Contrarian opportunity? Here’s what the StockRanks are saying about recruiters

A year ago, I’d have suggested that many UK recruitment stocks could be attractively priced. Here’s what’s happened to a basket of these stocks since then, compared to the FTSE All-Share index:

Buying into a falling trend too soon is a mistake I’ve made more than a few times in my investing career.

My article next week will take a data-driven look at the influence of momentum on UK stock market returns over the last decade.

However, this week I’ve been taking a more focused look at what the StockRanks are saying about the recruitment sector. Are contrarian opportunities emerging – or is it still too soon to consider buying?

Recent progress has certainly been cautionary. The chart above represents the aggregate performance of the following UK-listed recruitment firms:

• Hays (LON:HAS)

• Pagegroup (LON:PAGE)

• SThree (LON:STEM)

• Robert Walters (LON:RWA)

• Staffline (LON:STAF)

• Gattaca (LON:GATC)

• Empresaria (LON:EMR)

Only one is in positive territory on a three-year view, with others seeing share price falls of up to 65%:

Of course, recruitment has always been a cyclical sector, where profits are leveraged to the health of the economy.

In good times, employers are hiring and job hunters have negotiating power. Candidates also have the confidence needed to walk away from established jobs and take a chance on something new – something that has reportedly not always been true over the last 18 months.

Profits can rise quickly as busy recruitment agents are able to drive higher volumes.

[PageGroup]

When conditions become less favourable, these dynamics can go into reverse. Profits can slump as employers slow hiring and would-be candidates hesitate to give up secure positions with their current employer.

This is a sector of the market where investors need to have good timing to maximise profits. The chart below shows the performance of PageGroup, Robert Walters and SThree over the last 20 years. Note how their share prices have all moved largely in lockstep throughout this entire period:

Unsurprisingly, most of these companies have some common characteristics. Using PageGroup as an example, we can see that profitability can swing wildly between very high and very low levels:

Cash generation tends to be strong during boom times, allowing companies to build a cash buffer for when times are less good.

Workforce flexibility is another feature – companies are often quick to let recruitment consultants go when volumes fall.

Pagegroup’s average headcount has fallen by nearly 20% in two years. Robert Walters cut its headcount by 17% in 2024 alone.

This flexibility has allowed these firms to protect their balance sheets and maintain dividends supported by net cash, if not by earnings. Here’s PageGroup again:

The combination of a flat dividend and falling share price mean PageGroup shares offer a tempting forecast dividend yield of 6.5%.

Similar metrics apply to other companies in this sector:

High yields may give the impression that these shares are cheap, with recovery potential. This is a tempting narrative, but is there a data-driven hypothesis to back it up?

In the remainder of this piece I’ll consider the quality, value and momentum credentials of these stocks.

I’ll also comment on Empresaria and Staffline, to explain why these companies currently need to be viewed slightly differently.

StockRank overview

Let’s start with a look at the StockRanks and the individual factor ranks for each company:

I’m not surprised to see four Contrarian-styled stocks in this list. These stocks’ ValueRank and QualityRank scores are fairly high in most cases, but their MomentumRanks are almost uniformly low.

The exception to this is Empresaria, which also has a low QualityRank. In contrast to most of the other companies on this list, this group has a substantial net debt position and is currently unable to pay a dividend. Debt service costs have also exacerbated a severe decline in profitability. Mark discussed Empresaria’s recent results and risk profile recently here.

I’ll exclude Empresaria from any further discussion. I don’t see much logic in considering this micro cap (£12m) as a potential investment, given the alternatives available in this sector.

Quality

A more detailed view of this portfolio’s quality metrics reveals a very mixed picture on profitability, supported by somewhat average fundamental health (F-Score).

I’ve sorted these shares by return on equity in the table below, although sorting by operating margin would give a near-identical result:

SThree and PageGroup have remained the most profitable so far, with double-digit returns on equity last year.

Elsewhere, Staffline and Gattaca look potentially interesting, for reasons I will touch on in the next section.

However, looking at these metrics, I would argue that with the possible exception of SThree and PageGroup, none of these shares are exhibiting signs of true high quality at the moment.

Value

Switching to the Value view highlights some more impressive metrics.

It also provides us with a chance to see if these stocks could be cheap based on 10-year average (cyclical) earnings – the CAPE 10y. I find this a useful measure for heavily cyclical companies such as recruiters and commodity producers:

SThree, Robert Walters and Gattaca all trade with CAPE 10y ratios of around seven. To me, this suggests they could be affordably priced, relative to their historic through-cycle earnings power.

Elsewhere, Staffline trades on a remarkable 1.1x 10-year average earnings, but this needs to be seen in context.

