Employment, Mr. Market and The Hard Road to Big Gains
Adem is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
"In investing, what is comfortable is rarely profitable." - Robert Arnott
Peter Lynch called the edge to find stocks that the market misunderstands the “power of common knowledge;” it’s essential for small investors to beat the market. Today, I’m going to let you in on a group of stocks so misunderstood they’re certain to “make” your 2013.
The staffing industry is too often associated with employment numbers. That sounds like an obvious correlation but it’s not—let me explain.
After years as a consultant for many of these firms, I can let you in on a startling, counterintuitive secret: Temporary business actually thrives during periods of high unemployment! Once unemployment becomes high (as long as it's steady, rather than declining), temp business surges, as firms will hire temps before they are ready to hire full time employees. Think about it: If you were a business owner unsure of a recovery, wouldn’t you rather hire a temp, and skip paying benefits or worrying about unemployment insurance and workers compensation risk?
Need some concrete proof? According to the American Staffing Association (ASA), as of November, temporary staffing services are up 5% year over year; vastly out pacing the growth in general employment!
For further evidence, see the chart below.
| Company name | 2010 EPS | 2011 EPS | 2012 EPS (projected) |
| Kelly Services | 0.90 | 1.80* | 1.37 |
| Robert Half International | 0.44 | 1.04 | 1.54 |
| Barrett Business Services | 0.72 | 0.92 | 1.68 |
| Insperity, Inc. | 0.86 | 1.33 | 1.6 |
*Kelly's 2011 EPS was aided by tax benefits, its operational earnings for 2012 are ahead 2011, thus far.
Surprised? I'd bet employment was the last sector you expected to see this kind of YOY growth and therein lies the opportunity for you.
Revisiting Kelly
Not all staffing providers are “buys”. Some aren’t evolving, or are in terrible geographic locations, like Manpower’s (NYSE: MAN) 70% exposure to recessionary Europe. Yet some companies, like Kelly Services (NASDAQ: KELYA) are both delivering now and setting themselves up for a favorable tomorrow.
Yes, Kelly is thriving in the temporary staffing market but it’s so much more. A larger percentage of their revenue is coming from t direct hire placement of professional level hires (legal, etc). They’re getting wise to the talent gap in the U.S. and delivering employers the most sought-after workers in the world.
Another thing people don’t know about Kelly’s business is that they’re transforming themselves into a full service employment provider offering HR outsourcing solutions that are high margin and low risk. Offering these services makes Kelly a “one stop shop” they secure all of their clients business while “farming out” lower margin work to subcontractors. Now you know what others don’t, you can thank me later.
Looking back at my earnings preview of Kelly, the company delivered on all of the drivers of growth we needed to see: higher-margin temp business, Kelly OCG, and Latin America. It was a strong quarter, beating the streets EPS expectations by 25%; so what happened? The stock shot way up for two days and then receded back to its range. It’s laughable that day traders shoot this stock up after every quarterly beat and then drop it because they fear holding an "employment stock”—it’s only beat expectations every single quarter for nearly three straight years! Wall street, wake up!
Outsourcing Saves!
Robert Half International (NYSE: RHI) focuses solely on professional level staffing inside the U.S. and it’s good; but I’d rather see you in Kelly. The outsourcing business Kelly offers through “Kelly OCG” is this simple; they go to a client and say, “We’ll be your entire HR department.” Clients love having that option.
Kelly even makes money on its VMS technology, which is used as a platform to subcontract staffing to other vendors. Yes, for other vendors to make bids on Kelly’s subcontracted positions, they must pay Kelly a 2% fee for using the online platform. It’s just another area of Kelly’s business that Wall Street is oblivious to -- the power of common knowledge indeed!
While I’m bullish on Kelly’s transition, if you want the finished product, I highly recommend both Barrett Business Services (NASDAQ: BBSI) and Insperity (NYSE: NSP). They offer the HR/outsourcing solutions Kelly is transitioning into; yet the market mistakenly views them as employment-sensitive.
A hint for Mr. Market — companies outsource to save money!
Both companies have PEG ratios below 0.80, yet neither needs a booming economy to grow. These companies are wildly misunderstood, because the market thinks they're "staffing companies." Both are also wondering why you haven't bought them yet.
"It ain't so much the things we don't know that get us into trouble. It's the things we do know that just ain't so." — Artemus Ward
People think that high unemployment is bad for staffing and HR service providers. That's simply not true. I know better, and now you do, too. (You're welcome).
We can't pretend to know when “Mr. Market” will come to his senses. We may have to wait until unemployment stops being headline news. It may be a hard road to big gains, but eventually the market will realize value and drive these prices up. Price is what you pay, value is what you get—there are few opportunities in the market where the divergence of the two is so vast.
Kelly Services is better positioned, in better markets, and earning more profit than it did before the recession, when it traded near $30/share. Today it trades at $13. If you’re a long-term investor, isn’t that alone worth the wait?
mrrightside owns shares of Kelly Services and Dice Holdings. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Robert Half International. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!
