4 Stocks to Buy as Services Sector Activity Continues to Expand

Activity in the U.S. services sector that had slowed during the peak of the pandemic and the months thereafter have once again gathered steam. Higher orders are driving more activity in the space. According to the Institute for Supply Management, services activity increased once again in August.

One of the primary reasons for the jump in services activity was the recent easing of price pressures and supply constraints, which suggest that the economy might not be in recession. Given this situation, business services stocks like SPS Commerce, Inc. SPSC, Avis Budget Group, Inc. CAR, comScore, Inc. SCOR and ZipRecruiter, Inc. ZIP are likely to benefit in the near term.

Services Sector Expands

The Institute for Supply Management said on Aug 3 that its services sector Purchasing Managers’ Index (PMI) rose to 56.9 in August from 56.7 in July. Although the jump is marginal, the good sign is that the sector hasn’t yet succumbed to inflationary pressures. Economists had expected the reading to decline to 55.1.

A reading of anything above 50 suggests an increase in service activities. The services sector has now grown for 27 straight months, indicating that people have gradually started spending more on services and less on goods.

Also, a rise in services activity suggests that the economy may still have not given in to inflationary pressures despite manufacturing output decreasing and consumers being more cautious about spending due to rising commodity prices.

The Business Activity Index also came up with an impressive reading of 60.9% in August, increasing 1% from July’s reading of 59.9%. The New Orders Index came up with a reading of 61.8%, higher than July’s reading of 59.9%.

Lower Prices and Higher Orders Driving Services Activity

Orders in the services industry have increased as a result of lower prices. Additionally, some respite from supply difficulties has been driving orders. Another sign that the economy may not be as bad off as many predict is growth in the services sector despite rising costs.

The Prices Index declined 0.8% from July to 71.5% in August. Prices have now dropped for the fourth straight month. This fall in prices has greatly been boosting services activity.

The government said last month that U.S. GDP contracted 0.6% in the second quarter. Although this is slightly less than the 0.9% reported previously, prices are still a lot high, which has compelled people to spend cautiously. However, prices have eased lately, which might be an indication that they won’t soar further and the worst may just be over.

Additionally, consumers have again started spending more money on services than on goods. During the pandemic, people spent more on products, which decreased business activity in the services sector. However, once the economy began to recover, services activity started to take off.

This could be yet another factor contributing to the slowdown in the manufacturing and retail sectors. Due to significant demand, business activity is anticipated to grow even more in the upcoming months. A drop in pricing will help the industry even more.

Our Choices

The current situation makes for an ideal opportunity to invest in these four stocks from the services sector.

SPS Commerce, Inc. is a provider of on-demand supply-chain-management solutions, providing integration, collaboration, connectivity, visibility and data analytics to its customers worldwide. SPSC delivers its solutions over the Internet using a Software-as-a-Service model to improve the way suppliers, retailers, distributors and other customers manage and fulfill orders.

SPS Commerce’s expected earnings growth rate for the current year is 18.1%. The Zacks Consensus Estimate for current-year earnings has improved 3.4% over the past 60 days. SPSC carries a Zacks Rank #1 (Strong Buy) at present. You can see the complete list of today’s Zacks #1 Rank stocks here.

Avis Budget Group, Inc. operates as a leading vehicle rental operator in North America, Europe and Australasia, with an average rental fleet of nearly 650,000 vehicles. CAR is a leading global provider of mobility solutions through its three most recognized brands — Avis, Budget and Zipcar. Avis Budget Group has licensees in approximately 175 countries throughout the world.

Avis Budget Group’s expected earnings growth rate for the current year is more than 100%. The Zacks Consensus Estimate for current-year earnings has improved 19.3% over the past 60 days. CAR currently sports a Zacks Rank #1.

comScore, Inc. is a global leader in measuring the digital world. SCOR’s capability is based on a massive, global cross-section of more than two million consumers who have given comScore permission to confidentially capture their browsing and transaction behavior, including online and offline purchasing. comScore panelists also participate in survey research that captures and integrates their attitudes and intentions.

comScore’s expected earnings growth rate for the current year is 46.2%. Shares of SCOR have gained 3.8% over the past 30 days. Currently, comScore has a Zacks Rank #2 (Buy).

ZipRecruiter, Inc. provides employment services. ZIP offers recruiting, hiring, job boards, posting, web application, candidate screening, applicant tracking and job alerts services. ZipRecruiter operates principally in the United States and the United Kingdom.

ZipRecruiter’s expected earnings growth rate for the current year is more than 100%. The Zacks Consensus Estimate for current-year earnings has improved 73.9% over the past 60 days. ZIP presently has a Zacks Rank #2.

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