September's Services PMI Confirms U.S. Recovery: 5 Top Picks
We have narrowed down our search to five service-oriented stocks that have surged more than 20% year to date. These are: CROX, CHDN, YETI, CMG and DPZ.
For the last couple of months, a section of market participants was concerned about slowing U.S. economic recovery and said that the recovery process may have reached its peak. The rapid spread of the highly infectious Delta variant of coronavirus and higher inflationary pressure were the reasons for this negative thinking. These were the main reasons for Wall Street’s meltdown in September.
However, the recently released data for the U.S. manufacturing and services industry PMI (purchasing managers’ index) by the Institute of Supply Management (ISM) revealed that the U.S. economic recovery is firmly on track.
Strong Services Sector PMI for September
Service-oriented industries are flying high buoyed by the great reopening of the U.S. economy. On Oct 5, the ISM reported that the services PMI for the month of September rose to 61.9 from 61.7 in August. The consensus estimate was 60. Notably, any reading above 50 means expansion in services activities, while a reading above 60 is generally recognized as exceptional.
The Supplier Deliveries Index decreased to 68.8 in September from 69.6% in August. Any reading above 50 means slower deliveries. The Business Activity Index came in at 62.3, up 60.1% sequentially. Additionally, the New Orders Index gained 0.3% to reach 63.5 while the Backlog of Orders Index advanced 0.6 to rise to 61.9. A record number of 17 out of 18 service-related industries tracked by the ISM reported growth in new orders and production.
The report carried more significance in light of the resurgence of the Delta variant, which several economists and market researchers thought would decimate services sector growth. Moreover, on Oct 1, the ISM reported that the U.S. manufacturing PMI increased to 61.1 in September from 59.9 in August. The consensus estimate was 59.6.
The services sector accounts for 70% of the U.S. GDP while the manufacturing sector commands around 12% of economic activities. In September, both PMIs showed exceptional results. Robust data for both the manufacturing and services sectors will eventually lead to strong economic growth.
Other Near-Term Catalysts
Durable goods orders surged 1.8% in August. Moreover, new orders for core capital goods (non-defense capital goods excluding aircraft) rose 0.6% in August. Year over year, new orders for core capital goods jumped 16.4%. This metric is a closely watched proxy for a business investment plan. Shipments of core capital goods rose 0.7% in August. This metric is used to calculate equipment spending in GDP measurement.
In addition to strong business spending, consumer spending rebounded in August with a gain of 0.8% after declining 0.1% in July. Consumer spending is likely to remain elevated as we are entering the holiday sales season. Holiday retail sales are likely to climb this year as projected by various major market researchers like Deloitte, Mastercard SpendingPulse, Bain and KPMG. Notably, consumer spending accounts for nearly 70% of U.S. GDP.
Finally, a major driver of stock markets in October and November could be the third-quarter 2021 earnings results. As of Oct 1, total third-quarter earnings for the S&P 500 Index are expected to be up 26% from the same period last year on 13.9% higher revenues. Moreover, total earnings of the S&P 500 Index are projected to climb 42.6% on 13.5% higher revenues in 2021 and increase 9.8% on 5.2% higher revenues in 2022.
Our Top Picks
We have narrowed down our search to five service-oriented stocks that have surged more than 20% year to date. These stocks have strong growth potential for the rest of 2021 and have seen positive earnings estimate revisions in the last 60 days. Each of our picks carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The chart below shows the price performance of our five picks year to date.
Image Source: Zacks Investment Research
Crocs Inc. CROX designs, develops, manufactures, markets and distributes casual lifestyle footwear and accessories for men, women and children worldwide. It offers various footwear products, including clogs, sandals, flips and slides, shoes, and boots under the Crocs brand name.
The company has an expected earnings growth rate of more than 100% for the current year. The Zacks Consensus Estimate for current-year earnings improved 1.6% over the last 30 days. The stock price has soared 118.5% year to date.
Chipotle Mexican Grill Inc. CMG operates quick-casual and fresh Mexican food restaurant chains globally. It offers a focused menu of burritos, tacos, burrito bowls (a burrito without the tortilla) and salads. Chipotle restaurants feature free-range, hormone-free pork, natural chicken and other meat products cooked through traditional methods and served in a unique atmosphere.
The company has an expected earnings growth rate of more than 100% for the current year. The Zacks Consensus Estimate for current-year earnings improved 0.1% over the last 30 days. The stock price has rallied 31.8% year to date.
Churchill Downs Inc. CHDN operates as a racing, online wagering and gaming entertainment company in the United States. It operates through three segments: Churchill Downs, Online Wagering, and Gaming.
The company has an expected earnings growth rate of more than 100% for the current year. The Zacks Consensus Estimate for current-year earnings improved 4.3% over the last 30 days. The stock price has jumped 26% year to date.
YETI Holdings Inc. YETI designs, markets, retails and distributes products for the outdoor and recreation market under the YETI brand in the United States, Canada, Australia and Japan. Its products are designed for use in various categories, including hunting, fishing, camping, barbecue, farm and ranch activities.
The company has an expected earnings growth rate of 32.6% for the current year. The Zacks Consensus Estimate for current-year earnings improved 1.6% over the last 60 days. The stock price has climbed 23.9% year to date.
Domino's Pizza Inc. DPZ operates as a pizza delivery company in the United States and internationally. It operates through three segments: U.S. Stores, International Franchise, and Supply Chain. The company offers pizzas under the Domino's brand name through company-owned and franchised stores.
The company has an expected earnings growth rate of 14.1% for the current year. The Zacks Consensus Estimate for current-year earnings improved 0.6% over the last 7 days. The stock price has advanced 23.8% year to date.
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