Instead of being a cause for celebration for the labor market, the surprisingly low 7.8% unemployment number has been co-opted by political parties as a talking point. Since when are these politicians and pundits econometricians?
Moreover, if they hold unemployment measures in high esteem or if they discredit them as noise they should do so whether or not favor a particular candidate. Republican supporter and former General Electric (GE) CEO Jack Welch 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? There is a clear bias here.
Investors should learn to ignore the hot wind coming from such debates and focus on the economic meaning of declining unemployment figures. There could be a reversal of the "great recession" trends of higher unemployment and lower workforce participation. More hiring bodes well for companies that engage in staffing and payroll support. Stocks that benefit from more hiring and employment are considered below.
LinkedIn: A Web 2.0 Headhunting Play
LinkedIn (LNKD) is a career-oriented social networking service collects revenues by charging members fees for certain areas of its databases, and for the use of tools that will help employers find the best candidates for a specific job opening. This puts LinkedIn in the staffing market. LinkedIn also sells advertising on its website, which accounts for roughly one-third of its revenue.
At a price of roughly $119 per share, LinkedIn recently traded at astronomical 990 price-to-earnings multiples. Equity in this company is rich on a price-to-sales basis since shares trade at a 17.35 multiple, remarkably higher than the 1.29 of the S&P 500 average.
Why is it trading so high? An enthusiastic group of analysts working for Jefferies published a research report that projects how LinkedIn's earnings will be driven by more and more people posting their resumes on the website. Currently, over 170 million members have created profiles on LinkedIn, with almost 100 million members joining in the past two years.
Jefferies analysts predicted LinkedIn's revenue will more than triple during the next few years, rising from the predicted $522 million in 2012, to almost $2 billion in 2014.
Sure, LinkedIn is an amazing company, which provides a social network for professionals to connect to one another. Unfortunately, the novelty of LinkedIn just doesn't justify its valuation multiples. Even analyst estimates of 63.3% per year annualized earnings growth over the next five years can't justify such a high valuation. When compared with its staffing industry peers, it is readily apparent 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 $60. Investors can buy more revenue per dollar from the S&P500 since this index has a price-to-sales ratio of 1.29 while this stock has a much higher 2.7 ratio. ADP shares currently trade at a high 21.11 price-to-earnings ratio, a higher value than the 14.1 average of the S&P 500 index.
Investors focused on income should also shy away from this stock. Sure, its shares offer a dividend yield of 2.65%, higher than the 1.74% yield of the 10-year treasury bond. However, the sustainability of the firm's dividend payouts is in question because the 0.54 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 $34. Paychex shares are pricey since they currently trade at a high 22.1 price-to-earnings ratio and a high 5.44 price-to-sales ratio. Also like APD, Paychex's 3.81% dividend is precarious based on the firm's 0.84 dividend payout ratio.
Higher employment means that more people need to find jobs. This means that more companies have to post announcements for job openings. This would benefit the online job posting site Monster Worldwide (MWW).
Shares of Monster Worldwide are a growth-at-reasonable-price opportunity at roughly $7 per share. At a value of 0.87, 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 2.05 S&P 500 average. MWW shares currently trade at a 17.38 price-to-earnings ratio, a value somewhat higher than the 14.1 average of the S&P 500 index. Analysts expect that the firm's earnings growth will accelerate with five-year estimates at 20.7% per year.
Staffing firms will also benefit from declining unemployment. ManpowerGroup (MAN) stock is reasonably priced at $37 per share. When compared with the 1.29 price-to-sales ratio of the S&P 500, the 0.13 ratio of this stock is very attractive. MAN shares are trading at a fair 13.35 price-to-earnings ratio, in line with the S&P 500 average. The price-to-book multiple of this stock is 1.16, cheaper than the 2.05 S&P 500 average.
Dividend investors may also find ManpowerGroup attractive for income. Shares offer a dividend yield of 2.34% dividend, which is much higher than the 1.74% yield of the 10-year treasury bond. Future dividend payments are likely because the company pays out 0.29 of earnings as dividends, so earnings could drop considerably before dividends must be cut.
Robert Half International (RHI) is another staffing & outsourcing industry mid-cap stock. Unlike ManpowerGroup, it is too expensive at its current price of roughly $26 per share. RHI shares currently trade at a high 20.57 price-to-earnings ratio, a higher value than the 14.1 average of the S&P 500 index. In addition, the 4.61 price-to-book multiple of this stock is higher than the 2.05 S&P 500 price-to-book ratio.
Investors seeking to benefit from a labor market recovery should consider ManpowerGroup and Monster Worldwide. They are both attractively priced ways to gain from this trend.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.