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November ISM Services Index 2nd Highest in 13 Years: 5 Picks


On Dec 6, the Institute for Supply Management (ISM) reported fresh figures for its service index for November. The November reading exceeded expectations and surpassed the reading of previous month. Notably, the ISM Services indexes for October and November clearly indicate that the U.S. economy has sustained its momentum in the ensuing fourth quarter. Notably, gains were broad-based and occurred across 17 industries.

Service-oriented businesses remained strong in November (improving for 106 consecutive months) and the momentum is likely to sustain in December. At this stage, it will be a prudent move to invest in stocks from the services sector with a favorable Zacks Rank and strong growth potential.

Robust November Readings

The ISM reported that its service index was stood at 60.7% for the month of November, surpassing the consensus estimate of 59.2% and October reading of 60.3. The November Services index reading was the second highest in 13 years only behind the reading of 61.6 in September. Notably, any reading above 50% indicates expansion of the services sector and a reading of above 55% reflects outstanding performance by the services sector.

A strong bunch of 17 industries have expanded in November. The sole exception was Agriculture, Forestry, Fishing & Hunting. The Business Activity Index came in at 65.2%, and has now increased for 112 consecutive months. Additionally, the New Orders Index hit 62.5% while the Employment Index came in at 58.4%.

Strong U.S. Economy

On Nov 28, the Department of Commerce, in its second estimate, confirmed on Nov 28 that the U.S. GDP for the third quarter of 2018 expanded by 3.5%. This implies that the U.S. economy increased 3.3% in the first nine months of 2018, surpassing the target of 3% set by President Trump.

On Nov 29, the Department of Commerce reported that personal consumption expenditures increased $86.9 billion or 0.6% in October, highest in seven months. October data exhibited growing momentum for consumer spending which constitutes over 70% of U.S. GDP. This could be a signal for robust fourth-quarter GDP data.

On Nov 5, the Department of Labor reported that the U.S. economy added 250,000 non-farm jobs in October outpacing the consensus estimate of 193,000. Unemployment rate remained flat at 3.7%, the lowest since December 1969.

Our Top Picks

A substantial expansion in the services sector reflects its sustained allure as an investment option. Additionally, encouraging economic data highlights the optimism expressed by respondents in the ISM survey.

This is why it makes good sense to add stocks from this sector to your portfolio. We have narrowed down our search on five such stocks each carrying a Zacks Rank #1 (Strong Buy) and strong growth potential. You can see the complete list of today’s Zacks #1 Rank stocks here.

The chart below shows price performance of our five picks year to date.

General Finance Corp. GFN provides mobile storage, liquid containment and modular space solutions. The company has expected earnings growth of 433.3% for current year. The Zacks Consensus Estimate for the current year has improved by 39.1% over the last 60 days.

SPS Commerce Inc. SPSC is a provider of on-demand supply chain management solutions servicing its customers worldwide. The company has expected earnings growth of 93.8% for current year. The Zacks Consensus Estimate for the current year has improved by 10.7% over the last 60 days.

Clean Harbors Inc. CLH is a leading provider of environmental, energy and industrial services in North America. The company has expected earnings growth of 260.6% for current year. The Zacks Consensus Estimate for the current year has improved by 17.8% over the last 60 days.

WNS (Holdings) Ltd. WNS is a business process management company providing data, voice, analytical and business transformation services worldwide. The company has expected earnings growth of 11.6% for current year. The Zacks Consensus Estimate for the current year has improved by 6.4% over the last 60 days.

US Ecology Inc. ECOL provides environmental services to commercial and government entities in the United States, Canada, and Mexico. The company has expected earnings growth of 36.1% for current year. The Zacks Consensus Estimate for the current year has improved by 4.5% over the last 60 days.

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