Throughout the second half of 2011, many (if not most) pundits
and prognosticators have been waiting for the European debt crisis
to spread across the Atlantic Ocean and topple the U.S. economic
recovery. But over the past several weeks, a funny thing has
happened on the way to another recession: The economy has actually
picked up, and the job market has made its most significant
improvement in nearly a year.
The four-week average of new claims for unemployment has fallen
to its lowest level since June 2008, according to new Labor
Department data. Continuing claims, meanwhile, have fallen to
levels not seen since September 2008, when the Lehman Brothers
collapse sparked the financial crisis. Both new and continuing
claims for unemployment are now close to half of what they were
during the height of the Great Recession. And in November, the
unemployment rate dropped nearly half of a percentage point to
8.6%, the lowest it's been since March 2009.
Doubters say that the dip in the unemployment rate may be due to
people dropping out of the workforce, in part because they've
exhausted their benefits. But the so-called "U-6" unemployment
rate, which also includes those who want a job but have given up
looking for one, has also fallen significantly in the past two
months. And, according to a July 2011 report from the Federal
Reserve Bank of Chicago, unemployment "exhaustions will have a
limited and diminishing effect on the unemployment rate in coming
months". Final payments for the regular 26-week unemployment
program peaked in August 2009, the study's authors explained, and
"even if all 26-week exhausters qualified for the maximum
additional 73 weeks, they would have exhausted benefits around
Whether it's because government stimulus policies have finally
had enough time to course through the economy's veins, because the
scars of the 2008 financial crash are at last beginning to fade, or
some other reason, the employment numbers have been particularly
heartening. And, if European leaders can come together to quell the
continuing concerns about that continent's crisis, businesses may
become even more willing to invest in new employees.
An improving labor market doesn't just help the average
American; it can also help the prospects of companies in the
business services arena. Companies that make employee uniforms,
provide office supplies to businesses, or provide IT services --
these types of companies stand to benefit as companies increase
With that in mind, I recently used my Guru Strategies (each of
which is based on the approach of a different investing great) to
see if any business services stocks look attractive right now. I
found a number that fit the bill. Here are some of the best of the
bunch. (Several of them are smaller stocks, so keep in mind that
they may be subject to more volatility than larger stocks.)
UniFirst Corporation (
This Massachusetts-based firm provides employee uniforms and
protective clothing. It also offers floorcare and other
facility-related services and products to businesses, serving over
240,000 customer locations from Canada, the U.S., and Europe.
UniFirst also runs nuclear decontamination facilities, laundry
operations, and product distribution centers.
UniFirst ($1.1 billion market cap) gets strong interest from the
strategy I base on the writings of the late, great Benjamin Graham.
Graham was known as "The Father of Value Investing", and was a very
conservative investor. The strategy thus targets firms with current
ratios of at least 2.0 and long-term debt that is no greater than
net current assets. With a current ratio of 2.59, and $242 million
in net current assets versus just $100 million in long-term debt,
UniFirst makes the grade.
Of course, value was very important Graham, and this strategy
looks at both the price/earnings ratio and price/book ratio.
UniFirst's P/E of 14.8 comes in just below the model's upper limit
of 15, and its P/B ratio of 1.4 also passes muster.
Deluxe Corporation (
Minnesota-based Deluxe provides a wide array of services and
products to small businesses and financial firms, ranging from
checks to retail packaging supplies to payroll processing services.
It has about 4 million small business customers, and has taken in
about $1.4 billion in sales in the past year.
Deluxe ($1.1 billion market cap) gets strong interest from my
Joel Greenblatt-based model. Greenblatt found that a remarkably
simple, two-variable approach that examined return on capital and
earnings yield could trounce the market over the long haul. With an
earnings yield of 13.3% and a 122.9% return on capital, Deluxe
makes the grade.
Syntel, Inc. (
This I/T firm is based in Troy, Mich., and gets most of its
revenues from North American sources, though most of its employees
are located in India.
Syntel ($2 billion market cap) gets high marks from my Warren
Buffett-inspired model. A few reasons: The firm has upped EPS in
all but two years of the past decade, has no long-term debt, and is
averaging a 26.7% return on equity over the past ten years, a sign
of the "durable competitive advantage" Buffett is known to seek in
his buys. It also gets strong interest from my Peter Lynch-based
model, which considers it a "fast-grower" -- Lynch's favorite type
of investment -- thanks to its 24.2% long-term earnings per share
growth rate. (I use an average of the three-, four-, and five-year
growth rates to determine a long-term rate.) Lynch famously used
the P/E/Growth ratio to find bargain-priced growth stocks, and when
we divide Syntel's 17.9 P/E by that long-term growth rate, we get a
P/E/G of 0.74. That comes in under this model's 1.0 upper limit, a
Lynch also liked conservatively financed firms, and you can't do
better than Syntel's 0% debt/equity ratio.
Tech Data Corporation (
With more than $26 billion in sales over the past year, this
Florida-based firm is one of the largest wholesale I/T distributors
in the world. It has a market cap of about $2.1 billion.
Tech Data gets strong interest from two of my models. My
Lynch-based strategy likes its impressive 47.3% long-term EPS
growth rate and 9.9 P/E, which make for a PEG of just 0.21. This
strategy gives a bonus to firms that have a net cash/price ratio
above 30% (net cash is cash and marketable securities minus long
term debt); at 36.3%, Tech Data achieves this very difficult
My James O'Shaughnessy-based growth model also likes Tech Data.
A few reasons: The firm has upped EPS in each year of the past
five-year period; it has good momentum, with a one-year relative
strength of 82; and it has a dirt cheap price/sales ratio of
Canon Inc. (
Canon is based in Japan, but does a significant portion of its
business in the U.S. The $58-billion-market-cap firm specializes in
digital imaging products and services, including many common office
products like printers, scanners, fax machines, and projectors. It
also makes an array of products for consumers, including its famous
cameras and camcorders.
Canon gets strong interest from my O'Shaughnessy-based value
model, which looks for large companies with strong cash flows and
high dividend yields. Canon certainly has the size, and it's
generating $4.90 in cash flow per share, more than three times the
market average. Plus, it comes with a 3.6% dividend yield.
I'm long UNF and TECD.