PREMIUM SEARCH Search by job title, geography and build a list of executive contacts
Now filling a position on S&P's Industry Momentum List: the S&P Human Resource & Employment Services subindustry index. This subindex consists of 13 large, mid- and small-cap companies engaged in executive search, temporary employment, and a wide range of other job-market related activities.
Investors have snapped up the shares recently. During 2005, this subindex advanced 14.5%, while the S&P 1500 advanced 3.8%. Year to date through March 27, 2006, it has risen 12.7%, while the overall market has gained 4.8%.
The rolling 12-month relative strength price chart (pictured below) demonstrates this recent outperformance. As a reminder, the jagged blue line represents the sub-industry index's rolling 52-week price performance as compared with the 52-week performance of the S&P 1500. Any point above 100 indicates market outperformance over the prior year, while points below 100 indicate market underperformance. The red line is a rolling 39-week moving average, while the two green bands indicate one standard deviation above and below the sub-industry index's 15-year mean relative strength.
PAYROLL RISE. To see if the fundamental outlook for this group matches its momentum, I checked with S&P equity analyst Michael Jaffe. His fundamental outlook for the group is positive. Jaffe notes that the labor market joined the U.S. economic recovery in early 2004, and while job growth since the summer of 2004 has been somewhat unsteady, S&P thinks a better economy will add more jobs in the months ahead.
After a long period of sluggishness, nonfarm payrolls have risen for 30 straight months since September, 2003 (under restated totals). After a soft start to the recovery, says Jaffe, the gains have been mostly solid but somewhat unsteady, with a couple of soft patches in the mix. In 2005, employment adds averaged 174,625 in the eight months through August. Hurt by the impact of Hurricane Katrina, the gains slowed to an average of 42,500 in the next two months, but then bounced back to an average of 228,000 workers added in November through February, 2006. Also, at 4.8% in February, 2006, the unemployment rate was near the lowest seen in more than four years.
When the nation sees an economic recovery, temporary-staffing companies have historically been the first to experience better demand. S&P thinks this occurs because outfits usually won't make permanent hires until they're more certain that an apparent business recovery will last. Demand for non-skilled temporary workers turned up during parts of the past two years, but now appears to be leveling off as full-time hiring seems to be rising. Also, white-collar hirings emerged over the past two years, although manufacturing employment, in S&P's view, has remained quite sluggish.
SUNNY FORECAST. Jaffe says the Human Resource & Employment Services index recently traded at 24 times S&P's earnings forecast for 2006. Although that valuation was at a more than 50% premium to the S&P 1500, he believes it's warranted by the strong growth S&P forecasts for the subindustry over the next couple of years. Given this forecast, and S&P's belief that the labor market has an extended period of growth in front of it, Jaffe thinks shares of companies of the subindustry will outperform the S&P 1500 over the next 12 months.
So there you have it. From both a fundamental and momentum standpoint, S&P believes the investment outlook for the S&P Employment Services group is favorable over the coming 12 months. Issues in this index with favorable S&P STARS include Robert Half (RHI; 5 STARS, strong buy; recent price, $39) and Korn/Ferry (KFY; 4 STARS, buy; $20). In S&P's coverage group, only Monster Worldwide (MNST; 2 STARS, sell; $49) has an unfavorable STARS ranking.
Source: Standard & Poor's
Subindustry
Computer & Electronics Retail
Construction & Engineering
Construction Materials
Diversified Metals & Mining
Human Resource & Employment Services
Multi-Sector Holdings
Oil & Gas Drilling
Oil & Gas Equipment & Services
Oil & Gas Refining & Marketing
Specialized Finance
Steel
Water Utilities
Glossary
S&P STARS: Since January 1, 1987, Standard & Poor's Equity Research Services has ranked a universe of common stocks based on a given stock's potential for future performance. Under proprietary STARS (STock Appreciation Ranking System), S&P equity analysts rank stocks according to their individual forecast of a stock's future capital appreciation potential versus the expected performance of a relevant benchmark (e.g., a regional index (S&P Asia 50 Index, S&P Europe 350 Index or S&P 500 Index), based on a 12-month time horizon. STARS was designed to meet the needs of investors looking to put their investment decisions in perspective.
S&P Earnings & Dividend Rank (also known as S&P Quality Rank): Growth and stability of earnings and dividends are deemed key elements in establishing S&P's earnings and dividend rankings for common stocks, which are designed to capsulize the nature of this record in a single symbol. It should be noted, however, that the process also takes into consideration certain adjustments and modifications deemed desirable in establishing such rankings. The final score for each stock is measured against a scoring matrix determined by analysis of the scores of a large and representative sample of stocks. The range of scores in the array of this sample has been aligned with the following ladder of rankings:
A+
Highest
B
Lower
A
High
C
Lowest
A-
Above Average
D
In Reorganization
B+
Average
NR
Not Ranked
B-
Below Average
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S&P Core Earnings: Standard & Poor's Core Earnings is a uniform methodology for calculating operating earnings, and focuses on a company's after-tax earnings generated from its principal businesses. Included in the Standard & Poor's definition are employee stock option grant expenses, pension costs, restructuring charges from ongoing operations, write-downs of depreciable or amortizable operating assets, purchased research and development, M&A related expenses and unrealized gains/losses from hedging activities. Excluded from the definition are pension gains, impairment of goodwill charges, gains or losses from asset sales, reversal of prior-year charges and provision from litigation or insurance settlements.
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Required Disclosures
In the U.S. As of December 31, 2005, research analysts at Standard & Poor's Equity Research Services U.S. have recommended 28.2% of issuers with buy recommendations, 61.3% with hold recommendations and 10.5% with sell recommendations.
In Europe As of December 31, 2005, research analysts at Standard & Poor's Equity Research Services Europe have recommended 33.8% of issuers with buy recommendations, 46.8% with hold recommendations and 19.4% with sell recommendations.
In Asia As of December 31, 2005, research analysts at Standard & Poor's Equity Research Services Asia have recommended 24.8% of issuers with buy recommendations, 53.1% with hold recommendations and 22.1% with sell recommendations.
Globally As of December 31, 2005, research analysts at Standard & Poor's Equity Research Services globally have recommended 28.7% of issuers with buy recommendations, 59.1% with hold recommendations and 12.2% with sell recommendations.
5-STARS (Strong Buy): Total return is expected to outperform the total return of a relevant benchmark, by a wide margin over the coming 12 months, with shares rising in price on an absolute basis. 4-STARS (Buy): Total return is expected to outperform the total return of a relevant benchmark over the coming 12 months, with shares rising in price on an absolute basis. 3-STARS (Hold): Total return is expected to closely approximate the total return of a relevant benchmark over the coming 12 months, with shares generally rising in price on an absolute basis. 2-STARS (Sell): Total return is expected to underperform the total return of a relevant benchmark over the coming 12 months, and the share price is not anticipated to show a gain. 1-STARS (Strong Sell): Total return is expected to underperform the total return of a relevant benchmark by a wide margin over the coming 12 months, with shares falling in price on an absolute basis.
Relevant benchmarks: in the U.S. the relevant benchmark is the S&P 500 Index, in Europe the S&P Europe 350 Index and in Asia the S&P Asia 50 Index.
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Stovall is chief investment strategist for Standard & Poor's Equity Research Services
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