Five recruitment stocks that continue to trounce the market

Small cap recruitment companies have soared in price over the past 12 months, with bullish investors attracted by their exposure to an improving economic outlook in the UK and beyond. Yet despite the leaps in price, a number of these shares are still valued moderately. Not only that, but they offer top-notch quality and momentum signals too. So how do the top ranking recruiters stack up? We put Stockopedia’s Stock Comparison tool to work...

Figures from the Office for National Statistics (see their chart below) confirmed recently that UK employment rates have hit a five-year high. Staffing firms that supply temporary and permanent workers have naturally benefited from this rise, with growing earnings and corresponding improvements in share prices. Currently, five of these stocks rank in the top 2% of the market based on Stockopedia’s StockRanks - a blended range of metrics that analyse each company’s Quality, Value and Momentum (QVM). No other sector boasts such a concentration of high ranking companies, with nearly all of them showing continued relative price strength in recent months. Using Stockopedia’s Stock Comparison tool it’s possible to get a side-by-side comparison of where each of these shares is excelling (or failing). Subscribers can see the full Stock Comparison here - and see a full list of Employment Services firms here.

Comparing the recruiters

In terms of the overall ranks, Networkers International (LON:NWKI) leads the line with a StockRank of 99.8/100. Unlike other firms, the company specialises in recruitment niches mainly around telecoms, IT and engineering. Often this kind of focus can give a business a defensible edge against competition. As it turns out, Networkers’ return on capital (often used as a measure of that edge) is currently an impressive 27.6% - nearly double that of its nearest peer here (Staffline). It also has a better than average, operating margin of 3.49%. As an extra sweetener, Networkers has the best forecast dividend yield of the bunch, at 3.4%.

 

At £20.3 million, Empresaria (LON:EMR) has a market cap that’s less than half that of Networkers. But in terms of value, the company beats the crowd on nearly every common valuation metric. While eye-catching, that value appeal may need further investigation to ensure that Empresaria isn’t cheap for a good reason. Like Networkers, it scores a formidable 8 out of 9 on the Piotroski F-Score of improving balance sheet strength. However, Empresaria’s forecast dividend yield is the lowest of the top five ranking recruiters at just 0.9%.

With a MomentumRank of 99.9/100, Staffline (LON:STAF) is one of the strongest momentum stocks across the whole market at the moment. Its shares have soared by 88% over the past year (see chart below) and it has been a regular fixture on several guru-inspired strategies over that time, including the Screen of Screens. But the MomentumRank doesn’t just focus on price, it also accounts for other momentum triggers like earnings upgrades by analysts and earnings surprises. Both of these have been the case at Staffline over 12 months. Unfortunately, the re-rating has dented its value appeal, with the company looking more expensive than its peers here on several measures.

The final two stocks in the top five are Impellam (LON:IPEL) and Prime People (LON:PRP). In a sector often criticised for its thin margins, Impellam offers an extreme case. With a turnover of £1.2bn, it has a margin of just 0.034%, although that was hit by exceptional contract problems last year. On the upside Impellam is forecast to grow earnings per share by 31.8% next year, which beats its peers.

With a market cap of £10.7 million Prime People is easily the smallest stock here, and unsurprising suffers from low trading volumes and a wide spread as a result. That said, it currently offers the best dividend yield, at 4.6%, and boasts the best operating margin too, at 5.85%.

Can they keep delivering?

Rising rates of temporary and permanent employment have plainly been a massive boost for recruiters over the past year. Small caps in particular, have done well as a result of keen investor appetite at the smaller end of the market. But it’s not all good news. In a cyclical sector with thin margins, staffing groups can be hit badly if things go wrong in their geographic or industry territories. They also face uncertainties in employment regulation and even changing trends in the recruitment of temporary and permanent employees. Even so, with such strong StockRanks the current crop of high flying recruiters are an interesting play on the prospect of future economic and business growth.

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