Over the past several decades, America has shifted consistently
and dramatically toward being a service-dominated economy. Fifty
years ago, 59% of U.S. private jobs came from the service sector,
with 41% from the goods-producing sector; by 1981, the gap had
grown to 67.8% for the service sector vs. 32.2% for the
goods-producing sector; by 1991, it had shifted even further, with
about 75% of U.S. jobs coming from service sector and 25% from the
goods-producing sector.
Today, 83.4% of America's private jobs are service-oriented. We
rely less on people buying our cars and appliances and clothing
made in America, and more on people using our cable, phone, and
Internet services; shopping at stores that sell goods made
elsewhere; using healthcare services like doctors and nursing homes
and rehabilitation centers; and needing transportation services to
move products imported from other countries.
That means service-type companies, and the service sector as a
whole, have become the real bellwethers of U.S. economic activity.
And lately, if you listen to the pundits, you'd think that the
service sector is in dire straits, with fears of another recession
-- or worse -- having dominated the headlines for the past couple
months.
But guess what? The real, hard data from the service sector
hasn't been that bad. In fact, some of it has been downright good.
According to the Institute for Supply Management, the service
sector has expanded for 21 straight months. And in August -- a
month when fear seemed to be everywhere -- the sector not only
expanded, but did so at a faster pace than it did in July.
Of course, the service sector depends quite a bit on the U.S.
consumer -- and, for more than two years now, we've been hearing
how the U.S. consumer is overleveraged and tapped out. Fortunately,
the data doesn't support that notion. The latest retail and food
service sales figures were flat in August, but year-to-date they
are more than 8% ahead of last year's pace. And here's something
few commentators are mentioning: Americans' "financial obligations
ratio" -- that is, their amount of debt as a percentage of
disposable income -- was 18.85% in the third quarter of 2007, right
before the "Great Recession" began. The Federal Reserve's web site
has data going back to 1980, and that was the highest level on
record. But by last quarter, the figure had fallen to 16.39% -- the
lowest level since the fourth quarter of 1993.
Of course, none of that seems to matter to most investors right
now. They've been overwhelmed by European debt and double-dip
recession hype. And that's created a lot of bargains among shares
of strong service sector companies. Recently I used my Guru
Strategies -- each of which is based on the approach of a different
investing great -- to find some of the most attractive. Here are
some of the best of the bunch.
AT&T Inc. (
T
):
This Dallas-based telecom giant ($165 billion market cap) was
already one of the largest companies in the world before its recent
purchase of T-Mobile, which would make it the largest wireless
company in the U.S. The deal may fall through under regulatory
scrutiny, but AT&T is still a power, having taken in $126
billion in sales in the past year.
That size is part of why my James O'Shaughnessy-based value
model likes AT&T. Two more reasons: AT&T is producing $6.55
in cash flow per share, nearly five times the market mean ($1.33),
and it's paying a 6.1% dividend yield.
MarketAxess Holdings Inc. (
MKTX
):
New York City-based MarketAxess operates an electronic trading
platform that lets investment industry professionals trade
corporate bonds and other fixed-income instruments. It has a $1
billion market cap.
MarketAxess gets high marks from my Peter Lynch-inspired
strategy, which considers the stock a "fast-grower" -- Lynch's
favorite type of investment -- thanks to its 38.7% long-term
earnings-per-share growth rate. (I use an average of the three-,
four-, and five-year EPS growth rates to determine a long-term
rate.) Lynch famously used the P/E/Growth ratio to find
bargain-priced growth stocks. When we divide MarketAxess's 25.1
price/earnings ratio by that long-term growth rate, we get a P/E/G
of 0.65, which easily comes in under the model's 1.0 upper
limit.
MarketAxess also gets solid marks from the small-cap growth
approach that I base on the writings of Motley Fool creators Tom
and David Gardner. This approach has been my best performer since
its inception more than eight years ago, generating annualized
returns of nearly 15%. It likes MarketAxess' strong and improving
profit margins, which reached 21.5% this year. It also likes the
stock's 91 relative strength, and its strong recent growth --
earnings grew 66.7% in the most recent quarter while sales grew
29.6% (vs. the year-ago quarter).
LHC Group, Inc. (
LHCG
):
Louisiana-based LHC offers home health, hospice, private duty and
long-term acute care service to the elderly and other homebound
patients. I wrote about this small-cap ($300 million) about six
months ago, and, like many other companies in its industry, it's
been hit hard since. But two of my top-performing models think it's
being treated unfairly.
One is my Benjamin Graham-inspired model. Graham, known as the
"Father of Value Investing", was a very conservative investor, and
this approach looks for companies with good liquidity (current
ratio of at least 2.0) and a strong balance sheet (long-term debt
should not exceed net current assets). LHC has a 2.4 current ratio,
and about $70 million in net current assets vs. zero long-term
debt. It also trades for just 7.2 times three-year average
earnings, and just 1.03 times book value.
My Joel Greenblatt-based model also likes LHC, thanks to its
27.5% earnings yield and 80.5% return on capital. Together, those
figures make LHC the 5th-most-attractive stock in the market,
according to the Greenblatt-based approach.
Dollar Tree, Inc. (
DLTR
):
Based in Virginia, Dollar Tree's stores offer a wide variety of
discount merchandise, ranging from food items to household goods to
toys to yard-care products. It has a market cap of about $9
billion, and has taken in more than $6 billion in sales in the past
year.
Dollar Tree gets strong interest from my Lynch-based model,
thanks to its 26.7% long-term EPS growth rate and 0.77 P/E/G ratio.
My O'Shaughnessy-based growth approach also likes the stock. It
looks for firms that have upped EPS in each year of the past
half-decade (which Dollar Tree has done), and which have high
relative strengths and low price/sales ratios. Dollar Tree (92
relative strength) fits the bill, though its 1.45 P/S ratio just
makes the grade.
Advance Auto Parts (
AAP
):
Virginia-based Advance Auto ($4.4 billion market cap) is an
aftermarket retailer of auto parts. It has more than 3,500 stores
across 39 states and some U.S. territories.
Like Dollar Tree, Advance Auto is a favorite of my O'Shaughnessy
growth- and Lynch-based models. The O'Shaughnessy approach likes
its history of increasing EPS (it's done so each year of the past
decade) and 0.72 price/sales ratio. The Lynch approach, meanwhile,
considers the it a "stalwart" -- the type of steady, solid firm
that Lynch found holds up well in downturns -- because of its $6
billion in annual sales and moderate 16.4% long-term growth rate.
It likes Advance Auto's 0.79 P/E/G ratio, a sign the stock is
selling on the cheap.
I'm long T, MKTX, LHCG, and DLTR.