As I’m hunting around for good value, cash-generative businesses, recruitment stocks keep coming up on my radar. They seem cheap at first glance and offer attractive dividend yields. Many of them have balance sheets loaded with cash.
On the other hand, these cyclical stocks are clearly out of favour and face an uncertain outlook right now. Several have issued profit warnings in recent months.
Should I stay away from this niche sector of the market, or are these firms offering me an opportunity to lock in some attractive income and profit from an eventual upturn? I think there are opportunities here, but the situation probably requires a little explanation.
Many recruiters are coming off a record couple of years when inflation and staff shortages caused profits to surge. That process is now unwinding. Big tech and finance companies, in particular, have been laying off thousands of staff in recent months.
The US has been particularly hard hit, but other global markets are also affected. Intuitively, it might seem like the wrong time to consider buying shares in recruitment firms. Surely things are only going to get worse?
Well, perhaps – at least in the short term. But the stock market always looks ahead, and recruitment stocks in particular are generally seen as a leading indicator of the wider economic outlook.
The chart below covered the period from August 2006 up to today and shows how shares in the four biggest listed recruiters on the UK market have already sold off heavily. In many cases, these shares are trading at lows that remind me of the levels hit in 2009,2016, and 2020:
My investment thesis today might be to buy one or more (perhaps a basket) of recruiters, taking the view that they are probably cheap on a cyclical view.
However, in the short term I would be prepared to accept more volatility. I don’t think the downgrade cycle is over yet. In my view, there’s a good chance we’ll see earnings fall more sharply over the next 6-12 months, before perhaps starting to recover.
Of course, I could be wrong. The world’s major economies may avoid a recession. But even if things do get worse, I think much of the downside is already priced in. Most of these recruiters are…
