A softening labor market and rising unemployment rate have pummeled shares of staffing companies recently and left investors on edge about the economy's health.
The unemployment rate rose to 5 percent in December from 4.7 percent in November, which marked the biggest one-month gain in the jobless rate since October 2001, following the Sept. 11 terror attacks.
Stifel Nicolaus analyst Jim Janesky said that even though the job market "has not fallen off a cliff," it has slowed significantly.
"There are no investors interested in owning staffing stocks now," Janesky said in an interview.
Looking at the Labor Department's December employment report, Janesky said it showed that weakness in the U.S. economy has trickled into the labor market. Temporary employment, typically considered a leading indicator of how healthy the overall employment market is, remained flat in December.
Even staffing companies with a strong overseas presence are feeling the pain, such as Manpower Inc., which is largely tied to international markets. France is the company's largest market, and 85 percent of total sales come from overseas.
Still, shares have declined around 22 percent since hitting a 52-week high of $97.28 in July.
"That stock has pulled way back," Janesky said. "Investors are concerned that a slowdown (in the U.S.) will spill over to international markets."
Some of the other companies that have seen shares tumble recently include Kelly Services Inc., which kicks off earnings season for the sector when it reports quarterly results on Thursday. Since a 52-week high of $33.97 hit in April, shares have dropped nearly 17 percent.
Goldman Sachs analyst David Feinberg, who has a "Sell" rating on Kelly, wrote in a client note that Wall Street's 2008 earnings-per-share estimate is too high for Kelly and other staffing companies and needs to come down. Robert Half International Inc. has seen its stock price fall nearly 10 percent, also since hitting a yearly high of $42.21 in February.
Some industry executives predict job growth, albeit smaller, this year, as employers become more cautious.
"We're expecting a continued slowdown in 2008, but it's a slowdown in growth," said Richard Wahlquist, president and chief executive of the American Staffing Association, which publishes statistics on the industry.
But Goldman Sachs' Feinberg said he doesn't expect the staffing stocks to rebound until after the Federal Reserve stops cutting rates, which doesn't appear to be anytime soon. The Fed, confronted with a sagging economy and increased fears of a recession, on Tuesday slashed the federal funds rate by three-quarters of a percentage point and indicated further rate cuts were likely.
Terms & Conditions
RSS Headlines
Fool UK