Labor Stocks Are Going To Break Out In 2020

The Labor Market Is Driving Our Economy And Coming To A Boil

The labor markets were one of the most closely watched segment of our economy in 2019. Despite all the naysaying, the labor market ended the year on the most solid footing its been on in the history of the U.S. The size of the labor force is the largest its ever been, the unemployment rate is trending at historic lows, more minorities are working than ever before, wages are rising at a +3% clip, and the outlook for 2020 is just as robust.

If you are worried about what may happen in labor trends this year let me reassure you, the labor market will come to a boil in 2020 and push labor-related stocks to new highs. A recent survey by Manpower, Inc revealed employers are not scaling back their plans for hiring in 2020.

According to Manpower’s survey of 11,500 U.S. employers, only 5% of businesses are planning to cut back on employment. On a seasonally adjusted basis, fully 19% of businesses are planning to expand their workforces in the first quarter of the year while the remainder are going to maintain the workforces they’ve already built.

Manpower, Inc Will Cash In On Labor Shortages

Manpower, Inc (MAN), an international firm specializing in staffing and recruitment services, is going to cash in on labor market shortages. Two of my favorite data points, the number of available workers and the number of open jobs, help drive the reality of this situation home.

According to the Employment Situation Report, AKA the Non-Farm Payrolls Report shows 5.8 million American workers ready to go to work right now. The JOLTs report, Job Openings and Labor Turnover, shows upward of 7.3 million open jobs. That’s a deficit of roughly 1.5 million employees, a fact that will make recruitment and retention a top-priority in 2020.

Analysts are expecting Manpower, Inc to produce about 4% EPS growth next year but this is a low estimate. Momentum within the labor economy coupled with the gross-shortage of employees is going to drive business in the New Year.

At only 13.5X forward earnings Manpower is trading at the lowest valuation of any labor market stock I track. The stock is also paying 2.25% in yield which compares favorably with the broad markets average P/E of 19.5 and yield of only 1.75%. Manpower is also a dividend grower having raised its distrubution for the last 9 years with a 17% CAGR.

ADP, Cloud-Based Services For Employers Are In Demand

ADP (ADP) is another labor market stock in good position to cash in on employment trends in 2020. The company provides cloud-based solutions for employers that include payroll processing, insurance, retirement benefits, and human resources applications.

At today’s prices the stock is one of the more highly valued, trading at 27X forward earnings, but that’s easy to overlook when growth is in the forecast. Analysts are expecting ADP to grow revenue by 6% and deliver a near 12% increase in EPS. Couple this with the stocks newly acheived Dividend Aristocrat status and you have a recipe for double-digit total returns.

The stock is currently in an uptrend and consolidating just shy of recently set all-time highs. The indicators are bullish and point to a test of resistance at least. Resistance is near the $172 level, a break above this level would be bullish and bring targets near $215 into play.

Cintas, The Best Play On Labor You Can Buy

Cintas (CTAS) is another Dividend Aristocrat and the best play on labor market conditions you can buy. Trading at 30X forward earnings it is not a cheap stock but that is offset by its outlook for growth. The company has been growing organically in the high-single-digits for year and shows no signs of stopping. The company is also actively growing through acquisitions that promise to boost returns in the coming years.

What does Cintas do? Cintas is a provider of employer and employee services that include uniform rentals and delivery, safety products and first aid solutions. Analysts are expecting the company to deliver 6% revenue growth this year and produce 10% earnings growth. Because the company has been successfully cutting costs and widening margins, partly due to synergies realized through acquisitions, the consensus estimates for 2020 are likely too low. Over the past three years, the company has only missed estimates once.

Other than the yield, sub-1%, the dividend is quite good. The payout ratios is super-low at 28% which means the company could sustain dividend increases without the expectation of future earnings growth. The distribution has been increased every year for 28 years so there is a high expectation of future increases. Couple this with the growth outlook and the odds of Cintas uptrend continuing are quite high.

The stock has been in a protracted uptrend for a decade, coincident with a labor market expansion that began following the global financial crisis. Price action is now consolidating at the fresh all-time highs and on the verge of a major break out. The indicators are still mixed but set up to produce a trend-following swing in momentum that could easily take this stock to new all-time highs during the 1st quarter of 2020.