Business Service Stocks for the Economic Recovery

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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 January 2011."

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 their payrolls.

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 ( UNF ): 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 ( DLX ): 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. ( SYNT ): 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 good sign.

Lynch also liked conservatively financed firms, and you can't do better than Syntel's 0% debt/equity ratio.

Tech Data Corporation ( TECD ): 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 target.

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 0.08.

Canon Inc. ( CAJ ): 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.

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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