What a run it has been for staffing stocks. Over the past few years my favorite three staffing stocks, Robert Half International , Kelly Services , and Korn/Ferry International , have a combined average return over 100%. When you consider how out of favor staffing stocks become in periods of high unemployment, the recent run is very impressive.
Yet changing trends in employment should be considered before you load up on more shares from here. While I still feel that all three stocks will perform well, I feel that Korn/Ferry is the best staffing stock for you to buy in 2014.
Hiring trends for 2014, and beyond
Let me explain first why these businesses are all in a good shape for the near future. The much discussed "skills gap" in U.S. labor is getting wider, and with slow progress on immigration, it should continue to cause "pain" for corporate America. Careerbuilder.com recently released its list of the most in-demand jobs for 2014, which featured the usual suspects such as IT, Accounting, and Engineering.
This bodes well for Robert Half, which has brands like Accountemps, which are synonymous with professional staffing; its entire portfolio is "white-collar." It bodes well for Kelly as well, which has a much higher percentage of skilled (Engineers, etc.) business than the market has traditionally recognized. Over the past few years, this misunderstanding of Kelly's business has made it a tremendous value, as the company has surprised Wall Street and beat expectations in all but one quarter for four straight years! Still, Kelly has rallied hard and now trades at twenty times earnings, it's not as steep of a value as it once was.
Which brings us to Korn/Ferry, which only focuses on high-demand, permanent, hires. Manpower Group's recent talent shortage survey included executive level positions for the first time in five years, which is bullish for Korn/Ferry. When companies began hiring, post-recession, they opted to fill "skilled production" positions in Engineering and manufacturing. Sr. Management hiring always lags after a recession, so there could be another leg of growth for Korn/Ferry.
Bullish case for Korn/Ferry: an improving economy
Temporary labor providers have the advantage in poor economies. While Robert Half and Kelly each offer permanent placement, the foundation of their business is built on temporary placements. Once the bleeding of the recession stopped, in early 2009, this served them very well.
Companies that needed Accountant's and Machinists, but were uncertain if new layoffs would come, counted on Robert Half and Kelly to provide skilled temporary labor. Korn/Ferry, on the other hand, is a different type of business.
They are the largest and most established executive search (i.e. "permanent placement") firm. Korn/Ferry finds that "needle in the haystack" candidate that will take your business to the next level, and they charge a hefty fee (often ranging between 20k-40k) for each placement. They are "head hunters" with an outstanding reputation of finding executive level talent, in very competitive industries.
The bull case for Korn/Ferry is based on a belief that the economic recovery has another level. After the recent improvement in GDP, I'm willing to take that bet. If you don't agree, or if you feel the economy may decline, then Korn/Ferry is not the right stock for you.
A superior business model
In a neutral market, I prefer Korn/Ferry's business model over temporary providers. Korn/Ferry's only expense is its buildings and the salary of its consultants; Robert Half and Kelly, take on much more risk.
The cash conversion cycle for the latter two businesses is inferior, they must pay for the salaries of their temporary employees long before they get paid. This adds another risk to their business. They also must keep salaries of their temps reasonable, which becomes much harder as the economy improves. In addition to "floating" these salary costs for at least sixty-five days, they have other costs associated with managing employees, like worker's compensation and other benefits, that must enter the risk equation.
But Korn/Ferry? All they do is find candidates, and collect fee's, they don't manage anyone outside of their own doors. Even with the favorable environment for Robert Half and Kelly, this advantage of having fewer capital expenditures has helped Korn/Ferry grow free cash flow at a faster clip in recent years.
Korn/Ferry is also branching out into new employment consulting services, because they work in tandem with their permanent placement offerings. FutureStep, one of Korn/Ferry's fastest moving business units offers RPO (recruitment process outsourcing) consulting. These RPO services are also "zero-overhead," just like Executive Search, which should make this business model even stronger.
Foolish bottom line
In my opinion, these are the best "staffing stocks" in the market. I prefer Korn/Ferry's business model, and love its reputation, even though temporary staffing is more stable in down markets. This comes down to where you think the economy is going in 2014.
I say that the recovery continues, if you agree, Korn/Ferry is the top pick for the HR/Staffing industry.
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The article Is This the Best Staffing Stock for 2014? originally appeared on Fool.com.
Adem Tahiri has no position in any stocks mentioned. The Motley Fool recommends 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.
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