How to Profit From the Coming Jobs Crisis
Adem is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Warning--this article contains biases, subjective opinions and statements that may offend your investing sensibilities. Whew, now with that out of the way, let me tell you why. The reason why is because I want to help you, I really do. I have always believed that for individual investors to have a shot at beating the market they need to invest in the areas of the market with long term favorable trends. If said investor can do this in an area of the market that he or she has a better understanding than most, well, even better. Having spent much of my life as a Headhunter, Recruitment Manager or Employment Consultant of some kind, I consider the employment services sector my "buy what you know" area of the market; so consider this my Peter Lynch moment.
"You don’t have to know everything. A few really big ideas carry most of the freight."-Charlie Munger
Imagine if you were to have gotten behind a big idea early. Not a stock, but an idea. Let's say in 1900 you knew in your bones that this whole "automobile thing" would take off. Or in the early 1950's you figured fast food was here to stay in America. Wouldn't it have been easier to get rich knowing these life changing trends than by diligently pouring through quarterly earnings statements from individual stocks?
Well, I'm no physic but I can tell you there is a job crisis coming soon. Sooner than you may think. In fact, many experts believe we're already in the midst of this crisis. By now you're probably saying "of course there's a crisis you idiot, unemployment is through the roof"! But what if I told you I wasn't talking about high unemployment? What if I told you I was talking about a completely different trend, one that very few people were paying attention to but one that could still make you rich?
It's Not as Bad as You Think, Well, Not For Everyone
You probably heard recently that unemployment for the first time in 4 years went under 8%, to 7.8%. You've probably also heard politicians say that it's only going down because "a lot of people have stopped looking." My own personal rebuttal to that is that if people were only allowed to stay on unemployment three months, like before the "Great Recession" instead of a year and a half, that rate would be around 6%. Let alone that laying off Government workers in droves to "cut the deficit" doesn't help either--but I digress. The truth is that if you can look through the bluster of the political season, the employment situation really is getting better and has been for some time. In addition to the 7.8% number, in September 41 out of 50 states reported a decrease in unemployment and that is amidst some of the starkest cuts to government jobs in modern times. If you only looked at the private sector job growth you would see stark gains since late 2009 but especially in the past year.
But this recent downturn in the economy and unemployment spike has always been a bit of a dichotomy; call it the tale of two economies. For those educated, particularly in fields of math and science the economy hasn't been that bad at all. In 2011 according to the Bureau of Labor Statistics the unemployment rate for a college graduate was about 5% compared with someone who lacks a high school diploma at 14.1%.
When you dig a bit further into the jobs that are in fields based in math or science, the numbers are even more startling. The average Mechanical Engineer (in today's economy) faces an unemployment rate of just 2.1%; for Petroleum Engineers it's even lower at less than one half of 1%. Simply put employers are dying to find these workers. In fact, in 2011 over half of U.S. companies reported difficulty or inability in filling open positions, almost all reported a lack of "hard skills" or education as the reason. In that same year the U.S. ranked 3rd amongst all nations in % of positions that were left vacant. I know, this isn't the story you hear on the news every night but it's sadly true.
*source Wall Street Journal
The Long Term Trends Will Return, All in Due Time
It's part of the reason you hear both political parties say they want to "attract the best and brightest" from around the world here. Translation: "Americans are too stupid and/or lazy to get the training Employers want." That's a really harsh way of saying it but the truth is one of the biggest employment trends, before the recession, that experts saw coming was a skilled worker shortage. Now, we're starting to see it, even in this economy.
The reason experts saw this coming was twofold. One, as previously stated college students in the U.S. don't get the skills and training that employers usually need. In the U.S. we tend to go to college to chase a dream, such as becoming a writer or a graphic designer. Not too many kids grow up with the dream of becoming a machinist, as sexy as it may seem. We as a nation graduated five times as many students in liberal arts than any engineering discipline last year even as engineering jobs remain so hard to fill and so well paying. This isn't the case in most other countries.
The other reason is that we have this large group of citizens you may have heard of called the "baby boomers." They outnumber the folks in my generation by a wide margin and when they retire there will be many jobs to fill, skilled jobs at that with just not enough people to fill them. So what are we going to do? With the stock market (and 401k's) coming back it's only a matter of time before we start seeing retirement in droves. Are we going to make legal immigration easier? Yeah, good luck with that political hot button.