This UK-focused business specialises in providing “flexible, temporary and permanent workforce solutions”, placing more than 40,000 staff each day. Broadly speaking, these are blue collar roles. Staffline has a mixed track record and suffered a near-terminal experience a few years ago, requiring a massive shareholder bailout:

This business now seems to be leaving its problems in the past, but I think Staffline’s rolling P/E of 8 is more representative of current profitability than any of the other metrics. 

Finally, Gattaca deserves a standalone mention here for its apparent discount to tangible book value. Mark covered this group’s latest results in some detail in the Daily Report on 2 April:

In summary, they are significantly outperforming their sector while still trading on a material discount to listed peers. Their superior balance sheet strength means that they will be around to benefit from the sector recovery when it arrives. This makes them continue to be GREEN, in my opinion, and I am in no rush to sell, despite some caution over reduced FY26 forecasts.

Unfortunately, the final part of Mark’s comment also highlights the risks facing investors in this sector. Will profits start to recover over the next 12 months – or could they fall further?

To round out this quantitative review, I need to consider the issue of momentum.

Momentum

This is where the real problem is, in my view. Look at this sea of red:

Using technical measures of price momentum, all of these shares look weak.

Broker earnings estimates – the other key element of the MomentumRank – have also been trending lower across the board.

For example, FY25 earnings estimates for PageGroup have been slashed by 75% over the last 12 months:

At SThree, estimates have been cut by 68% since April 2024:

Are recruiters at a turning point?

In most cases above, FY26 earnings estimates are higher than those for FY25. In other words, if forecasts can be believed, the 2025 period could be the low point for earnings at many of these firms.

This could signify a contrarian opportunity for investors who can stomach the current economic uncertainty and apparent US recession risk. The valuation of companies such as PageGroup and Robert Walters broadly supports a positive contrarian stance, in my opinion.

From a chartist’s perspective, it’s also possible to make the case that some of these shares are trading at 20-year support levels only previously breached in 2008/9. Here are a couple of examples.

Pagegroup:

Robert Walters:

Outlook: risks to a recovery?

My view on this sector has always been that cyclical demand will recover over time, as it always has done previously.

On that basis, I think it’s reasonable to suggest that some opportunities could be emerging among listed UK recruiters. I think Gattaca, SThree, Robert Walters and PageGroup could be worth a closer look.

However, I’d also argue that this situation isn’t without risk, for two main reasons:

Cyclical risk: the timing could still be wrong – economic conditions could be set to worsen in western markets.

For example, while many experts are predicting a recession in the US, aggregate earnings forecasts for the S&P 500 are still predicting double-digit growth this year:

The endgame on US tariffs is impossible to predict right now, in my view. But I think it’s fair to suggest there’s still some scope for a further slowdown in the US and other developed markets.

Are recruiters about to be disrupted? What could happen if my comforting assumption about an inevitable cyclical rebound is wrong?

At the top end of the market – high-level executives and technical experts – I expect that referrals, relationships and recruiter-led searches will remain the primary methods of recruitment.

But I’m starting to wonder about the outlook further down the pile. Will recruitment be another casualty of AI and the internet?

Sifting, sorting and shortlisting can increasingly be done by semi-automated services that can match requirements, trace candidates’ histories and review their personal profiles by drilling into LinkedIn profiles and other online sources.

LinkedIn also provides employers with direct access to a vast database of suitable candidates and allows job hunters to apply directly for roles.

In the future, I wonder if we’ll see recruitment firms needing to spend more on IT, while also suffering a possible loss of pricing power in some markets.

Final thoughts

Momentum can often persist for longer than investors expect. This applies to both positive and negative trends. For this reason, I’m trying to train myself to be more patient when waiting for signs of a turnaround in cyclical sectors.

Buying too early can carry a hefty opportunity cost, even if the trade eventually works out as hoped.

In my experience, it’s can be better to wait for a sign that momentum is improving before considering a purchase, even if it does mean missing out on some early gains.

You are looking for the first glimmer of a change - the first hint of good news after the gloom. You will pay a little more this way but look upon the extra cost as an insurance premium - Jim Slater, The Zulu Principle

Right now, I can’t see any clear evidence in the numbers that the trend is about to turn for recruiters. True, earnings forecasts for FY26 are (mostly) higher than those for FY25. But I can’t help feeling that repeated cuts to broker estimates over the last 18 months have weakened the credibility of consensus numbers. City analysts appear to be following the news, not anticipating it.

If I wanted to open a position in this sector, I might be tempted to buy a basket of shares in stages over the coming months in order to protect myself from any company-specific problems that might emerge. I'd only really want to take a higher-conviction view if we start to see the leading recruiters reporting in-line trading and stabilising levels of fee income. For now, I can’t help feeling there may be better opportunities elsewhere in the UK market.