performance of our five picks year to date.
McGrath RentCorp MGRC rents and sells relocatable modular buildings, portable storage containers, electronic test equipment, and liquid and solid containment tanks and boxes. It operates through four segments: Mobile Modular, TRS-RenTelco, Adler Tanks and Enviroplex.
The company has an expected earnings growth rate of 15.7% for the current year. The Zacks Consensus Estimate for the current year has improved 6.8% over the last 30 days. The stock has soared 46.4% year to date.
FTI Consulting Inc. FCN is a global business advisory firm aimed at helping organizations manage change, mitigate risk and resolve financial, legal, operational, political and regulatory reputational and transactional disputes.
The company has an expected earnings growth rate of 47.8% for the current year. The Zacks Consensus Estimate for the current year has improved 9% over the last 30 days. The stock has jumped 61.6% year to date.
Huron Consulting Group Inc. HURN is an independent provider of financial and operational consulting services. It provides advisory, technology and analytic solutions in the United States and internationally.
The company has an expected earnings growth rate of 24% for the current year. The Zacks Consensus Estimate for the current year has improved 3.2% over the last 30 days. The stock has surged 31% year to date.
Select Medical Holdings Corp. SEM operates critical illness recovery hospitals, rehabilitation hospitals, outpatient rehabilitation clinics and occupational health centers in the United States. It has four segments: Critical Illness Recovery Hospital, Rehabilitation Hospital, Outpatient Rehabilitation, and Concentra.
The company has an expected earnings growth rate of 7.8% for the current year. The Zacks Consensus Estimate for the current year has improved 5.7% over the last 30 days. The stock has climbed 29.5% year to date.
Tenet Healthcare Corp. THC operates as a diversified healthcare services company. It operates through three segments: Hospital Operations and Other, Ambulatory Care and Conifer.
The company has an expected earnings growth rate of 29% for the current year. The Zacks Consensus Estimate for the current year has improved 0.4% over the last 30 days. The stock has jumped 64% year to date.
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