3 Business Services Stocks Likely to Top Q3 Earnings

The U.S. economy is expected to continue its upward trajectory with a GDP growth in the vicinity of 3% in the third quarter of 2016, after a seasonally adjusted subdued 1% rise in the first half of the year. Allaying fears of a near-term recession, the domestic equity market gradually picked up steam buoyed by firm consumer spending, stronger exports and positive business investment.

Encouraging labor market data and rising oil prices have further raised hopes of a rate hike this year. However, uncertainties related to the approaching presidential elections have somewhat marred the euphoria.

The Positive Feelers

The upturn was led by positive economic data that showed a rapid improvement in the U.S. manufacturing activity in September, as the manufacturing index measured by the Institute for Supply Management increased to 51.5 from 49.4 in August.

On an average, there were 192,000 job additions per month in the third quarter. The unemployment rate rose marginally to 5% in September from 4.9% in the previous month due to a higher participation rate of 62.9% as more people looked for work - a clear indication that the economy is indeed improving.

Enjoying the fruits of a resurgent job market, low inflationary pressures and cheaper oil bills, consumer confidence remained strong. The Conference Board Consumer Confidence Index improved to 104.1 in September from 101.8 in August. Consumer spending, which accounts for over two-thirds of the U.S. economy, is expected to grow at an annualized rate of 3% for the year as the consumers remain cautiously optimistic.

The Markit Composite Purchasing Managers Index data improved to 52.3 in September from 51.0 in August. This represents a general uptrend in new business growth and a cautious spending pattern of clients.

As the companies take stock of the situation and deliberate on their future course of action, let us take a glimpse into how the third-quarter earnings is shaping up so far for the business services sector.

Business Services Sector Performance

About 17.4% of the total S&P 500 companies in the Business Services sector have reported their earnings results through Oct 19, 2016. With a 'beat ratio' of 100.0%, total earnings for these companies are up 17.4% year over year. Revenues increased 8.0% compared with the year-ago period, with a 'beat ratio' of 100.0%.

The entire Business Services sector is expected to perform far better than the overall index. The earnings growth expectation for the sector is 7.3% as against a decline of 1.0% for the S&P 500 index. (Read: Is the Earnings Improvement for Real? )

The primary growth drivers in this highly fragmented industry hinge on a healthy economy with decent prospects for job growth, higher disposable income and new business initiatives. An ideal mix of services, effective marketing strategies and ability to retain and attract new customers make the perfect recipe for profitability for most of these companies.

Given the forecast, it might be a good idea to zero in on a handful of Business Services stocks that are poised to beat earnings estimates this quarter. An earnings surprise should help these stocks outperform in the near term.

How to Pick?

The Business Services sector covers an array of services that include marketing, consulting, staffing, security, telecommunications, Internet services, logistics and waste handling. Amid a diverse range of companies in this arena, picking the right stock for your portfolio could appear to be a colossal task. An easy way to narrow down the list is to look at stocks that have a favorable Zacks Rank and a positive Earnings ESP with the help of the Zacks Stock Screener .

Earnings ESP is our proprietary methodology for determining which stocks have the best chance to surprise with their next earnings announcement. The Earnings ESP shows the percentage difference between the Most Accurate estimate and the Zacks Consensus Estimate.

The combination of a Zacks Rank #1 (Strong Buy) or #2 (Buy) or #3 (Hold) and a positive Earnings ESP is usually a harbinger of a likely earnings beat.

We have mentioned three Business Services stocks below which match these criteria, and thus may be potential winners this earnings season.

Social Reality, Inc. ( SRAX ): Headquartered in Los Angeles, CA, Social Reality is an Internet advertising firm that provides tools to automate the digital advertising market.

Social Reality has a long-term earnings growth expectation of 15%. The company currently sports a Zacks Rank #1 along with an Earnings ESP of +13.04%. You can see the complete list of today's Zacks #1 Rank stocks here . The company is expected to report its results on Nov 21.

S&P Global, Inc. ( SPGI ): S&P Global, formerly known as McGraw-Hill Financial, is the provider of financial information, and the owner of one of the top credit rating agencies (Standard & Poor's). The company primarily focuses on capital and commodities markets and includes iconic brands like S&P Ratings, S&P Capital IQ, S&P Indices and Platts.

This Zacks Rank #2 stock has a long-term earnings growth expectation of 12.4% and an Earnings ESP of +2.99%. The company is scheduled to report its results before the opening bell on Nov 3.

MasterCard Incorporated ( MA ): Founded in 1966 and headquartered in Purchase, NY, MasterCard is a leading global payment solutions firm that provides an array of services in support of the credit, debit, mobile, web-based and contactless payments, and other related electronic payment programs to financial institutions and other entities in more than 150 currencies from approximately 210 countries.

The company has a long-term earnings growth expectation of 15.5% and a forward PE of 28.2x. MasterCard currently carries a Zacks Rank #2 along with an Earnings ESP of +1.02%. The company is slated to report its results before the opening bell on Oct 28.

Moving Forward

As the U.S. stocks appear to gain ground with an improving economy, a sneak peek at some possible outperformers backed by a solid Zacks Rank and a positive Earnings ESP could be a great idea for investors to gain from this earnings season.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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