Last week, the Bureau of Labor Statistics reported unemployment fell to a 50-year low of 3.5%. While health care and education saw the largest growth in September with a net gain of 40,000 jobs, the professional and business services sector recorded an impressive gain as well, adding 34,000 positions.
As a result, investors may be interested in looking for value opportunities among employment services companies that are trading below Peter Lynch value.
Lynch, a renowned investor who posted average annual returns of 29% while managing Fidelity’s Magellan Fund, developed this strategy in order to simplify his stock-picking process. With the belief good, stable companies eventually trade at 15 times their annual earnings, he set the standard at a price-earnings ratio of 15. Stocks trading below this level are often considered good investments since their share prices are likely to appreciate over time, creating value for shareholders. The GuruFocus All-in-One Screener, a Premium feature, also looked for companies with a business predictability rank of at least two out of five stars and a 10-year revenue per share growth rate of at least 6%.
Employment services stocks that met these criteria as of Oct. 9 were Korn Ferry (KFY, Financial), Mastech Digital Inc. (MHH, Financial) and TrueBlue Inc. (TBI, Financial).
Korn Ferry
The Los Angeles-based management consulting company has a $1.99 billion market cap; its shares were trading around $35.75 on Wednesday with a price-earnings ratio of 10.99, a price-book ratio of 1.63 and a price-sales ratio of 0.99.
The Peter Lynch chart shows the stock is trading below its fair value, suggesting it is undervalued.
GuruFocus rated Korn Ferry’s financial strength 6 out of 10. Although the company has adequate interest coverage, the Altman Z-Score of 2.98 indicates it is under some financial pressure since it has recorded a slowdown in revenue per share growth over the past 12 months and has a low cash-debt ratio of 0.91.
The company’s profitability and growth scored a 9 out of 10 rating. Although the operating margin is in decline, it still outperforms a majority of competitors. In addition, Korn Ferry is supported by a high Piotroski F-Score of 7, which suggests operations are healthy, and a 3.5-star business predictability rank. According to GuruFocus, companies with this rank typically see their stocks gain an average of 9.3% per annum over a 10-year period.
According to the GuruFocus Industry Overview page, Korn Ferry is the seventh-largest company in the employment services space, behind Robert Half International Inc. (RHI, Financial), ManpowerGroup Inc. (MAN, Financial), 51job Inc. (JOBS, Financial), Insperity Inc. (NSP, Financial), Trinet Group Inc. (TNET, Financial) and ASGN Inc. (ASGN, Financial).
Of the gurus invested in Korn Ferry, Chuck Royce (Trades, Portfolio) has the largest position with 0.72% of outstanding shares. John Rogers (Trades, Portfolio), Jim Simons (Trades, Portfolio)’ Renaissance Technologies, Hotchkis & Wiley, Joel Greenblatt (Trades, Portfolio), Ken Fisher (Trades, Portfolio) and Paul Tudor Jones (Trades, Portfolio) are also shareholders.
Mastech Digital
Headquartered in Pittsburgh, the company, which provides information technology staffing services and digital transformation services, has a market cap of $63.25 million; its shares were trading around $5.73 on Wednesday with a price-earnings ratio of 6.82, a price-book ratio of 1.49 and a price-sales ratio of 0.33.
According to the Peter Lynch chart, the stock is undervalued.
As a result of issuing approximately $19.54 million in new long-term debt over the past three years, Mastech’s financial strength was rated 5 out of 10 by GuruFocus. The Altman Z-Score of 3.73, however, suggests it is in good financial standing.
The company’s profitability and growth scored an 8 out of 10 rating. Although the operating margin is in decline, Mastech is supported by strong returns that outperform over half of industry peers, a moderate Piotroski F-Score of 4, which suggests operations are stable, consistent earnings and revenue growth and a 4.5-star business predictability rank. GuruFocus says companies with this rank typically see their stocks gain an average of 10.6% per year.
Simons’ firm holds 0.51% of the company’s outstanding shares.
TrueBlue
The Tacoma, Washington-based company, which provides staffing and workforce solutions, has an $843.88 million market cap; its shares were trading around $21.26 on Wednesday with a price-earnings ratio of 12.56, a price-book ratio of 1.36 and a price-sales ratio of 0.33.
Based on the Peter Lynch chart, the stock appears to be undervalued.
TrueBlue’s financial strength and profitability and growth were both rated 7 out of 10 by GuruFocus. While the company has a low cash-debt ratio of 0.36, underperforming a majority of competitors in its industry, it has adequate interest coverage. In addition, the robust Altman Z-Score of 4.56 indicates it is in good standing financially.
While the company’s margins and returns are underperforming over half of its competitors, it is supported by a high Piotroski F-Score of 7. The 2.5-star business predictability rank is on watch as a result of declining revenue per share over the past three years.
With 0.60% of outstanding shares, Royce is the company’s largest guru shareholder. Other top guru investors are Barrow, Hanley, Mewhinney & Strauss, Simons’ firm, Hotchkis & Wiley and Greenblatt.
Disclosure: No positions.
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