US Service Sector Sees Near-Record Growth: 5 Solid Buys

Economic activity in the non-manufacturing sector expanded at a faster pace in November. Respondents remained optimistic about business conditions and new orders increased, bolstering the economy and corporate houses. The employment gauge dipped a bit but remained at a historically elevated level. Thus, investing in service-oriented companies at this moment seems wise.

Service Sector Registers Second-Strongest Reading in 13 Years

U.S. services sector expanded in November to a near-record level, per the Institute for Supply Management (ISM). The non-manufacturing index (NMI) came in at 60.7 in November from 60.3 in October, topping analysts’ estimates of a decline to 59.0. The index, thus, recorded the second-highest reading since 2008.

The survey that provides a barometer for the nation’s restaurants, builders, bankers, and other service providers saw uninterrupted expansion for 111 consecutive months, indicating steady growth for the broader economy this year. After all, the non-manufacturing sector accounts for nearly 90% of the economy, while any reading above 50 indicates that the said sector is expanding.

In the last two quarters, the U.S. economy recorded the fastest six-month growth in four years and is on track to hit the Trump administration's annual growth target of 3%. If that happens, it would be the best yearly performance since 2005, two years before the Great Recession.

Notably, all the 17 non-manufacturing industries reported expansion, including education services, transportation and warehousing, utilities, real estate, finance & insurance, healthcare, construction, mining, retail trade, agriculture and information, to name a few.

Business Activity & New Orders Improve, Employment Subindex Falls

The gauge of U.S. service industries rose mostly on gains in business activity and new orders. Business expectations issued in November for the days ahead continue to be encouraging. The business activity index came in at 65.2, showing an increase of 2.7 percentage points from the October reading of 62.5. This showed an uptick in business activity for the 112th straight month.

(Source: Institute of Supply Management)

The index for new orders jumped to 62.5 in November from October’s reading 61.5. New orders, thus, increased for the 94th successive month. The pick-up in new orders suggests that the service sector is poised to gain traction in the coming months.

(Source: Institute of Supply Management)

Unlike expansion in new orders and business activities, companies lowered hiring in November as employers are struggling to find skilled workers. The non-manufacturing employment index came in at 58.4, below the October reading of 59.7.

But, market pundits ignored the overall drop in service industry employment last month. Instead, they pointed out that 14 out of the 17 industries still reported an increase in employment in November.

Top 5 Gainers

Given the promising developments in the service sector, investors may consider buying sound stocks from the said sector. We have, thus, selected five stocks that should make meaningful additions to your portfolio. These stocks flaunt a Zacks Rank #1 (Strong Buy) or 2 (Buy). The search was also narrowed down with a VGM Score of A or B. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three metrics. Such a score allows you to eliminate the negative aspects of stocks and select winners.

Shoe Carnival (NYSE:CCL), Inc. (NASDAQ:SCVL) operates as a family footwear retailer in the United States. The company currently has a Zacks Rank #1 and a VGM Score of A. The Zacks Consensus Estimate for earnings rose 10.2% in the past 60 days. The company’s expected earnings growth rate for the current year is 59.7% compared with the Retail - Apparel and Shoes industry’s projected rise of 10.8%.

BJ's Restaurants, Inc. (NASDAQ:BJRI) owns and operates casual dining restaurants in the United States. The company currently has a Zacks Rank #2 and a VGM Score of B. The Zacks Consensus Estimate for earnings rose 10.8% in the past 60 days. The company’s expected earnings growth rate for the current year is 66.8% compared with the Retail - Restaurants industry’s estimated rise of 10%.

Manning & Napier, Inc. (NYSE:MN) is a publicly-owned investment manager. The company currently has a Zacks Rank #2 and a VGM Score of B. The Zacks Consensus Estimate for earnings rose 14.3% in the past 60 days. The company’s expected earnings growth rate for the current quarter is 50% compared with the Financial - Investment Management industry’s projected decline of 7.8%. You can see the complete list of today’s Zacks #1 Rank stocks here.

CACI International Inc (NYSE:CACI) provides information solutions and services in North America. The company currently has a Zacks Rank #1 and a VGM Score of A. The Zacks Consensus Estimate for earnings rose 7.1% in the past 60 days. The company’s expected earnings growth rate for the current quarter is 13% compared with the Computer - Services industry’s estimated decline of 9.5%.

Boot Barn Holdings, Inc. (NYSE:BOOT) , a lifestyle retail chain, operates specialty retail stores in the United States. The company currently has a Zacks Rank #1 and a VGM Score of B. The Zacks Consensus Estimate for earnings rose 8.7% in the past 60 days. The company’s expected earnings growth rate for the current year is 78.6% compared with the Retail - Apparel and Shoes industry’s projected rise of 10.8%.

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