Two sets of data on the services sector were released yesterday. At first glance, they may seem mildly contradictory, but overall they reflect a similar trend. Unimpeded by the roadblocks the rest of the economy is facing, the U.S. services sector is growing at a steady clip.
ISM Index Falls, But Growth Steady
The ISM services index slipped from 56.9 in February to 56.5 in March. This is the slowest pace of growth in three months, an identical reading to that of December last year.
However, the exports index increased from 53.0 in February to 59.0 in March, This is the highest level experienced since Feb 2013. The employment index increased from 56.4 to 56.6 in March, the highest level since Oct 2014. These increases imply that the sector could grow substantially during the rest of the year.
According to Anthony Nieves, who heads the Institute for Supply Management, 14 of the 18 non-manufacturing industries experienced growth during March. Further, most of the respondents are optimistic about the economy and business conditions. Their comments indicate stability and Nieves believes the sector is “on the right track.”
The report indicates that recent soft economic data is possibly a result of the pressures faced by sectors like manufacturing and mining. This may in turn be a result of factors such as a strong dollar and an oil price slump. Such a phenomenon may be temporary in nature.
Markit Services PMI Jumps
Meanwhile, the Markit services PMI increased at a fast clip during March. The final numbers for Markit PMI increased from 57.1 in February to 59.2 in March. This is significantly higher than the flash reading of 58.6 and its highest point since August last year.
The services employment index increased from 52.7 in February to 54.0 in March, the highest level since June last year. Additionally, the Markit services index’s new business component increased to its highest level since September.
Our Choices
The Growth Style Score combines conventional growth metrics with a thorough analysis of the company’s income statement, balance sheet and statements of cash flows to evaluate its financial health and the sustainability of its growth trajectory. Back-tested results show that stocks with Growth Style Scores of A or B when combined with Zacks Rank of 1 or 2 offer the best upside potential.Both these reports indicate that the services sector is on track for further growth this year. Below we present three stocks which will gain from these trends, each of which also has a good Zacks Rank. The attractiveness of these companies as an investment option at this stage is also confirmed by its Growth Style Score of ‘A’ or ‘B’.
Hackett Group holds a Zacks Rank #2 (Buy) and has a Growth Style Score of ‘A’. The company has projected earnings growth of 43.8%. The forward price-to-earnings ratio (P/E) for the current financial year (F1) is 18.44.
ICF International Inc. (ICFI) partners with government and commercial clients to deliver consulting services and technology solutions in the energy, environment, transportation, social programs, defense and homeland security markets.
Apart from a Zacks Rank #2 (Buy), ICF International has a Growth Style Score of ‘A.’ The company has projected earnings growth of 26.2% and has a P/E (F1) of 15.14x.
TriplePoint Venture Growth BDC (TPVG) is a management investment company, created for the expansion of the venture growth stage business segment of TriplePoint Capital LLC.
TriplePoint holds a Zacks Rank #2 (Buy) and has a Growth Style Score of ‘B’. It has an expected earnings growth of 32.3% and has a P/E (F1) of 8.39x.
Considering the pressures on the manufacturing sector, the focus is shifting to services companies. It is likely that the sector is expected to grow further in the year ahead. This is why these stocks would make for a prudent choice.
by Swarup Gupta
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