The Business Services sector had an eventful 2014 as global and domestic events continued to sway its fortunes. While the equity market performance by the broader sector remained impressive throughout the year, overall sector growth seemed to have run out of steam in the second half.
The Finance, Real Estate and Business Service sectors account for the largest share of the entire U.S. Services sector. Consequently, a decline in the growth momentum of the Business Services sector is bound to have a tell-tale effect on the Services sector that accounts for nearly 80% of the country’s GDP. Let us have a quick recap of the various events in the sector that provide ancillary services to other players in the market.
The Business Services Sector: 2014 at a Glance
The Business Services sector reported year-over-year earnings growth of 9.7%, 10.0% and 11.3% in the first three quarters of 2014, which was much higher than the respective performances of the S&P 500 index at 1.5%, 8.3% and 6.9%.
This highly labor intensive sector contributed significantly to the job growth of the country as the unemployment rate and the number of unemployed persons in 2014 were down by 1.2 percentage points and 1.7 million, respectively. Latest employment data shows that total non-farm payroll employment rose by 321,000 in November, compared with an average monthly gain of 224,000 over the prior 12 months.
The Business Services sector leads the pack for the highest job additions with 86,000 jobs added in November, compared with an average gain of 57,000 per month over the prior 12 month-period.
However, data from the seasonally adjusted Markit Flash U.S. Services PMI Business Activity Index indicates that the sector growth has been going downhill for the fifth month in a row. From a high of 61 in June (a reading of above 50 denotes expansion), it has declined to 56 in November – reflecting a moderation in new business gains.
Much of this downfall is attributable to a parallel fall in oil prices since June. Although the current decline in oil prices is primarily related to an over-supply from non-OPEC countries, the 12-member OPEC has decided to keep its output target unchanged. Oil prices are expected to gradually rise to optimum market levels within the next two years. Until then, it is likely to lead to volatility in various sectors, including the Business Services sector.
Industry Rank of the Sector
In order to hedge against this unpredictable market, we leverage on indigenous Zacks methodology and utilize two underlying metrics to determine individual sector dynamics and priceless stocks therein. These are the Zacks Industry Rank and Zacks Rank.
Within the Zacks Industry classification, we have divided the business world into 16 sectors comprising 60 industries (at the medium or M-level) and 260 industries at the expanded or X-level. We rank all 260 plus X-level industries in the 16 sectors based on the earnings outlook for the constituent companies in each industry.
We have 8 X-level industries within the Business Services sector, namely, Auction/Valuation Services, Business Information Services, Business Services, Consulting, Financial Transaction Services, Outsourcing, Staffing and Waste Removal Services. As a guideline, the outlook for industries with Zacks Industry Rank #88 and lower is 'Positive,' between #89 and #176 is 'Neutral' and #177 and higher is 'Negative.'
Staffing at Zacks Industry Rank #34, Consulting at #52, Financial Transaction Services at #65 and Business Information Services at #70 falls in the upper 1/3 of all Zacks industries and has a positive outlook.
Auction/Valuation Services at Zacks Industry Rank #114, Outsourcing at #157 and Waste Removal Services at #167 are positioned in the mid 1/3 of all Zacks industries and have a neutral outlook. With Zacks Industry Rank #204, Business Services falls in the lower 1/3 of all Zacks industries and has a negative outlook.
This distribution of industry ranks within the Business Services sector shows that the overall sector is skewed towards a positive or neutral outlook.
Top 3 Sector Performers
Amid such strong industry fundamentals, we provide you a handful of top-performing Business Services stocks in 2014 based on solid Zacks Industry Rank, individual Zacks Rank, year-to-date share price return and healthy earnings surprise history. Let’s take a closer look at these companies that appear to be well positioned to benefit from the solid sector dynamics.
CTPartners Executive Search Inc. (CTP): Based in New York, this Zacks Rank #1 (Strong Buy) stock offers advisory and executive recruiting services to global clients across diversified industries.
With a market cap of $109.78 million, CTPartners belongs to the Staffing Industry that carries a Zacks Industry Rank #34. The company had an average earnings surprise of 26.28% in the last four trailing quarters. Generating a stellar year-to-date return of 169.64%, CTPartners surely leads the pack of the top-performing Business Services stocks in the year.
Fidelity National Information Services, Inc. (FIS): Headquartered in Jacksonville, FL, this Zacks Rank #2 (Buy) stock is reportedly the largest provider of banking and payments technology solutions in the world, serving over 14,000 institutions across 110 countries.
Fidelity National belongs to the Financial Transaction Services Industry that carries a Zacks Industry Rank #65. This $17.07-billion-market-cap-holding company had an average earnings surprise of 13.99% in the last four trailing quarters. Fidelity National has an impressive share price return of 12.07% so far this year.
Gartner Inc. (IT): Headquartered in Stamford, CT, Gartner is one of the premier information technology research and advisory firms in the world that helps its clients in informed decision-making process.
This Zacks Rank #2 (Buy) stock has a market cap of $7.30 billion and belongs to the Consulting Industry that carries a Zacks Industry Rank #52. Gartner reported an average earnings surprise of 12.04% in the last four trailing quarters and has a healthy year-to-date share price return of 16.78%.
Moving Forward
Although past performances are not guarantees for similar results in the coming year, these stocks (by virtue of favorable Zacks Industry Ranks) are expected to continue their growth momentum in 2015 as well. Consequently, it is worth a risk to own such tried-and-tested stocks than bet on seemingly unknown non-performers.
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