Staffing company stocks are a smart bet on a muddled labor market

staffing-company-stocks-are-a-smart-bet-on-a-muddled-labor-markeA chorus of critics is taking issue with the surprisingly strong jobs picture the Bureau of Labor Statistics released Friday. Some are taking aim at the high number of temp and government hires. Others are pointing out that the numbers might be a fluke since they don't jibe with the outlook recently presented by ADP, the country's largest processor of payroll information.

Shares of staffing companies like Manpower (MAN) and Robert Half International (RHI), meanwhile, have traded in tandem with the initial euphoria and then skepticism surrounding the outlook. Shares soared more than 10% on Friday, but slipped on Monday despite a slew of analyst upgrades for the sector.
But investors should ignore the broader jobs debate and hone in on one aspect that seems indisputably strong: the pickup in temp hiring. In much the same way that stocks tend to perform best when the economy is showing signs of coming out of a recession but doesn't have enough momentum for the Federal Reserve to raise interest rates, staffing companies do well in an environment where employers are looking for workers to fill demand, but don't have the confidence to make permanent hires. Betting on staffing companies, in other words, would allow investors to play on the reigning confusion surrounding the labor markets.

Temp hiring boomed by 51,000 in November – the sharpest gain since October 2004 – after picking up by 42,000 the prior month. Temp jobs have now showed four months of continued strength, and "there is mounting evidence in the United States and Europe that the temporary-staffing industry has rebounded nicely during the last few months," analysts at William Blair wrote in a research report upgrading Manpower shares to an outperform.

Temp Firms Thrive When Confidence is Weak

Employers have increasingly turned to hiring temps instead of rehiring laid of workers in the last two relatively mild downturns compared to prior post-World War II recessions. Given the severity of the most recent economic plunge and the accompanying uncertainty, that trend should be bolstered this time around.

Shares of Manpower and Robert Half already trade at heady valuations -- 52 and 67 times forward earnings, respectively. But those earnings could get a big boost if employers -- seeing stronger gains in demand than expected, but still lacking the confidence to make permanent hires -- increasingly turn to temp workers like they have in the last two recessions.

And some Wall Street heavyweights like Byron Wien at The Blackstone Group note than many companies cut costs to the bone in anticipation of another Great Depression that never materialized, meaning the scramble for workers as demand rebounds may be particularly fierce.

Wall Street's mood swings, meanwhile, may have an especially pronounced impact on staffing company stocks. "We believe investors' perceptions about the economy impact staffing stocks' prices more than fundamentals do at cycle bottoms," analysts at Credit Suisse wrote in a research note following Manpower's third quarter earnings at the end of October. But that could make room for more upside as better employment data "to afford MAN shares a higher peak earnings multiple in coming months than they have in recent quarters."

Not only might earnings be poised for strong gains, then, but investors would be willing to assign the stocks a higher multiple as earnings grow. That would make staffing company stocks a good bet as the broader labor market continues to muddle along.
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