Service Sector Still Serving Up Good Values

Summary

• Since early 2009, the US service sector has enjoyed a remarkable, lengthy expansion.
• That's been great news, given that nearly 85% of American private sector jobs are now service-oriented.
• While service sector stocks have fared well, good values remain.

Since the end of the Great Recession, America's service sector has been on a remarkable run. When the sector expanded in June, it did so for the 65th consecutive month, according to the Institute for Supply Management. The growth has been particularly strong for over a year now, and high levels of new orders indicate it shouldn't be slowing any time soon.

The strong service sector growth is critical because, over the past several decades, America has shifted consistently and dramatically toward being a service-dominated economy. In the early 1960s, 59% of U.S. private jobs came from the service sector, with 41% from the goods-producing sector; by 1981, the gap had grown to 67.8% for the service sector vs. 32.2% for the goods-producing sector; by 1991, it had shifted even further, with about 75% of U.S. jobs coming from service sector.

Today, nearly 85% of America's private jobs are service-oriented (all data from the Labor Department). Yes, we are experiencing something of a manufacturing "renaissance", but by and large we still rely less on people buying our cars and appliances and clothing, and more on people using our cable, phone, and Internet services; shopping at stores that sell goods made elsewhere; using healthcare services like doctors and nursing homes and rehabilitation centers; and needing transportation services to move products imported from other countries.

That means service-type companies, and the service sector as a whole, have become the real bellwethers of U.S. economic activity. Of course, the service sector depends quite a bit on the U.S. consumer -- and, in recent years, we've heard how the U.S. consumer is overleveraged and tapped out. Fortunately, the data doesn't support that notion. In recent months Americans seem to have been putting to work the money they are saving thanks to low gas prices.

And here's something few commentators are mentioning: Americans' "financial obligations ratio" -- that is, their amount of debt as a percentage of disposable income -- was over 18% in late 2007, right before the "Great Recession" began. The Federal Reserve's web site has data going back to 1980, and that was the highest level on record. But over the past couple years, the ratio has moved down toward 15% -- levels not seen since the early '80s.

Given the solid service sector situation, I thought it would be a good time to see what service sector stocks impress my Guru Strategies, each of which is based on the approach of a different investing great. Here are some of the best of the bunch.

TrueBlue Inc. (TBI): Tacoma, Wash.-based TrueBlue provides temporary blue-collar staffing services to a variety of industries, including construction, manufacturing, transportation, aviation, waste, hospitality, retail, and renewable energy. It operates about 700 branches in all 50 states, Puerto Rico and Canada, and has taken in about $2.4 billion in sales over the past 12 months.

TrueBlue ($1.2 billion market cap) gets strong interest from my Peter Lynch-based model. The Lynch strategy considers it a "fast-grower" -- Lynch's favorite type of investment -- thanks to its impressive 39% long-term earnings per share growth rate. (I use an average of the three-, four-, and five-year EPS growth rates to determine a long-term rate.) Lynch famously used the P/E-to-Growth ratio to find bargain-priced growth stocks, and when we divide TrueBlue's 17.5 price/earnings ratio by that long-term growth rate, we get a PEG of 0.45. That falls into this model's best-case category (below 0.5).

Lynch also liked conservatively financed firms, and the model I base on his writings targets companies with debt/equity ratios less than 80%. TrueBlue's D/E is 23%, another good sign.

Foot Locker, Inc. (FL): This specialty athletic retailer ($10 billion market cap) has been growing earnings at a rapid 41% clip over the long term, and the big decline in gas prices should give consumers more money to spend on the discretionary-type items it sells. My Lynch-based model loves that high growth rate and likes Foot Locker's 18.3 price/earnings ratio, which make for a strong 0.44 PEG ratio. (Anything under 1.0 is considered a good value according to this model.) Foot Locker's 5% debt/equity also impresses.

My James O'Shaughnessy-based growth stock model is also high on Foot Locker. It looks for firms that have upped earnings per share in each year of the past five-year period, which Foot Locker has done. The model also looks for a key combination of variables: a high relative strength, which is a sign the market is embracing the stock, and a low price/sales ratio, which is a sign it hasn't gotten too pricey. FL has an excellent 12-month relative strength of 88, and its P/S ratio of just 1.33 comes in below this model's 1.5 upper limit.

Jones Lang LaSalle (JLL): JLL is a financial and professional services firm specializing in real estate. It has over 200 corporate offices worldwide and operations in more than 1,000 locations in 70 countries, offering integrated real estate and investment management services on a local, regional and global basis to owner, occupier and investor clients.

JLL ($8 billion market cap) gets strong interest from my Peter Lynch- and James O'Shaughnessy-based strategies. The Lynch model likes its 28% long-term growth rate and 19 P/E ratio, which make for a 0.67 PEG ratio. The O'Shaughnessy model, meanwhile, likes the firm's persistent earnings growth, 87 relative strength, and 1.38 price/sales ratio.

Marcus & Millichap (MMI): This $1.7-billion-market-cap brokerage firm specializes in commercial real estate investment sales, financing, research and advisory services. The company also offers market research, consulting and advisory services to developers, lenders, owners and investors.

M&M gets strong interest from my Peter Lynch-based model. While its P/E ratio may seem high at about 32, this strategy thinks that the high multiple is merited given M&M's stellar 47% long-term growth rate. Those figures make for a solid 0.68 PEG ratio.

Lithia Motors (LAD): Lithia operates automotive franchises and sells new and used vehicles and services. The company operates in three segments: Domestic, Import and Luxury.

Lithia ($3 billion market cap) has increased EPS in each of the past 5 years, helping it earn strong interest from my O'Shaughnessy-based model. It also has a great combination of momentum and value, with a 78 relative strength and 0.48 price/sales ratio.

Disclosure: I am/we are long MMI, JLL, FL, TBI. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.