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U.S. Services Sector Hits Record High in Early May: 6 Picks

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The U.S. economy is witnessing an impressive recovery since the beginning of 2021, faster-than-expected by a large number of market participants. The vaccination drive on a priority basis, easing of restrictions and an unprecedented stimulus helped the economy to ramp up the level of economic activities.

Weekly jobless claims have fallen significantly in the past six reported weeks, while manufacturing and services' activities picked up and are facing a shortage of skilled manpower to raise their level of production.

In line with this trend, on May 21, IHS Markit reported that the preliminary result of its U.S. services business activity index jumped to 70.1 n May from 64.7 in April, marking the sharpest growth since October 2009. Notably, any reading above 50 indicates the expansion of services businesses. Moreover, the services sector accounts for nearly two-thirds of the U.S. GDP.

U.S. Services Sector Flourishing in 2021

The services sector predominantly consists of restaurants and bars, hotels and motels, travel, logistics and cargo delivery, and various forms of entertainment. Per the IHS Markit, new orders and backlog of orders are rising sharply as demand is continuing to pick up both at domestic and in export markets.

In its latest retail sales report, the Department of Commerce reported that sales in bars and restaurants climbed 3% in April month over month. Moreover, the National Restaurant Association reported that the restaurant & bars industry added 187,000 manpower in April on a seasonally adjusted basis. Per IHS Markit, strong economic growth is likely to persist through the summer, boosting sales at restaurants and bars.

Research firm Bernstein said last week that Domestic airfares are up 9% since Apr 1 while international fares are up 17% as an increasing number of people have started traveling. Hotel rates are picking up in Orlando, New York City and Hawaii as more and more businesses, theme parks and amusement centers are reopening.

With respect to the transportation and logistics services industry, the betterment in the freight scenario can be gauged by the latest Cass Freight Shipments Index report, according to which shipment volumes increased 27.6% on a year-over-year basis in April. the growing popularity of e-commerce business is spurring demand for logistics and cargo delivery operators.

Meanwhile, movie theaters are reopening slowly across the country maintaining new standards of social distancing, cleaning procedures and installation of top-of-the-line ventilation systems. The industry is witnessing gradual manpower recruitment.

Positive Macro-economic Indicators

Massive nationwide deployment of COVID-19 vaccines is the basis for the faster-than-expected reopening of the U.S. economy. On May 4, President Joe Biden announced that the latest target of his administration is to get 70% of U.S. adults receive at least one dose of a COVID-19 vaccine and having 160 million adults fully vaccinated by Jul 4.

Moreover, Americans have a gigantic $2.3 trillion of excess or forced savings from their locked-in period. Massive pent-up demand together with unprecedented personal savings should drive consumer spending in services industries in the near future. Notably, the services sector was a major sufferer due to pandemic-related restrictions.

Additionally, per the average of analysts' estimate, the U.S.GDP is expected to jump 6.5% this year, its highest in 36 years. Finally, corporate profits are likely to skyrocket this year. Per our latest estimate, total earnings per share (EPS) for the S&P 500 companies are likely to soar 33.2% year over year in 2021 on 9.9% higher revenues. Thereafter, EPS and revenues are estimated to grow 11.8% and 6.4%, respectively, in 2022 and 11.3% and 4.7%, respectively, in 2023.

Our Top Picks

We have narrowed down our search to six stocks from the services industries that popped double digits in the past three months. These stocks have strong growth potential for the rest of 2021 and have seen solid earnings estimate revisions within the last 30 days. 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 the price performance of our six picks in the past three months.

Bloomin' Brands Inc. BLMN owns and operates casual, upscale casual, and fine dining restaurants in the United States and internationally. It operates through two segments, U.S. and International.

The company has an expected earnings growth rate of more than 100% for the current year. The Zacks Consensus Estimate for the current year has improved 67.5% over the last 30 days. The stock price has surged 14.1% in the past three months.

Dine Brands Global Inc. DIN owns, franchises, operates and rents full-service restaurants in the United States and internationally. The company has an expected earnings growth rate of more than 100% for the current year. The Zacks Consensus Estimate for the current year has improved 39.8% over the last 30 days. The stock price has advanced 19.6% in the past three months.

RCI Hospitality Holdings Inc. RICK operates nightclubs that offer live entertainment, restaurant and bar services. It operates through Nightclubs, Bombshells, and Other segments. The company has an expected earnings growth rate of more than 100% for the current year (ending September 2021). The Zacks Consensus Estimate for the current year has improved 42.5% over the last 30 days. The stock price has appreciated 22.4% in the past three months.

Covenant Logistics Group Inc. CVLG provides transportation and logistics services in the United States. It operates through four segments: Expedited, Dedicated, Managed Freight, and Warehousing.

The company has an expected earnings growth rate of more than 100% for the current year. The Zacks Consensus Estimate for the current year has improved 14.8% over the last 30 days. The stock price has rallied 23.3% in the past three months.

Expeditors International of Washington Inc. EXPD is engaged in the business of global logistics management, including international freight forwarding and consolidation, for both air and ocean freight in the Americas, North Asia, South Asia, Europe, the Middle East, Africa, and India.

The company has an expected earnings growth rate of 18.7% for the current year. The Zacks Consensus Estimate for the current year has improved 14.7% over the last 30 days. The stock price has climbed 32.7% in the past three months.

OneWater Marine Inc. ONEW is a premium recreational boat retailer mainly in the United States. It offers products and services including new and pre-owned boats, parts and accessories, finance and insurance products, maintenance and repair and ancillary services.

The company has an expected earnings growth rate of 54.9% for the current year (ending September 2021). The Zacks Consensus Estimate for the current year has improved 31.1% over the last 30 days. The stock price has jumped 38.2% in the past three months.

Infrastructure Stock Boom to Sweep America

A massive push to rebuild the crumbling U.S. infrastructure will soon be underway. It’s bipartisan, urgent, and inevitable. Trillions will be spent. Fortunes will be made.

The only question is “Will you get into the right stocks early when their growth potential is greatest?”

Zacks has released a Special Report to help you do just that, and today it’s free. Discover 7 special companies that look to gain the most from construction and repair to roads, bridges, and buildings, plus cargo hauling and energy transformation on an almost unimaginable scale.

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Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

Rogers Communication, Inc. (RCI) : Free Stock Analysis Report

DINE BRANDS GLOBAL, INC. (DIN) : Free Stock Analysis Report

Expeditors International of Washington, Inc. (EXPD) : Free Stock Analysis Report

Bloomin Brands, Inc. (BLMN) : Free Stock Analysis Report

RCI Hospitality Holdings, Inc. (RICK) : Free Stock Analysis Report

OneWater Marine Inc. (ONEW) : Free Stock Analysis Report

Covenant Logistics Group, Inc. (CVLG) : Free Stock Analysis Report

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Zacks Investment Research