Economic activity in the non-manufacturing sector continued to grow at a solid pace in February despite the employment gauge seeing the steepest one-month fall since 2014. In fact, the scaling of the new order index to its highest level since 2005 and a measure of business activity touching an almost one-year high pointed to underlying strength. Thus, investing in service-oriented companies at this moment seems judicious.
Service Sector Grows Near Fastest Pace in a Decade
U.S. services sector expanded in February near the fastest pace in at least 10 years, per the Institute for Supply Management (ISM). The non-manufacturing index (NMI) came in at 59.5 in February, topping analysts' estimates of 58.4. It was also more than a 57 average for all of 2017.
The non-manufacturing sector saw uninterrupted expansion for the 97th consecutive month and indicated that the broader economy is on track for steady growth this year. After all, the non-manufacturing sector accounts for nearly 90% of the economy, while any reading above 50 indicates that the said sector is expanding.
Notably, 16 of the 18 industries reported expansion, mostly led by education services, transportation and warehousing, utilities, real estate, finance & insurance, healthcare, construction, mining, retail trade, agriculture and information.
Lest we forget, a NMI reading above 49% indicates an expansion of the broader economy. The economy has expanded at a rate of 2.3% for all of 2017 following a meager 1.5% in 2016. The growth topped the 2.2% average of the last eight-and-a-half-year long recovery (read more: 5 Winning Stocks for Best Stretch of Growth Since '09 ).
New Orders Hit 12-1/2-Year High, Business Activity Rises
The index for new orders jumped to 64.8 in February from the January reading of 62.7, scaling a 12-year peak. New orders, thus, increased for the 85th successive month. The pick-up in new orders suggests that the service sector is poised to gain traction in the coming months.
Business expectations issued in February for the days ahead continue to be encouraging. The business activity index came in at 62.8, showing an increase of 3 percentage points from the January reading of 59.8. This showed an uptick in business activity for the 103rd consecutive month.
The business outlook is looking up largely buoyed by the recent tax breaks. The Republican tax plan slashed the corporate tax rate from 35% to 21%, while any income brought back from overseas is taxed 8% to 15.5%, instead of the earlier 35% (read more: GOP Passes Landmark Tax Bill: Best & Worst for Stocks ).
Employment Subindex Falls From Record Highs
Unlike expansion in new orders and business activities, companies lowered hiring in February. The non-manufacturing employment index came in at 55, below the January reading of 61.6.
But, market pundits ignored the drop in service industry employment last month, citing that January's rise had pushed the index to unsustainable levels. Instead, they expect solid jobs growth for February.
The Labor Department is expected to release February's employment report on Mar 9. Most of the economists expect a healthy rise in job growth of 200,000, matching January's job addition.
Top 5 Gainers
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 should make meaningful additions to your portfolio. These stocks flaunt a Zacks Rank #1 (Strong Buy) or 2 (Buy). The search was also narrowed down with a VGM Score of A or B. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three metrics. Such a score allows you to eliminate the negative aspects of stocks and select winners.
Burlington Stores, Inc.BURL operates as a retailer of branded apparel products in the United States. The company offers fashion-focused merchandise. Burlington Stores has a Zacks Rank #2 and a VGM Score of B. The Zacks Consensus Estimate for its current-year earnings rose 0.2% in the last 90 days. The stock's expected growth rate for the current year is 32.1% versus the industry 's projected rally of 15.1%. Burlington Stores has outperformed the broader industry in the past year (+27% vs. +18.3%).
Legg Mason, Inc.LM provides investment management and related services. The stock has a Zacks Rank #2 and a VGM Score of B. The Zacks Consensus Estimate for its current-year earnings soared 26.3% in the last 90 days. The company's expected growth rate for the current year is 9.9% compared with the industry 's projected rally of 9.3%. Legg Mason has posted a solid return of 7.7% in a year's time.
AMN Healthcare Services, Inc.AMN provides healthcare workforce solutions and staffing services in the United States. The company has a Zacks Rank #2 and a VGM Score of A. The Zacks Consensus Estimate for its current-year earnings rose 19.9% in the last 90 days. The stock's expected growth rate for the current year is 26.9% versus the industry 's projected rally of 23.9%. AMN Healthcare Services has outperformed the broader industry in the past year (+39.4% vs. +3.9%). You can see the complete list of today's Zacks #1 Rank stocks here.
Schneider National IncSNDR - a Zacks Rank #1 company - is a provider of transportation, logistics and related services. The stock has a VGM Score of B. The Zacks Consensus Estimate for its current-year earnings jumped 22.8% in the last 90 days. The company's expected growth rate for the current year is 48.9% versus the industry 's estimated rally of 15.3%. Schneider National has outperformed the broader industry in the past one-year period (+34.7% vs. +0.6%).
CBRE Group, Inc.CBG operates as a commercial real estate services and investment company. The stock has a Zacks Rank #2 and a VGM Score of B. The Zacks Consensus Estimate for its current-year earnings increased nearly 8% in the last 90 days. The company's expected growth rate for the current year is almost 10%, in contrast to the industry 's projected decline of 7.4%. CBRE Group has outperformed the broader industry in the past year (+30.1% vs. +4.9%).
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