WDAY - Strong Buy Stock Ideas After The March 2023 Jobs Report

2023-04-07 12:50:27 ET

Summary

• Unemployment remains tight at 3.5%, setting the stage for another 25 bps interest rate hike.
• Follow the job growth by investing in those sectors.
• Other considerations are the OPEC+ supply cut, a weaker US dollar, and the resolved bank crisis.

With each passing month in 2023, investors appear keen on reacting to the jobs and inflation reports. Market futures only edged slightly higher , only because the markets are closed stock trading for Good Friday. Astute investors will fare better by reviewing the March nonfarm payroll report closely.

Payrolls Rise in March 2023

Jobs grew by 236,000 in March , slowing from the increase of 326,000 in February 2023. The unemployment rate barely changed at 3.5% , according to the U.S. Bureau of Labor Statistics. The persistently tight labor conditions will permit the Federal Reserve to increase interest rates again by 25 basis points at its next meeting.

Investors will notice that the rise in payroll employment is sharply lower than in 2021 and 2022. Jobs are healthy in leisure and hospitality, government, professional and business services, and healthcare.

Macro investors may allocate their holdings to sectors that are adding jobs. In leisure and hospitality, Hilton ( HLT ) is up by 11.29% YTD, beating the S&P 500 ( SPY ) return of 7.0%. Marriott International ( MAR ) is up by 9.5% YTD. Hotels will thrive as consumers increase travel activities following two years of a brutal lockdown.

Marriott and Hilton have strong growth and profitability. The weak quant valuation suggests that investors should not chase them at current levels. Consider waiting for higher oil prices at the start of the increased travel season to send these hotel stocks lower.

Steady Unemployment Rates

BLS reported a largely unchanged unemployment rate for a full year. Beneath the lack of net movement is the increase in permanent job losses. Job losers increased by 172,000 to 1.6 million in March.

Labor force participation increased in March to 62.6%. In addition, the employment-population ratio increased slightly, as shown below. Those two figures suggest the U.S. may expect an increase in labor participation. Spurred by lower disposable income, people will need to enter the workforce to offset the impact of weaker purchasing power due to inflation.

The number of persons not in the labor force who want a job is 4.9 million. As an investing idea, readers may consider companies like Fiverr International ( FVRR ). It connects businesses with freelancers.

Markets are bearish on Fiverr. The short interest is at 7.91% . FVRR stock scores a C- in three out of the four key quant grades:

Companies like Workday ( WDAY ), Zuora ( ZUO ), and ServiceNow ( NOW ) help companies manage staff administration. They thrive best when maintaining or growing headcount. Of the three firms, ServiceNow has attractive prospects. It announced a major platform expansion. Now Platform Utah has artificial intelligence-powered process mining.

For more than three months, stock markets pumped the prospects of AI. ServiceNow is one of the few firms that will apply AI to improve its product offering.

BigBear.ai ( BBAI ) and SoundHound ( SOUN ) are examples of companies to avoid. They have yet to prove their AI will increase revenue. C3.ai ( AI ) is the latest volatile AI trade. It erased its recent gains after a short seller accused the firm of alleged accounting issues .

Above: BBAI stock gave up its over five-bagger return after peaking in Feb.

Establishment Survey Data Highlights

The government increase in employment of 47,000 accounted for 20% of the 236,000 nonfarm payroll employment increase. This is still sharply below its February 2020 level by 314,000. Investors should continue to expect that the government will spend heavily on infrastructure clean energy and aerospace and defense.

Small-cap clean energy companies like Babcock & Wilcox ( BW ) are examples of investments that could fare well this year . The company would need the government to continue to roll out clean energy projects.

In the military sector, Lockheed Martin ( LMT ), Northrop Grumman ( NOC ), and Raytheon ( RTX ) have strong long-term prospects. The government shows no signs of slowing its spending in this sector. Although the stock barely moved since January , markets will eventually notice Raytheon's $1.2 billion contract with Switzerland and $650.4 million with the U.S. Navy.

RTX stock has a strong profitability grade. Raytheon scores a D+ on gross profit margin. This grade will improve as the supply chain constraints ease, lowering its costs.

Other Trade Considerations

Weakening US Dollar

Investors need to watch out for countries like Brazil, Turkey, and Russia trading with China and settling with the Yuan. On March 29, 2023, China and Brazil struck a deal to avoid the US Dollar ( DXY ) for trade. On March 21, 2023, Russia beat Saudi Arabia as China's biggest oil supplier .

The weak dollar would lift the value of silver ( SLV ), gold ( GLD ), and Bitcoin ( BTC-USD ).

Above: Bitcoin is trouncing both gold and silver. Give gold and silver time to catch up.

Higher Oil Prices

On April 2, 2023, OPEC+ truly "shocked" the energy market by announcing a surprise oil production cut . The OPEC+ actions weaken the effectiveness of the Federal Reserve's interest rate policy tool.

OPEC+ timed the cut perfectly. As the summer travel season begins, high prices at the gas station could hurt consumer confidence.

Bank Crisis

The Feds and the Treasury solved the Silicon Bank ( OTC:SIVBQ ) bank run. It shut down Signature Bank ( OTC:SBNY ). Still, wiping out common and preferred shareholders, along with debt holders, creates a new negative precedent.

This month, Charles Schwab ( SCHW ) is on close watch. The media appeared to speculate about "massive" losses from its debt holdings.

Above: Schwab stock is unwinding from the pandemic-fuelled growth of 2020-2022.

Fortunately, Schwab said it attracted over $53 billion of core net new client assets last month .

Your Takeaway

The March job report paves the way for the Fed to proceed with its 25 bps rate hike at the next meeting. Look closely at where jobs are increasing. Sectors that increase jobs are growing. Investors should invest in those sectors. Conversely, companies that cut jobs may boost profits in the short term but risk hurting long-term prospects.

Be wary of rewarding companies that cut jobs merely to boost short-term efficiency.

For further details see: