The New York Times recently reported on the popularity of temporary workers, as businesses seek to control costs in the face of a growing economy. Sure, the US economy is hardly doing well, but it is growing slowly.
The challenge for the Obama administration and the nation as a whole is the unemployment rate, which hovers around 10%, high by virtually any measure (except, perhaps, the depths of the Great Depression). What The Times reported on, was the reluctance of employers to hire full-time workers. Typically, when a recession ends, employers rely on temporary workers for a few months. As the recovery takes hold and business managers and owners feel more confident about their economic prospects, they then shift to hiring permanent help.
This shift has not yet occurred. In fact, the use of temporary workers is part of a larger trend. Companies are using consultants and outsourcing services for similar reasons as their reliance on temps-- they are looking to contain costs by minimizing overhead expenses while still allowing the business to grow with the economy.
For this reason, I screened for the stocks of services companies that seem well positioned to take advantage of businesses' desire to control costs. Of course, they must also earn a passing grade from the Guru Strategies I use to choose stocks. These are computerized strategies based on the investment approaches of well-known investors.
I found that the strategy I base on the writings of Peter Lynch, a giant among mutual fund managers, is the strategy that really likes these companies at this time. It is worth noting that the Lynch strategy, since I began following it in mid-2003, is up 9.5% versus a gain of 1.7% for the S&P 500. Year-to-date, the Lynch portfolio is up an impressive 45.5%, nearly double the S&P 500's 23.3%. This is a strategy worth listening to, and here are four companies it gives high marks to.
One such company is Administaff (ASF). Administaff provides a wide variety of human resource services to small and medium-sized companies, including screening and hiring employees, employee records management, and providing health and retirement benefit plans. Administaff can provide small or medium-sized companies with human resource services comparable to those of large companies.
The Guru Strategy I base on the writings of Peter Lynch gives Administaff high grades. This strategy is best known for the P/E/G ratio, which brings together the price-to-earnings ratio with the company's growth rate, and is a measure of how much the investor is paying for growth. You do not want the P/E/G to be more than 1.0. Administaff's P/E is 20.9 and its growth rate is 22.9%, based on the average of its three, four and five year historical EPS growth rates. This produces an acceptable P/E/G of 0.91. Another important plus is Administaff's low debt. More precisely, it has no debt, which is considered very favorably by the Lynch strategy.
AECOM Technology (ACM) provides a variety of technical and management support services, including managing and designing large construction projects and overseeing maintenance facilities. Using its average three, four and five year historical EPS growth rate of 22.57% and its P/E of 16.02, the company enjoys a desirable P/E/G of 0.71. Also, debt is a low 9.9% of equity, which is another important plus.
Automated Data Processing (ADP), commonly referred to by its initials, is a classic outsourcing firm. It provides outsourced human resources services to companies. Its best known service is payroll, where it does all the services required of payrolls, including paying employees, withholding taxes and paying them to the government, and other related services. ADP's three, four and five year historical EPS growth rate is 17.47%. Companies whose growth rate falls between 10% and 19% are analyzed using a yield-adjusted P/E/G, and ADP's such P/E/G is a strong 0.78. Plus, debt is close to zero, which is also favorable.
The last company I will report on is Forrester Research (FORR), which provides technology and research consulting services. Using the three, four and five year EPS growth rates, Forrester is a fast grower at 48.23%. Coupled with its P/E of 26.4, the company's P/E/G is an impressive 0.55. And like all of these service companies, debt is a non-issue (the company has no debt).
All of these companies provide services which enjoy high demand. They are also all well positioned in their segments of the services industry and, of course, they earn accolades from the Lynch strategy. Any of these companies should help you get your portfolio off to a good start with the new year.
Published by Globes [online], Israel business news - www.globes-online.com - on December 31, 2009