'The Great Shift' In The American Economy Favors Staffing Stocks

 |  Includes: DHX, KELYA, MAN, PAYX, TBI
by: Jonathan Yates

While investment advice can be obtained from usual sources, white papers generally do not top the list.

However, "The Great Shift: Where Have all the Workers Gone?," a recent white paper from Bob Funk, the CEO and Chairman of the Board of Express Employment Professionals, a staffing firm, is well worth the time for investors. Funk is hardly another random CEO seeking the limelight as he was just extensively interviewed in The Wall Street Journal. The performance of publicly traded companies in the staffing sector like the privately held Express Employment Professionals such as TrueBlue (NYSE: TBI), Paychex (NASDAQ: PAYX), ManpowerGroup (NYSE: MAN), and Kelly Services (NASDAQ: KELYA) have rewarded the owners with gains from investing in this thriving industry.

After reading "The Great Shift" investors should expect companies in the $100 billion staffing industry to continue to outperform the market.

Already these firms are more profitable. In a recent Wall Street Journal article by E. S. Browning, "Survival Kit for Stocks, Profits," Ethan Harris, the Co-Chief Economist for Bank of America (NYSE: BAC), was cited for pointing out that corporate profit growth in the United States had slowed to just 2.1% over the last four quarters. By contrast, Paychex has a profit margin of 24.50%. The profit margin for Dice Holdings (NYSE: DHX) is 17.50%. Robert Half International (NYSE:RHI) has a profit margin more than twice the average for American corporations, too.

This disparity shows up clearly in the return-on-equity, which is one of Warren Buffett's favorite indicators. The average return-on-equity for a member of the Standard & Poor's 500 Index is around 15%. For Paychex, it is 33.80%. Robert Half International has a return-on-equity of 27.70%. The return-on-equity for Dice Holdings is 18.20%.

The demographic trends that Funk details in "The Great Shift" will likely widen these margins, and thus the performance of the share prices. In his white paper, Funk notes that the percentage of adults in America now in the labor force is at its lowest point in decades, just 63.4 percent. While there are a variety of factors for that, Funk points out that many are now "Stuck in the safety net." As a study by the Federal Reserve Bank of San Francisco stated about this, the drop in labor force participation is due to, "increased use of some social benefit programs, notably disability insurance."

There is also the "Skills Gap."

Funk advises that, "Millions of people are looking for jobs, but millions of jobs are looking for people." Just 1% of Express Employment Professional offices reported it was easy to fill positions. By contrast, about two-thirds replied that it was "somewhat difficult" with 12% claiming it was "very difficult."

These and other factors have created a "Perfect Storm" for companies in the workforce sector.

Due to the rising costs of social programs, employers do not want to hire full-time workers. ObamaCare alone has businesses drastically altering their workforces to avoid having to comply with the mandate of providing health insurance to full-time employees. As a result, there is a greater demand for temporary employees. Due to the "Skills Gap," there is an increasing need for companies like TrueBlue, Paychex, Kelly Services, and ManpowerGroup, especially in the demand labor field.

The demand labor sector with firms such as TrueBlue, ManpowerGroup and Labor SMART (OCTBB: LTNC) is a $29 billion segment of the $100 billion temporary worker industry. Companies ranging in size from small businesses to Fortune 100 companies have needs for temporary workers. For investors, that shows up prominently in the income statement, balance sheet, and share price of the companies.

TrueBlue and ManpowerGroup are the best known in this sector. Labor SMART is a rapidly growing demand labor firm that just posted record revenues for the most recent quarter and is tremendously undervalued. TrueBlue is undervalued, too, with a price-to-sales ratio of just 0.65. Each dollar of sales for TrueBlue is priced at more than a one-third discount in a share of stock. It is the same story for ManpowerGroup with a price-to-sales ratio of just 0.28, resulting in more than a two-thirds discount in the share price. Labor SMART is also very cheap as its revenues for just the third quarter are much more than the market capitalization of the stock.

Paychex just reported earnings with revenue growth, too, for its back office services. Along with that has been a soaring stock price: up nearly 30% for 2013. It is much the same for Kelly Services, up more than 27% for the same period.

About investing, Ralph Wanger, legendary head of the Acorn Fund, stated that, "If you are looking for a home run...a great investment for 5 years or 10 years or more...then the only way to beat this enormous fog that covers the future is to identify a long-term trend that will give a particular business some sort of edge."

In "The Great Shift," Funk clearly identifies the staffing business as one that will benefit from "a long-term trend" in the US workforce. Funk provides the research for those looking for growth stocks in the American economy as it recovers from The Great Recession. Combined with the proper due diligence for each entity, investors should be able to find a desirable stock in the workforce sector with companies ranging from prominent blue chips like Paychex to promising small caps like Labor SMART.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in TBI, OTCPK:LTNC over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.