The 10 Best Service Sector Stocks

The top service sector stock, according to a consensus of more than 30,000 investors participating in Motley Fool CAPS, isn't a widely followed large cap like Accenture, Time Warner, or UPS. In fact, none of those global gorillas even crack the CAPS investors' top 10. Instead, a South American cable company -- not even a twentieth of the size of either of those companies -- sits atop the list.

Net Servicos de Comunicacao (Nasdaq: NETC  ) , though relatively small with a market cap of $480 million, is Brazil's largest cable provider and sports close to 2 million subscribers. Net is also special in that it offers Brazilians the "triple play" of cable TV, high-speed Internet, and fixed-line phone services. They've been adding subscribers at a smoking pace recently, while the stock -- up nearly 400% over the last three years -- is hotter than the Samba.

As Brazil's economy continues to strengthen, Net's unique bundled package should only become more affordable (and popular) going forward. So, it's clear that our CAPS investors love Net for the exposure it gives them to booming Brazilian growth.

And what companies make up the rest of top 10, you ask?

Company

Market Cap*

Celadon Group

$380

McKesson (NYSE:MCK)

$17,270

MSC Industrial Direct (NYSE:MSM)

$3,430

CE Franklin

$220

The McGraw-Hill Companies (NYSE:MHP)

$23,620

Health care Services Group (NASDAQ:HCSG)

$799

Multi-Color

$247

ICON (NASDAQ:ICLR)

$1,230

Spherion (NYSE:SFN)

$547

*In millions

As always, none of the companies on this list should be considered formal recommendations, but rather as suggestions for further research. After all, when so many Fools feel so strongly about a group of service stocks, you'd do your portfolio some service by giving them a closer look.

Common ground
The 10 companies provide services that are as varied as the sector itself, underlining an important point about the industry.

Business outsourcing is the major tailwind of the service industry, and many obscure companies have created a sweet niche for themselves based on this trend. Although most are too small for Wall Street to notice, CAPS investors seem to be right on top of them.

Six of the 10 companies on our list have market caps below $1 billion, providing services that range from staffing and pharmaceutical development to oilfield solutions and even labeling. So, within this sector, investors can find a disproportionate number of ignored stocks with huge, untapped opportunities in front of them. Of course, we can't say for certain which one will be the next great multibagger, but it's good to know that our CAPS community is searching carefully.

Another notable trend in the group is strong returns on equity and capital. Nine of the companies have double-digit returns on equity (with an average of about 22%), while the average return on capital for the group is around 17%. In other words, it's a fundamentally sound bunch. So, even though CAPS investors are favoring the smaller, growth-ier stocks in the sector, they're not exactly speculative selections, either.

What do you think? Does Net Servicos deserve to be the sultan of all service stocks? How about the other companies our list? To chime in with your thoughts and opinions, join Motley Fool CAPS -- a completely free service -- today.

Fool contributor Brian Pacampara owns no position in any of the companies mentioned. Accenture is a Motley Fool Inside Value recommendation. Time Warner is a Stock Advisor pick, and UPS is an Income Investor pick. The Fool has a disclosure policy.


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