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5 Solid Buys From the U.S. Service Sector Boom

Tirthankar Chakraborty

Economic activity in the non-manufacturing sector increased at a solid pace in January. In fact, services side of the economy expanded at the fastest pace since last summer. In fact, the 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 55.5 in January, topping analysts’ estimate of 55. It was also higher than the December reading of 54.9. Notably, all 12 non-manufacturing industries reported expansion, led by hospitals, retailers and restaurants.

The non-manufacturing sector, thus, saw uninterrupted expansion for the 120th 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.

Lest we forget, an NMI reading above 49% indicates expansion of the broader economy. The U.S. economy grew at a seasonally adjusted annual rate of 2.1% in the fourth quarter of 2019, matching the pace of the previous three months.

New Orders, Business Activity Rise

The index for new orders jumped to 56.2 in January, an increase of 0.9 percentage points from the December reading of 55.3. New orders, thus, increased for the 126th successive month. The pick-up in new orders suggests that the service sector is poised to gain in the coming months.

Business expectations issued in January continue to be encouraging. The business activity index came in at 60.9, showing an increase of 3.9 percentage points from the December reading of 57. This showed an uptick in business activity for the 126th straight month as well.

Employment Subindex Falls

Unlike expansion in new orders and business activities, companies lowered hiring in January. The non-manufacturing employment index came in at 53.1, below the December reading of 54.8.

But market pundits ignored the overall drop in service industry employment last month, citing an increased employment in six major non-manufacturing industries. What’s more, they are more concerned about the shortage of skilled labor than overall hiring numbers.

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 might make meaningful additions to your portfolio. These stocks flaunt a Zacks Rank #1 (Strong Buy) or 2 (Buy).

Community Health Systems, Inc. CYH, together with its subsidiaries, owns, leases, and operates general acute care hospitals in the United States. The company currently has a Zacks Rank #1. The Zacks Consensus Estimate for its next-quarter earnings has moved 9.3% north over the past 60 days. The company’s expected earnings growth rate for the current year is 8.8%, compared with the Medical - Hospital industry’s projected rise of 2.2%.

Tenet Healthcare Corporation THC operates as a diversified healthcare services company. The company operates in three segments: Hospital Operations and Other, Ambulatory Care, and Conifer. The Zacks Consensus Estimate for the Zacks Rank #2 company’s current-year earnings has moved 1.5% up over the past 90 days. The company’s expected earnings growth rate for the current year is 44.6% compared with the Medical - Hospital industry’s estimated growth of 2.2%.

Rite Aid Corporation RAD operates a chain of retail drugstores in the United States. The company operates through two segments — Retail Pharmacy and Pharmacy Services. The company currently has a Zacks Rank #1. The Zacks Consensus Estimate for its current-year earnings has moved more than 100% north over the past 60 days. The company’s expected earnings growth rate for the next year is 70.6% compared with the Retail - Pharmacies and Drug Stores industry’s expected rise of 24.3%. You can see the complete list of today’s Zacks #1 Rank stocks here.

Chipotle Mexican Grill, Inc. CMG, together with its subsidiaries, operates Chipotle Mexican Grill restaurants. The company currently has a Zacks Rank #2. The Zacks Consensus Estimate for its current-year earnings has climbed 1.6% over the past 60 days. The company’s expected earnings growth rate for the current year is 28.6% compared with the Retail - Restaurants industry’s estimated increase of 3%.

Domino's Pizza, Inc. DPZ operates as a pizza delivery company in the United States. The company offers pizzas under the Domino's brand name through company-owned and franchised stores. The company currently has a Zacks Rank #2. The Zacks Consensus Estimate for its next-year earnings has moved 0.8% north over the past 60 days. The company’s expected earnings growth rate for the current year is 11.4% compared with the Retail - Restaurants industry’s projected growth of 3%.

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Tenet Healthcare Corporation (THC) : Free Stock Analysis Report
 
Community Health Systems, Inc. (CYH) : Free Stock Analysis Report
 
Rite Aid Corporation (RAD) : Free Stock Analysis Report
 
Chipotle Mexican Grill, Inc. (CMG) : Free Stock Analysis Report
 
Domino's Pizza Inc (DPZ) : Free Stock Analysis Report
 
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