5 Stocks To Buy On Service Sector Strength

A disappointing employment report in April showed that job growth had declined to its lowest pace in seven months. The number of jobs added came in far lower than expected while the employment rate remained flat at March’s level. Following a series of mixed signals, this is the first significant indication that the economy may be slowing down.

However, the service sector shows no signs of slowing down as was borne out by last week’s ISM numbers. Nearly all the employment gains for April came in from three services sectors. Adding stocks from these areas to your portfolio makes good sense at this point.

Job Growth Flags

The U.S. economy created a total of 160,000 jobs in April, significantly lower than the consensus estimate of 203,000. The tally was also considerably lower than March’s downwardly revised job number of 208,000. Moreover, the unemployment rate in April was in line with the consensus estimate and March’s rate of 5%.

However, average hourly earnings gained 0.3% or 8 cents in April from the previous month’s figure to $25.53. This was the third highest monthly gain in a year. Average hourly earnings also witnessed a 2.5% rise from the year-ago figure.

Services Power Gains

The lion’s share of job additions came from three areas, professional and business services, healthcare and the financial sector. Coming in at first place was professional and business services with 65,000 job additions. Management and technical consulting services added 21,000 jobs.

The number of jobs in the healthcare sector increased by 44,000. Ambulatory health care services and hospitals contributed 19,000 and 23,000 jobs, respectively. Financial activities provided 20,000 more jobs with credit intermediation and related services adding 8,000 positions.

ISM Gauge Hits Four-Month High

The ISM Services Index increased from 54.5% in March to 55.7% in April, indicating expansion in servicing activity for the 75th straight month. Additionally, the reading was more than the consensus estimate of 54.8%. This was the highest reading for the index in the last four months.

Currently, the services sectors have come to comprise nearly 90% of the U.S. economy. Weighed down by weak global economic conditions and a stronger dollar, manufacturing is traversing particularly troubled waters. On the other hand, sectors which are relatively insulated from global weaknesses, such as health care providers, have been faring much better.

Our Choices

Strong services sector growth is shoring up the economy at a time when it is beset by troubles from abroad. This is specifically true for those industries which are relatively insulated from the weaknesses of global demand and a rising dollar.

Investing in such sectors makes good sense, especially because such conditions are expected to prevail for some time now. However, picking winning stocks may be a difficult task.

This is where our VGM score comes in. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three scores. Such a score allows you to eliminate the negative aspects of stocks and select winners. However, it is important to keep in mind that each Style Score will carry a different weight while arriving at a VGM score.

We have narrowed down our search to the following stocks based on a good Zacks Rank and VGM score.

Vectrus, Inc. (NYSE:VEC) engages in providing infrastructure asset management, logistics and supply chain management, and information technology and network communication services.

Vectrus has a Zacks Rank #1 (Strong Buy) and a VGM Score of A. The forward price-to-earnings (P/E) ratio for the current financial year (F1) is 9.69, lower than the industry average of 16.15.

PRGX Global, Inc. (NASDAQ:PRGX) provides audit, analytics, and advisory services in order to improve client financial performance.

PRGX Global has a Zacks Rank #1 and a VGM Score of A. Its earnings estimate for the current year has improved by 79% over the last 30 days.

Nobilis Health Corp. (NYSE:HLTH) is an owner and manager of ambulatory surgical centers and hospitals.

Nobilis Health has a Zacks Rank #2 (Buy) and a VGM Score of B. The company has expected earnings growth of 97.1% for the current year. It has a P/E (F1) of 6.29, which is lower than the industry average of 14.25.

HEALTHSOUTH Corp. (NYSE:HLS) provides post-acute healthcare services and home-based patient care.

Vail Resorts has a Zacks Rank #2 and a VGM Score of A. The company has expected earnings growth of 9.5% for the current year. It has a P/E (F1) of 16.71, which is lower than the industry average of 18.82. Its earnings estimate for the current year has improved by 2.4% over the last 30 days.

Raymond James Financial, Inc. (NYSE:RJF) provides financial services mainly in the U.S. and Canada.

Raymond James Financial has a Zacks Rank #1 and a VGM Score of B. Its earnings estimate for the current year has improved by 5.2% over the last 30 days.