ISM Services Index Remains Robust In October: 5 Top Picks

On Nov 5, the Institute for Supply Management (ISM) announced fresh figures for its service index for the month of October. Notably, the reading exceeded expectations. The ISM Services index clearly reflects that the U.S. economy has sustained its momentum going into the fourth quarter. Gains were broad-based and occurred across 17 industries.

Service-oriented businesses remain strong in October (improving for 105 consecutive months) and the momentum is likely to remain robust indicating a solid upcoming holiday season. At this stage, it will be a prudent move to invest in stocks from the services sector with a favorable Zacks Rank and strong growth potential.

Strong October Readings

The ISM reported that its service index was pegged at 60.3% for the month of October, surpassing the consensus estimate of 58.8%. Although the October reading trailed the September reading of 61.6% (an all-time high), it achieved the second highest level of the index’s 21-year old history. Notably, any reading above 50% indicates expansion of the services sector and a reading of above 55% reflects outstanding performance by the services sector.

A strong bunch of 17 industries have expanded in October. The sole exception was Educational Services. The Business Activity Index came in at 62.5%, and has now increased for 111 consecutive months. Additionally, the New Orders Index hit 61.5% while the Employment Index came in at 59.7%.

Healthy Fundamentals of the U.S. Economy

ISM chair Anthony Nieves said “The non-manufacturing sector has again reflected strong growth despite a slight cooling off after a record month in September.” This impressive result was predominately buoyed by a strong U.S. economy which is currently in the 10th year of expansion.

U.S. GDP increased 3.3% in the first nine months of 2018, surpassing the target of 3% set by President Trump. On Oct 30, the Conference Board reported that U.S. consumer confidence for the month of October was pegged at 137.9, the highest reading since September 2000.

Additionally, the future expectations index, — reflecting what Americans think the economy will look like in the next six months — increased to 114.6 from 112.5, signaling strong growth at least up to first quarter of 2019.

Our Top Picks

A substantial expansion in the services sector is indicative of its continuing attractiveness as an investment option. Additionally, encouraging economic data, like the latest report on non-firm pay-roll, bears out the optimism expressed by respondents in the ISM survey.

This is why it makes good sense to add stocks from this sector to your portfolio. We have narrowed down our search on five such stocks each carrying a Zacks Rank #1 (Strong Buy) and strong growth potential. You can see the complete list of today’s Zacks #1 Rank stocks here.

The chart below shows price performance of our five picks year to date.

SPS Commerce Inc. (NASDAQ:SPSC) is a provider of on-demand supply chain management solutions servicing its customers worldwide. The company has expected earnings growth of 93.8% for current year. The Zacks Consensus Estimate for the current year has improved by 10.7% over the last 30 days.

Core-Mark Holding Co. Inc. (NASDAQ:CORE) is one of the largest marketers of fresh and broad-line supply solutions to the retail industry in North America. The company has expected earnings growth of 28% for current year. The Zacks Consensus Estimate for the current year has improved by 2.4% over the last 30 days.

Clean Harbors Inc. (NYSE:CLH) is a leading provider of environmental, energy and industrial services in North America. The company has expected earnings growth of 260.6% for current year. The Zacks Consensus Estimate for the current year has improved by 17.8% over the last 30 days.

FTI Consulting Inc. (NYSE:FCN) provides business advisory services to manage change, mitigate risk, and resolve disputes worldwide. The company has expected earnings growth of 61.6% for current year. The Zacks Consensus Estimate for the current year has improved by 14.7% over the last 30 days.

General Finance Corp. (NASDAQ:GFN) provides mobile storage, liquid containment and modular space solutions. The company has expected earnings growth of 283.3% for current year. The Zacks Consensus Estimate for the current year has improved by 8.7% over the last 30 days.

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