Jobs Report Paints a Pretty Picture for Stocks: 5 Top Picks

The month of May has seen strong and widespread job addition, with the rate of jobless matching the lowest in half a century. Robust jobs data offset brewing trade war fears and helped Wall Street recoup large chunk of losses. Let us, thus, look into stocks that made the most of the blockbuster jobs report and scaled north.

Blockbuster Jobs Report Offsets Trade Worries

May’s jobs report made a pretty picture of an economy with opportunities for almost everyone. The United States added 223,000 jobs last month, exceeding analysts’ estimates. Such a feat was achieved despite questions about employers’ ability to find skilled labor.

The jobless rate ticked down to an 18-year low of 3.5%, indicating that the nine-year stretch of economic expansion has scope to continue. Black unemployment, in fact, fell to a record low. The real unemployment rate, also known as the U6 rate, contracted to 7.6% from 7.8%. The U6 now stands at a level lower than it was during the 2007-2009 recession.

Such robust jobs data shrugged off trade war fears. The United States decided to impose tariffs on steel and aluminum imports from the European Union (EU), Canada and Mexico. This in turn has sparked chances of retaliation by the trade partners, reigniting concerns of a global trade war.

Staffing Stocks to Make the Most of Strong Jobs Report

The latest job additions bode well for staffing companies. Additionally, the Conference Board’s Employment Trends Index, was 108.08 in April, up from 107.37 in March. When compared to the year-ago level, the index shows a jump of 4.9%.

Gad Levanon, North American added that “with the economy growing well above trend, and the working-age population barely growing at all, we expect the labor market to significantly tighten in the coming year.”

The buoyancy in the staffing space is further confirmed by its solid Zacks Industry Rank in the top 37%, indicating continued hiring and more job opportunities. In fact, the top 50% of Zacks Ranked Industries outperforms the bottom 50% by a factor of more than 2 to 1.

Retailers Lead the Way in Hiring

By and large, the jobs report showed that most of the industries added jobs and workers’ pay have risen at a better-than-expected pace. Industries such as construction and manufacturing have raised issues of shortage of skilled workers, but, did report steady hiring. Construction firms boosted payrolls by 25,000 and manufacturers took on 18,000 workers.

However, it was retailers who led the way in hiring by increasing employment by 31,000. Such a hiring spree indicated that retailers are in an expansion mode and their businesses are churning out huge profits. And why not? Sales at U.S. retailers rose in broad fashion in April as fatter after-tax pay checks helped compensate the uptick in fuel cost. Per the Commerce Department, sales increased 0.3% in April, matching the median forecast, after a 0.8% rise in the prior month.

Jobs Report Points to Higher Interest Rates, Financials Gain

The phenomenal jobs report also shows that hourly pay went up by 8 cents or 0.3% to $28.92 an hour last month. In the last 12 months, wages rose to 2.7% after remaining at 2.6% for three months at a stretch.

Higher pay means that the cost of borrowing for both consumers and businesses is going to go up soon. Higher inflation, in turn, may lead to increased interest rates. Minutes from the Fed’s May 2 meeting had already shown that most of the policymakers have agreed that a strong economic outlook warranted a rate hike “soon.” Traders in the federal funds futures market are pricing in a 91.3% chance of a June rate hike.

As the stage for a rate hike is set,institutions such asbanks and insurance houses will see a ramp up in profits. Higher interest rates can boost bank profits as they increase the spread between what banks earn by funding longer-term assets, such as loans, with shorter-term liabilities.

Rising rates act as a boon for insurance companies as they derive their investment income from investing premiums, which are received from policyholders in corporate and government bonds. Yields and coupons on these bonds rise in response to a hike in Fed fund rates and bank interest rates. This enables life insurers to invest their premiums at higher yields and earn more, expanding their profit margins.

Dollar Strengthens on Jobs Report, Time to Think Small

The ICE Dollar Index inched higher against a basket of six currencies, trading up 0.2% to 94.213 after the release of upbeat U.S. employment data. The current strength in the U.S. dollar, however, is weighing on multinational stocks.

But, small caps have little or no exposure to overseas market when it comes to revenue generation. So, they tend to gain with a stronger dollar. The small-cap S&P 600 index is up 8.6% since the start of the year, compared with 2.6% gain of the large-cap S&P 500 (read more: 5 Top Stocks to Pull Through the June Swoon).

Top 5 Winners

From recruiters and retailers to financials and those who have high domestic exposure in terms of revenue generation, all stand to gain from a strong jobs report. Thus, investing in such stocks seems the right thing to do now. We have picked five such stocks that should make meaningful additions to your portfolio. These stocks flaunt a Zacks Rank #1 (Strong Buy) or 2 (Buy).

Kforce Inc. KFRC provides professional staffing services and solutions in the United States and internationally. The company has a Zacks Rank #1. The Zacks Consensus Estimate for its current-year earnings rose 3.3% in the last 60 days. The stock’s expected earnings growth rate for the current year is 40.1% versus the Staffing Firms industry’s estimated rally of 25.3%.

Burlington Stores, Inc. BURL operates as a retailer of branded apparel products in the United States. The company has a Zacks Rank #2. The Zacks Consensus Estimate for its current-year earnings rose 2.2% in the last 60 days. The stock’s expected earnings growth rate for the current year is 36.8% versus the Retail - Discount Stores industry’s projected rally of 18.4%.

Brookline Bancorp, Inc. BRKL operates as the holding company for Brookline Bank, Bank Rhode Island, First Ipswich Bank, and Brookline Securities Corp that provide commercial, business, and retail banking services to corporate, municipal, and retail customers in the United States. The company has a Zacks Rank #2. The Zacks Consensus Estimate for its current-year earnings rose 2.9% in the last 60 days. The stock’s expected earnings growth rate for the current year is 35% versus the Financial - Savings and Loan industry’s estimated rally of 21.7%. You can see the complete list of today’s Zacks #1 Rank stocks here.

Federated National Holding Company FNHC engages in insurance underwriting, distribution, and claims processing business in the United States. The company has a Zacks Rank #1. The Zacks Consensus Estimate for its current-year earnings rose 12.5% in the last 60 days. The stock’s expected earnings growth rate for the current year is 275% versus the Insurance - Property and Casualty industry’s estimated rally of 23.7%.

Salem Media Group, Inc. SALM operates as a multimedia company in the United States. The company has a Zacks Rank #1. The Zacks Consensus Estimate for its current-year earnings rose 68.4% in the last 60 days. The stock’s projected earnings growth rate for the current year is 23.1% versus the Broadcast Radio and Television industry’s expected rally of 18.3%.

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