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Reboot of Economy Stimulates US Service Sector: 5 Winners

Zacks Equity Research

Per a recent Institute for Supply Management (ISM) data, service sector in the United States showed signs of recovery in June as businesses began to reopen following the relaxation of coronavirus-induced lockdowns.

The report suggests that the non-manufacturing activity index increased to a reading of 57.1 in June from 45.4 in May, marking the highest four-month gain after a record plunge of 41.8 in April. Notably, reading above 50 points toward growth. A poll conducted by Reuters shows that economists anticipated the index to rise to 48.9 in June while economists polled by Bloomberg predicted the scale to increase to a median reading of 50.2.

According to the report, non-manufacturing indexes like agriculture, accommodation and food services, wholesale trade and the real estate were a few standouts among the 14 industries that reported growth last month. Of the rest, three indices contracted. 

The uptick in the index follows last week’s ISM report on its manufacturing survey, which showcased that the factory activity soared to a 14-month high in June. However, a second-wave spike in cases could force several states to hold back the re-openings and slow down the gains in July. 

“Respondents remain concerned about the coronavirus and the more recent civil unrest; however, they are cautiously optimistic about business conditions and the economy as businesses are beginning to reopen,” Anthony Nieves, chairman, ISM’s non-manufacturing business survey committee, said in a statement.

The Business Activity Index witnessed a rise of 25 points to 66 in June while the gauge of new orders climbed 19.7 points to 61.6 last month. ISM’s measure of service employment advanced 11.3 points to 43.1 in June but remains lower than the year-ago figure of 55.2, highlighting that the coronavirus continues to weigh on the labour market across industries.

Our Top Choices

Although the June numbers surpassed all expectations and look encouraging, hopes of a quick economic rebound are unlikely. The recent relapse in COVID-19 looms large, dimming the prospects of a rapid improvement in services.

“We believe the recovery will progress at a slower pace compared to this initial, snap-back phase,” reckons Gregory Daco, chief economist, Oxford Economics. “The concerning trajectory of the virus in recent weeks will be the key impediment constraining the recovery as many states have now paused or rolled back their reopening plans due to a spike in cases.”

At this stage, keeping all the positives in mind, we narrowed down our search to five stocks for investment purpose, carefully chosen from the industries with top performances in June, namely agriculture and accommodation and food. Each stock currently has a Zacks Rank #1 (Strong Buy) or 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Sprouts Farmers Market, Inc. SFM operates in a highly fragmented grocery store industry with focus on product innovation, e-commerce, expansion of private label assortment and enhancement of technology. The company has a trailing four-quarter positive earnings surprise of 37.17%, on average. It is presently a Zacks #1 Ranked player. 

Dine Brands Global, Inc. DIN is a full-service dining company. It operates and franchises restaurants under both the Applebee's Neighborhood Grill & Bar and IHOP brands. The company's Applebee's restaurants offer casual food, drinks, casual dining and table services while IHOP restaurants provide full-table services plus food and beverage offerings. The company has a trailing four-quarter positive earnings surprise of 9.17%, on average. It is presently a #1 Ranked player. 

Tractor Supply Company TSCO is the largest retail farm and ranch store chain in the United States. The company, currently carrying a Zacks Rank #2, offers a wide array of merchandise, such as livestock, pet and animal products, maintenance products for agricultural and rural use, hardware and tools, lawn and garden power equipment, truck and towing products, and work apparel. The Zacks Consensus Estimate for current-year earnings has seen 11 upward revisions in the past 60 days.

Marcus Corporation MCS engages in lodging and entertainment industries. It operates through two segments: Movie Theatres and Hotels and Resorts. Marcus' lodging division owns or manages hotels and resorts in several states as well as runs a vacation club. The company has a trailing four-quarter positive earnings surprise of 18.33%, on average. It currently holds a Zacks Rank of 2. 

Domino’s Pizza, Inc. DPZ is a top player in the quick-service restaurant space and is one of the largest pizza chains globally. In the United States, the company is the market leader in the delivery segment and ranks second in the carry-out division. As far as earnings surprises are concerned, this currently Zacks #2 Ranked company boasts an excellent record as its bottom line surpassed the Zacks Consensus Estimate in all the trailing four reports, the average being 12.72%.

 

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Dominos Pizza Inc (DPZ) : Free Stock Analysis Report
 
DINE BRANDS GLOBAL, INC. (DIN) : Free Stock Analysis Report
 
Marcus Corporation The (MCS) : Free Stock Analysis Report
 
Tractor Supply Company (TSCO) : Free Stock Analysis Report
 
Sprouts Farmers Market, Inc. (SFM) : Free Stock Analysis Report
 
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