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Stock Strategist Industry Reports

Opportunities in Employment

The price is right for a few names on our employment services list.

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While by no means robust, job growth did return to positive territory during the latter half of 2010. This dynamic continued into the first four months of 2011 with the government reporting 1.7 million nonfarm jobs added between January 2010 and May 2011. The private sector was even more robust as 2.0 million nonfarm jobs were added during this period, excluding the government sector. The unemployment rate has fallen 70 basis points to 9.1% from November 2010 to May 2011, which is a mostly positive sign as the participation rate has not fallen on par. Additionally, most employment services firms continued to report robust results during the most recent earnings season, and many management teams have stated that these trends will accelerate for the remainder of 2011. The confluence of positive data has reinforced our expectation for moderate job growth for 2011.

Given the strengthening employment market, there has been a runup in the share prices of most employment services firms. The average price/fair value ratio for staffing and payroll processing firms is currently at 1. Many investors already have priced in a solid recovery for many of these players, in our opinion. However, there are a few names we currently believe are undervalued and offer market participants a compelling opportunity.

Vishnu Lekraj does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.