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NEW YORK A second wind for U.S. staffing companies' stocks, which rallied after President Trump's election, could rest on whether optimism over his agenda leads to sustained strength for the economy and employment.
Like other cyclical industries, staffing shares benefited from hopes that tax cuts and fiscal stimulus would boost growth and corporate earnings. Investors now want firm evidence that improving business confidence converts into a strengthening economy.
"The real key from here is that this confidence translates into orders for the staffing companies and that remains to be seen," said Chris Serra, analyst at Thrivent Asset Management. "To date, we have yet to see that in any significant way."
Shares of companies including Robert Half (RHI.N), True Blue (TBI.N) and On Assignment (ASGN.N) have climbed between 15 percent and 50 percent since the Nov. 8 election, with the bulk of the gains following soon-after, as the potential for tax cuts also lifted the domestically focused industry.
"Stocks were basically signaling another recession and as soon as the election results hit, there’s new life that was breathing into these staffing stocks," said Dan Dolev, analyst at Nomura Instinet.
A test of the economy's strength -- and for staffing stocks -- comes on Friday, when monthly U.S. employment data is released. New applications for unemployment benefits recorded their biggest drop in nearly two years last week, data on Thursday showed.
Federal Reserve officials believe the economy is at or near full employment. That means a growing economy could produce only moderate benefits for staffing companies, compared with the boost they would get earlier in the business cycle.
But analysts also point to a greater-than-usual number of Americans out of the workforce, so a return to more normal levels could support hiring of temporary workers.
"While the overall unemployment rate is low, the worker participation rates also continue to be low which suggests that perhaps there are portions of the labor market that are still being underutilized," said Mark Marcon, analyst with Robert W. Baird.
Staffing companies provide access to temporary employees, although the type of job and industry varies. Robert Half specializes in accounting and finance, TrueBlue focuses on blue-collar work, while On Assignment specializes in tech jobs.
The penetration rate of temporary workers of the U.S. workforce has been rising since mid last year, accounting now for slightly over 2 percent of nonfarm payroll employment, or 2.9 million workers, according to Dolev. That rate stands at about its highest of the past three years.
"Structurally, it’s become more attractive over time for companies to use temporary staffing as an alternative to full-time employees," said Eric Kuby, chief investment officer at North Star Investment Management, whose small-cap focused firm owns shares of BG Staffing (BGSF.A).
Even if the improved business sentiment translates into real economic growth and employment gains, some investors say staffing stocks may already have seen their best days.
Looking at valuation, five top staffing firms trade on average near 15 times earnings estimates for the next year. That is similar to their five-year average and below the 22-times long-term level.
That valuation contrasts with the broad S&P 500, which trades some 20 percent above historic norms. It also signals that investors expect moderate, mid-cycle economic growth.
Baltimore-based Adams Funds bought Robert Half shares last September, said Mark Stoeckle, the firm’s CEO. They sold in January after the stock had gained more than 30 percent, he said.
“The easy money had been made, and we took the opportunity to recycle that into another stock,” Stoeckle said.
(Reporting by Lewis Krauskopf; Editing by Andrea Ricci)