This will be a very real problem. In fact a recent study by Boston Consulting Group found that our skilled worker shortage should multiply by ten as soon as 2020. To tell the truth, I don't know what we as a nation are going to do about this, but I do know what you can do to profit off of it.
Find the Needle in the Haystack
The first investment that comes to mind when addressing a crisis about finding skilled workers is to, well; invest in the companies that find them. With everything going online you can probably guess that I don't mean your local newspapers classifieds, rather, Internet job boards. But which ones? If you've followed this space at all you've probably heard that Linkedin (NYSE: LNKD) is going to make old stalwart Monster World Wide (NYSE: MWW) go the way of the dinosaur.
The problem with the entire Linkedin investment thesis is the people who've driven the stock up have no idea of what the client experience is like. Now if you're investing in Linkedin because you like their prospects on ad sales or something of the like, fine I won't judge, but if you're investing in it based on it being a superior recruiting tool--sell your shares, now.
Warning, this article is about to get even more subjective. The problem with Linkedin is not that it isn't useful, it is. The problem is that, from a Recruiters perspective the most useful way to use it is for free. That's right, if you want to find that "needle in the haystack" candidate you will probably just try to search for them based on keywords and network with them. Or you may join a group targeted to them "Electrical Engineer Jobs" and post your opening for free (yes, they let you do this).
So why on earth would you pay to post your position for a skilled worker on the general job board only to get a bunch of applicants who aren't qualified? I've never heard of a sustainable business model where the free services were superior to the paid ones. Not to mention the ridiculous valuation tagged with this stock, even if it hits all of its lofty growth expectations it will still have a wild P/E of nearly 85. I'm not recommending Monster either. To take at advantage of this trend you need to think like an employer and like a skilled employee. If you were a Petroleum Engineer and had 30 Recruiters a day calling you, would you have your resume sitting on a generalized job board like Monster? No. If you want to know the place to find the most skilled of the skilled, my friend, it's time to roll the dice.
Please excuse the cheesy pun but Dice Holdings (NYSE: DHX) is the perfect play on this trend. This is a company that holds a portfolio of specialized career websites (job boards) and career fairs for targeted professional communities specializing mostly in high tech fields. In other words, this company finds the ways, whether passive or direct, to connect employers with the highly skilled workers they cannot find. If you go on Dice's signature site the only candidates you'll find are tech candidates; that's what Recruiters want. However, if you need more specialized help finding, say a Petroleum Engineer, their specialty site RigZone has a network of only oil and gas professionals and will arrange career fairs for you to meet them.
Forget the fact that the company has been growing like a weed, this is the the type of play on this trend you want to be behind for the next 10 years. Right now, it's still a little known small cap with a market cap of $528.05 million. It trades at a reasonable P/E of 15 and a PEG of 1.02. That won't last forever.
Kicking it Old School
Another small cap in this space ($663.30 million) with great prospects is Korn/Ferry International (NYSE: KFY). Korn/Ferry finds top level talent the "old school" way, through employing "Headhunters" who have great relationships with top candidates and hiring authorities. This firm only specializes in high level professional positions from Engineers to CEO's and primarily operates in direct hire consulting. This combination of high margin fees and low overhead (their only cost is headhunters) provides a tantalizing return on invested capital and it trades at a relatively cheap P/E of 13.15. Korn/Ferry is also branching out into new employment consulting services, all with low overhead and high margins. If you're interested in the stock you'll want to check the different service offerings listed on their websites. But rest assured, this is the best and most trusted name in the world of "Headhunting" it is synonymous with top executive level talent--most of the value comes in the brand.
You heard it here first folks. America has a jobs crisis on the horizon; it's just not the one you've heard about. As time goes on you'll want to have holdings in firms that take advantage of the need for hard to find skilled workers. For my money, I think Dice Holdings and Korn/Ferry are great options. Naturally there will be others to choose from, just make sure you’re behind something in this trend; you've been warned.
Adem Tahiri has no positions in the stocks mentioned above. The Motley Fool owns shares of LinkedIn. Motley Fool newsletter services recommend LinkedIn. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.