QQQ - Stock Buying Ideas After The Non-Farm Payroll Report

2023-06-02 12:59:36 ET

Summary

• The BLS reported strong job growth in the service super sector, government, and healthcare.
• Readers may invest in sectors that add jobs.
• Stock ideas in healthcare, defense and aerospace, and retail discussed.

Markets initially responded positively to the May 2023 non-farm payrolls report jump. The Bureau of Labor Statistics posted NFP rising by 339,000 . The unemployment rate rose to 3.7%, above the 3.5% consensus and higher than the prior 3.4%. At first glance, the higher unemployment rate might sway the Federal Reserve to pause its interest rate hike at its June 2023 meeting. However, that action would ignore the last inflation report and the revised NFP figures for the two preceding months of March and April.

What are some of the stocks to consider after the BLS posted the NFP report?

Employment Situation Summary

Total NFP increased by 339,000 , while the unemployment rate rose by 0.3%. Just as investors should follow the money flow and buy into sectors that benefit, they should invest in sectors that report job gains. Last month, professional and business services added 64,000 jobs. This is of a similar magnitude in April. Within that service super sector, professional, scientific, and technical services added 43,000 jobs.

Investors loosely inferred that companies in the diagnostics and research sector would outperform the market. Thermo Fisher Scientific ( TMO ) undermines that assumption. Unfortunately, the market will not overpay for stocks with weak valuation and growth. Still, readers should expect growth to continue in the mid-teens. CEO Marc Casper said that the company has a strong backlog.

Readers who want to invest in TMO stock and its peers may look at the hold and buy quant ratings here . The companies include Danaher ( DHR ), Agilent Technologies ( A ), and Illumina ( ILMN ).

Government Employment Rises

Government employment increased by 56,000. This is above the average monthly gain of 42,000 over the last year. Government hiring is an example of "following the money." The more it spends on services like administering defense and aerospace contracts, the more that investors should buy defense contractors like Northrop Grumman ( NOC ), Raytheon ( RTX ), and Lockheed Martin ( LMT ).

Shares in those firms peaked only two months ago. Ahead of the debt-ceiling limit, fearful investors panic sold defense contractors. Zooming out of the monthly trend charts, local and state government employment rose since 2020 .

At a macro level, the increase in government jobs adds to the employment level. This will help stimulate demand levels for goods.

Investors who hold retail stocks will appreciate that strong job growth will not lift all firms. Dollar General ( DG ) is struggling in the post-pandemic era. Shrinkage, or retail theft, is a small reason for the weak outlook. The discount goods firm suffered from higher inventory damages and markdowns . In addition, customers are buying more consumables. This has a lower gross profit rate than the other product categories.

In the automotive repair sector, the SA quant system issued a warning that Advance Auto Parts ( AAP ) risked cutting its dividend . This is consistent with the 83% quarterly dividend cut AAP announced earlier this week . The company's management failed to sustain profit margins. Margins fell due to higher-than-expected planned investments.

AAP faces serious competitive price pressures.

Missteps like the $1 billion share buyback in 2021 will hurt its shareholders.

Healthcare

Consistent with the average 50,000 average monthly gain, healthcare added 52,000 jobs in May. The economy added 24,000 jobs in ambulatory healthcare services and 20,000 in hospitals. The above-average job addition failed to help healthcare-related REITs and big pharma. For example, Medical Properties ( MPW ) needed its tenant to close new financing before gaining shareholder confidence.

The job growth in healthcare would not warn investors of the downtrend in pharmaceutical firms like Pfizer ( PFE ). Pfizer continued its downtrend for 2023 after starting above $50. It traded recently at $38.50. Markets expect the company to lose a revenue tailwind from sales of COVID anti-viral drugs and vaccines.

Pfizer is pivoting out of that market. It's buying Seagen for $43 billion to replenish its pipeline.

AbbVie ( ABBV ) is another example of big pharma that closed at a 52-week low yesterday. Markets are needlessly panicking over Coherus BioSciences' ( CHRS ) planning to launch a Humira biosimilar at an 85% discount . Coherus partnered with Mark Cuban's pharmaceuticals startup to bring this biosimilar to the market.

March and April NFP Revisions

At the bottom of the NFP report are key revisions. The BLS wrote:

The change in total non-farm payroll employment for March was revised up by 52,000, from +165,000 to +217,000, and the change for April was revised up by 41,000, from +253,000 to +294,000. With these revisions, employment in March and April combined is 93,000 higher than previously reported.

Investors should anticipate the BLS would revise the May 2023 report higher.

Your Takeaway

Count on The Federal Reserve to decipher the details of the jobs report closely. It might cite the increase in unemployment to pause its rate hike. Bullish investors will assume the rate pause continues indefinitely until a rate cut.

That's a wrong conclusion.

The Fed is data driven. It will continue to assess the inflation report and the next jobs report. This might mean a rate pause after its June meeting, followed by a 25 bps rate hike after that.

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