5 Top Ranked Stocks To Buy On Services Sector Gains

Following the recent spate of disappointing economic reports, the economy finally sent out a crucial positive signal on Wednesday. Data released by both the Institute of Supply Management and private information provider Markit indicated that the services sector had undergone an expansion in April.

Meanwhile, even as it took cognizance of sluggish growth conditions at its recently concluded meeting, the Fed believes such weakness is temporary. The central bank expects growth to pick up later this year and it makes good sense to invest in stocks from the services sector, given that they account for a bulk of the country’s GDP.

ISM Services Gauge Improves

The ISM services index increased from the level of 55.2 recorded in March to 57.5 for April. This is the second highest reading recorded over a period of 18 months. Additionally, April marks the 88th consecutive month of gains for the index. Growth was experienced across most industries, with 16 of the 18 services sectors experiencing expansions. Leading the pack were the wholesale and retail trade, arts, utilities and mining sectors.

Both the ISM Prices Index and Business Activity Indexes experienced increases. Notably, the New Orders Index increased from 58.9 to 63.2 in April, which is the gauge’s best reading since Aug 2005. Additionally, the Markit U.S. Services PMI increased from 52.8 in March to 53.1 in April. According to the information provider, growth has now been experienced in every single survey period since Mar 2016.

Fed Describes Q1 Sluggishness as Temporary

Acknowledging a cooling off in the economy during the first quarter, the Fed refrained from raising rates at its recently concluded two day policy meeting. Unlike the completely bullish tone of earlier minutes, the Fed also said that household expenditure had increased only modestly and inflation remained below its target have come to of 2%.

At the same time, the central bank dismissed the slowdown in first quarter GDP growth as transitory. According to the Fed, job gains have been “solid,” justified by continuing growth in consumer spending. As per estimates released by the Bureau of Economic Analysis, personal income increased $40.0 billion or 0.2% in March against the Consensus estimate of 0.3%. The central bank also hopes that “gradual adjustments” in monetary policy would result in expansion of economic activity, strengthening of the labor market, and stabilization of inflation rate around 2% over the medium term.

Our Choices

An expansion in services activity indicates that the sector is in fine fettle. Continuous growth has ensured that services are well poised to gain from the pickup in growth in the months ahead.

Adding stocks from the sector to your portfolios looks like a smart option at this point. However, picking winning stocks may be difficult.

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, each of which has a Zacks Rank #1 (Strong Buy) and a good VGM score. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

SP Plus Corporation (NASDAQ:SP) provides professional parking, ground transportation, facility maintenance, security and event logistics services to property owners and managers in all markets of the real estate industry.

SP Plus has a VGM Score of A. The company has expected earnings growth of 18.9% for the current year. The forward price-to-earnings ratio (P/E) for the current financial year (F1) is 20.61, lower than the industry average of 22.28. The stock has returned 29.8% over the last six months, outperforming the Zacks Consumer Services – Miscellaneous industry, which has gained 15.4% over the same period.

Leucadia National Corporation (NYSE:LUK) is a diversified financial services holding company. The company has a plethora of financial services businesses and merchant banking investments, with varied ownership interests in each business.

Leucadia National has a VGM Score of A. The company has expected earnings growth of more than 100% for the current year. It has a P/E (F1) of 15.21x, lower than the industry average of 17.73. The stock has returned 37.8% over the last six months, outperforming the Zacks Diversified Operations industry, which has gained 8.7% over the same period.

DXC Technology Company (NYSE:DXC) is an IT services company.

DXC Technology has a VGM Score of A. The company has expected earnings growth of more than 100% for the current year. It has a P/E (F1) of 11.55x, lower than the industry average of 17.96. Its earnings estimate for the current year has improved by more than 100% over the last 30 days. The stock has returned 34% over the last six months, outperforming the Zacks Computers - IT Services industry, which has gained 7.6% over the same period.

CSX Corp. (NASDAQ:CSX) is one of the leading transportation suppliers in the U.S.

Sinopec has a VGM Score of B. The company has expected earnings growth of 25.3% for the current year. Its earnings estimate for the current year has improved by 9.9% over the last 30 days. The stock has returned 60.7% over the last six months, outperforming the Zacks Transportation - Rail industry, which has returned 23.5% over the same period.

AllianceBernstein Holding L.P. (NYSE:AB) provides diversified investment management services, primarily to pension funds, endowments, foreign financial institutions, and to individual investors.

AllianceBernstein has a VGM Score of A. The company has expected earnings growth of 7.1% for the current year. It has a P/E (F1) of 10.64x, lower than the industry average of 12.63. Its earnings estimate for the current year has improved by 3.9% over the last 30 days. The stock has returned 1.8% over the last six months, underperforming the Zacks Internet - Content industry, which has returned 16.5% over the same period. This provides a good opportunity to buy the stock given that there is significant upside potential.

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