Service Side of US Economy is Up and Running: 5 Top Picks

Economic activity in the non-manufacturing sector expanded in July for the second month in a row, indicating that the broader economy is buoyant even after the fresh spike in coronavirus cases compelled many states to reimpose restrictions. Activity in the services sector, where most Americans work, hit a 17-month high in July.  What’s more, increase in the new order index and improving measure of business activity pointed to underlying strength. Thus, investing in service-oriented companies at this moment seems judicious.

U.S. Service Sector Humming

According to the Institute for Supply Management (ISM), the non-manufacturing index (NMI) came in at 58.1% in July, topping analysts’ estimate of 55%. It was also higher than the June reading of 57.1%.  The non-manufacturing sector, thus, saw growth for the second straight month after contraction in April and May, preceded by a 122-month of uninterrupted expansion.  It’s worth pointing out that the non-manufacturing sector accounts for nearly 90% of the economy, while any reading above 50 indicates that the said sector is expanding. Lest we forget, an NMI reading above 48.5% indicates expansion of the broader economy.  Anthony Nieves, Chair of the ISM Services Business Survey Committee, said that “the past relationship between the Services Index and the overall economy indicates that the Services Index for July (58.1 percent) corresponds to a 3.3-percent increase in real gross domestic product on an annualized basis.”

New Orders, Business Activity Rise

The index for new orders jumped to 67.7% in July, an increase of 6.1 percentage points from the June reading of 61.6%. New orders, thus, increased for the second consecutive month after contraction in April and May, preceded by a 128-month stretch of continuous expansion. The pick-up in new orders suggests that the service sector is poised to gain in the coming months. Business expectations issued in July continue to be encouraging. The business activity index came in at 67.2%, showing an increase of 1.2 percentage points from the June reading of 66%. This showed an uptick in business activity for the second straight month as well.  And respondents from the 14 industries that reported an uptick in business activity for the month of July stated that “more stores opened” last month and “most areas have lightened restrictions, and work is being released for completion.” However, some companies laid off workers in states such as California, where business restrictions were imposed to curb the spread of coronavirus. Thus, the employment gauge slipped to 42.1% from 43.1%. Nonetheless, Nieves confirmed that business houses are “mostly optimistic about business conditions and the economy as businesses continue to reopen.”

5 Solid Buys

Given the promising developments in the service sector, investors may consider buying sound stocks from the said sector. We have, thus, selected five stocks that might make meaningful additions to your portfolio. These stocks flaunt a Zacks Rank #1 (Strong Buy) or 2 (Buy). Houghton Mifflin Harcourt Company HMHC is the provider of education solutions, delivering content, technology, services and media to students. The company currently has a Zacks Rank #2. The Zacks Consensus Estimate for its current-year earnings has moved up 0.3% over the past 60 days. The company’s expected earnings growth rate for the current year is 139.4%. CoreLogic, Inc. CLGX is a leading provider of property information, analytics, and data-enabled software platforms and services. The company currently has a Zacks Rank #1. The Zacks Consensus Estimate for its current-year earnings has risen 27.2% over the past 60 days. The company’s expected earnings growth rate for the current year is 29%. FTI Consulting, Inc. FCN is a business advisory firm aimed at helping organizations manage change, mitigate risk and resolve financial, legal, operational, political and regulatory, reputational and transactional disputes. The company currently has a Zacks Rank #2. The Zacks Consensus Estimate for its current-year earnings has moved 1.3% north over the past 60 days. The company’s expected earnings growth rate for the next year is 17.7%. You can see the complete list of today’s Zacks #1 Rank stocks here. Artisan Partners Asset Management Inc. APAM is an independent investment management firm that provides a broad range of U.S., non-U.S. and global equity investment strategies. The company currently has a Zacks Rank #1. The Zacks Consensus Estimate for its current-year earnings moved 27.2% up over the past 60 days. The company’s expected earnings growth rate for the current year is 12%. Medpace Holdings, Inc. MEDP provides Phase I-IV clinical development services to the biotechnology, pharmaceutical and medical device industries. The company currently has a Zacks Rank #1. The Zacks Consensus Estimate for its current-year earnings has advanced 82.8% over the past 60 days. The company’s expected earnings growth rate for the current year is 30.1%.

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