Thankfully trends of higher unemployment and lower workforce participation have started to reverse, providing relief from the "great recession." More hiring bodes well for companies that engage in staffing and payroll support. Stocks that would benefit from a continuation in this economic trend are considered below.
Employment and the Oval Office
Prior to winning the recently concluded elections, President Barack Obama had campaigned in Ohio, and noted that privately owned firms had set the pace by hiring the most employees in a period of eight months. Other sectors such as construction have also played a role in creating new jobs as reports show that about 17,000 workers have been absorbed by construction companies. General Motors (GM), which is the largest U.S. car manufacturer, indicated that it plans to bring on board 10,000 workers to help reduce the amount of work that is outsourced. It plans to open four facilities country wide to accommodate this labor force.
Recent reports from the labor market indicate that more workers have been employed during the month of October and this has pushed up the unemployment rate higher as more people are flooding the employment market to look for jobs. Some sectors of the economy such as motor industry and construction sites are already experiencing the gains made in employment as consumers are spending freely. UBS (UBS) Securities Chief Economist Maury Harris said, "Jobs are expanding despite all this expression of business caution. You continue to see improvements in people's perceptions of what's happening in the job market."
De-Politicizing the Economic Numbers
Unfortunately, the surprisingly low 7.8% unemployment number was co-opted by political parties as a talking point. This has focused groundless disdain for them by whichever side is hurt by them. Don't be duped: politicians and pundits are not econometricians.
If people with political motivations hold unemployment metrics in high esteem or if they discredit them as noise they should do so whether or not they favor a particular candidate. Such would be the view of unbiased intellectual integrity. Unfortunately, such a person is hard to find. Consider how former General Electric (GE) CEO and Republican supporter Jack Welch cast doubt on labor statistics. He wrote, "Unbelievable jobs numbers. These Chicago guys will do anything. Can't debate so change numbers." Why wasn't he complaining about the unreliable nature of these estimates when unemployment numbers were higher? If it was a bad yardstick, you would criticize it even if it inaccurately produced desired numbers.
Now that the election is over, investors can focus on the economic meaning of declining unemployment figures without distraction.
LinkedIn: Headhunting-Social Media Style
LinkedIn (LNKD) is a professional social networking service that collects revenue by charging for premium services and for the use of tools that help employers search candidates for job openings. This makes LinkedIn a human resources company.
At a price of roughly $ 99 per share LinkedIn recently traded at an astronomical 640.4 price-to-earnings multiple. Equity in this company is rich on a price-to-sales basis since shares trade at a 12.75 multiple, much higher than P/S multiples in the broader market.
Why is it trading at such high multiples? An enthusiastic group of analysts working for Jefferies published a research report that predicts that LinkedIn's revenue will more than triple during the next few years from about $522 million in 2012 to almost $2 billion in 2014. Their thesis is based on the notion that more and more people posting their resumes on the website would drive earnings.
Without a doubt, LinkedIn is a fantastic company that provides a social network for professional connections. Unfortunately, the dominance of LinkedIn in this field just doesn't justify larger-than-life valuation multiples.
When compared with its staffing industry peers, it is obvious that investors should stay away from LinkedIn shares at current price levels, even after considering growth projections.
Other Staffing and Recruiting Stocks
Automatic Data Processing (ADP) is a payroll processing stock that would benefit from higher employment. Unfortunately, this stock is too expensive at a price of roughly $56. Investors can purchase more sales per dollar from the S&P 500 since this index has a price-to-sales ratio of 1.30 while this stock has a much higher 2.5 ratio. ADP shares currently trade at a high 19.63 price-to-earnings ratio, a higher value than the 14.01 average of the S&P 500 index.
Investors focused on income should also shy away from this stock. Though its shares offer an attractive dividend yield of 2.90%, which is higher than the 10-year treasury yield, the sustainability of the firm's dividend payouts are in question because the 0.56 payout ratio is near the 0.6 rule of thumb for maximum sustainable dividend payouts.
We reach the same conclusion when considering ADP's rival, Paychex (PAYX). This stock is too expensive at its current price of roughly $32. Paychex shares are pricey since they currently trade at a high 21.13 price-to-earnings ratio and a high 5.20 price-to-sales ratio. Also like APD, Paychex's 4.00% dividend is precarious based on the firm's 0.84 payout ratio.
Higher employment means that more people need to find jobs. This means that more companies have to advertise job openings, benefiting the online job posting site Monster Worldwide (MWW).
Shares of Monster Worldwide are a growth-at-reasonable-price opportunity at roughly $6 per share. At a value of 0.72, this stock trades at a fraction of the S&P price-to-sales average multiple. The 0.74 price-to-book multiple of this stock is very attractive, much cheaper than the 2.02 S&P 500 index average. Monster's trailing earnings are negative, making a price-to-earnings ratio incalculable.
Staffing firms will also benefit from declining unemployment. Manpower (MAN) stock is reasonably priced at $37 per share. When compared with the 1.30 price-to-sales ratio of the S&P 500, the 0.14 ratio of this stock is very attractive. Manpower shares are trading at a fair 14.27 price-to-earnings ratio, in line with the market average. The price-to-book multiple of this stock is 1.13, cheaper than the 2.02 S&P 500 index.
Dividend investors could buy Manpower for dividend yield. Shares offer a dividend yield of 2.30%, which beats the yield of the 10-year treasury bond. Dividend payments are likely to continue since Manpower pays out 0.32 of earnings as dividends.
Robert Half International (RHI) is another staffing and outsourcing industry stock. Unlike Manpower, it is too expensive at its current price of roughly $27 per share. Robert Half International shares currently trade at a high 19.61 price-to-earnings ratio, a higher value than the 14.01 average of the S&P 500 index. In addition, the 4.45 price-to-book multiple of this stock is higher than the 2.02 S&P 500 price-to-book ratio.
Investors seeking to benefit from a labor market recovery should consider Manpower as a attractively priced, stable stock. Monster Worldwide is a more speculative investment, which is trading at lower price multiples. Both stocks stand to gain from a recovery.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.