by Dan Burrows | January 13, 2014 1:28 pm
Staffing stocks shrugged off last week’s shockingly bad December jobs report, but if labor-market weakness proves to be more than a blip, staffing stocks could get slammed.
Staffing stocks like Manpower Group (MAN), Robert Half International (RHI) and Kelly Services (KELYA) have put up market-beating to market-crushing gains over the last year, boosted by accelerating strength in the job market.
MAN stock is up 86% during the past 52 weeks, vs. a 25% gain for the S&P 500. KELYA is up 55% over the same span, while RHI stock has gained 26%.
But the latest jobs figures — and worrisome underlying weakness — put further outperformance on the part of staffing stocks very much in question.
For now, the terrible December reading on the labor market is being chalked up to unusually frigid weather, among other transitory factors. Maybe that will prove to be the case. You can bet that anyone investing in staffing stocks sure hopes so.
After several consecutive periods of adding at least 200,000 new jobs a month, December saw the addition of just 74,000 positions, well below forecasts for at least 197,000 new jobs.
More disturbing — especially for staffing stocks — was the labor participation rate. Indeed, the unemployment rate dropped only because more people dropped out of the labor force. At 62.8%, the participation rate hit a low equivalent to that of 1978. The number of people not in the labor force expanded by 535,000 to a record 92 million.
If the weakness in the job market is temporary, many of those people will be lured back into the job hunt — a nice tailwind for staffing stocks. That’s the bullish argument, and it better pan out, because given the run-up and stretched valuations in staffing stocks, these names need all the growth they can get.
MAN stock looks like it has the most to lose among staffing stocks. Not only has MAN stock jumped 85% in a year — the best performance among the sector’s major stocks — it’s up 260% since the bear-market low of March 2009. (The S&P 500 is up 172% over the same period.)
Furthermore, MAN stock looks pricey, trading at a forward price-to-earnings ratio of 22. That means the market is counting on robust growth, which won’t happen if the labor market continues to sour. The hot run, outsized valuation and sensitivity to the muddle-through recovery could deflate this staffing stock fast.
The same can be said for RHI stock and KELYA.
RHI stock is up 55% for the last year and 187% since the market low. Like MAN stock, RHI and other staffing stocks have been trading on a jobs recovery that now looks to be in jeopardy. RHI stock has a pricey forward P/E of nearly 20. It needs to grow into that valuation — a risky bet if December’s jobs numbers are more than a one-off.
KELYA stock doesn’t look nearly as pricey as MAN or RHI, but it too needs plenty of growth to maintain its price trajectory. With a forward P/E of 16, Kelly Services is cheap relative to the staffing sector, but with a long-term growth rate of just 10%, it can hardly be called a big bargain. KELYA stock also has the biggest run since the bear-market bottom, rising an incomparable 292%.
The December jobs report is subject to two rounds of revisions, and it’s likely that bad weather really did distort the figures. The trend remains one of an improving labor market.
But if we get another ugly report next month, the market will almost certainly punish staffing stocks.
It might be time to lock in any profits in the staffing stocks while you still can.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
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