The service sector is a massive and growing part of the U.S. economy. A 2016 Forbes article cheekily called the service sector “the only important part of the U.S. economy” and suggested it should take center stage when gauging the financial strength of the country.
There are plenty of publicly traded companies making tremendous amounts of money in the space. This opens the door to investment opportunities that are hard to ignore. However, not all stocks in the sector are created equal. Some investments in the space have the potential to generate compelling gains, but others will result in significant declines.
So, as is the case when investing in any sector, it’s important that you choose which service sector stocks to buy wisely.
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5 Best Service Stocks to Buy in 2020
Between shipping services, communication services, financial services, and a wide range of other service companies listed on U.S. stock exchanges, options in the service sector are plentiful. However, this can also make drilling down where you should invest your money difficult.
The five stocks mentioned below are the perfect names to start your research with.
1. United Parcel Service (UPS)
The company’s golden UPS brand name on the backdrop of massive brown trucks has become iconic. When Americans see the delivery person jumping out of a UPS truck, a sense of excitement begins to take hold. Although the company is already a household name, given the current environment, the upside potential is hard to ignore.
As was the case marketwide, the stock took a bit of a dip early in the year as the COVID-19 pandemic began to take hold. However, it has also displayed one of the most impressive recoveries and has climbed significantly higher than its pre-pandemic highs.
The reason is simple: There has been a trend toward online shopping for years. The COVID-19 pandemic sped up the trend dramatically. All of a sudden, going to the store became a dangerous prospect. Those who would have taken years to transition to online shopping are now all but forced to shop from their home offices and living rooms. The trend away from brick-and-mortar to online shopping has been sped up by years in a matter of months.
This bodes well for the e-commerce industry as a whole. However, online shoppers aren’t just buying products — they’re buying products that will need to be shipped to their homes. So, COVID-19 has created both an uptick in online shopping and a dramatic boost in demand for shippers.
With such a trend, taking part in these gains by investing in shipping stocks is a no-brainer. So is choosing to invest in the stock that is the leader in the space. According to CSI Market, UPS accounts for 72.59% of the total domestic shipping revenue in the United States.
Aside from the tremendous upward potential UPS stock has thanks to recent online shopping trends, the company is also a great dividend payer. In fact, the dividend yield on the stock is 2.51%, a strong dividend when looking at a growth opportunity.
With a long history of dominance in the domestic shipping space, online shopping trends suggesting that shipping demand will continue to climb, and dividends to ice the cake, UPS stock is an opportunity that should not be ignored.
2. Upwork (UPWK)
Upwork was founded in 2015 as the result of a merger between eLance and oDesk. The two companies were pioneers in the emergence of the online gig economy, and the combined company is more relevant today than ever before.
As COVID-19 changed the game for the e-commerce and shipping industries, it has also shifted how Americans and others around the world work. As the pandemic began to spread, businesses around the world were forced to close, including throughout the United States.
Unless you worked for what was deemed to be an essential service or you worked from home, you couldn’t work at all. As a result, unemployment rates in the United States and around the world began to surge. Unfortunately, the unemployment rate in the United States is still very high and expected to remain that way for some time to come.
Although this is a painful reality for the U.S. economy and many displaced workers, the shift to a work-from-home economy bodes extremely well for Upwork. The company gives freelancers the ability to list their services, whatever they may be, on a popular website with millions of customers paying attention.
Upwork service providers write articles, build websites, proofread content, translate, and design videos. The list of services seems endless. With so many workers stuck sitting at home, out of options when it comes to work, and running out of money, more and more people are looking into joining the gig economy.
Some argue that economic stimulus has made it difficult for reopening companies to find workers. As a result, many companies are looking to the Internet as an option to fill positions that may never have done so in the past.
There’s a strong argument that this will become a long-term trend. Several major companies have announced that their workers will work from home for a prolonged period of time. Moreover, exposure to the gig economy among businesses and workers who wouldn’t have otherwise explored the option will only serve to expand the market for freelance remote workers — a market which Upwork largely controls.
With a leadership position in the gig economy and expectations that COVID-19 will forever change the landscape of employment in the United States and around the world, Upwork is uniquely positioned to benefit greatly from this change in tides. As such, the stock should be on your watchlist.
Pro tip: If you’re going to add service stocks to your portfolio, make sure you choose the best possible companies. Stock screeners can help you narrow down the choices to companies that meet your requirements. Learn more about our favorite stock screeners.
3. Carnival Cruise Lines (CCL)
Carnival Cruise Lines being on a top investments list during the COVID-19 pandemic is a surprise to many, but it has earned its position. As one of the largest cruise lines in the world, Carnival has felt significant pain throughout the pandemic.
To date, sailings through September have been cancelled, with some arguing that cancellations will continue throughout the calendar year. Overall, there are dark clouds over the cruise line industry as a whole.
So why would you even consider putting your money into Carnival Cruise Lines? Because it’s cheap, that’s why!
2020 has been a horrible year for the stock, dragging prices down from $51.31 per share to under $15 per share. That’s a fall of more than 70%. The dramatic drop in price now means that valuation ratios like cash-per-share and book-value-per-share are so low, they’re falling off of the charts, suggesting the company is trading at a steep discount to its fair market value.
But declines shouldn’t be the singular basis for an investment decision, and they are not the only reason for the bullish thesis held on Carnival Cruise Lines stock. There are three key points to focus on when considering the future of Carnival Cruise Lines.
- Eventual Recovery. The cruise line industry is feeling pain, and several cruise and other travel companies will likely file for bankruptcy. However, the industry isn’t dead. The pandemic will not last forever. As consumers begin to feel safe again, the cruise industry is likely to boom. With Carnival Cruise Lines taking a lion’s share of this market, it seems a shoe-in to benefit from the recovery.
- A Strong Balance Sheet. Sure, Carnival Cruise Lines is dealing with a significant reduction in its revenue, but due to previous success and smart financial planning, the company can afford to weather a short-term bump in the road. With vaccines and treatments likely just around the corner, its nearly $7 billion in cash on hand is plenty to get the company through these tough times.
- Few More Attractive Value Stocks. Finally, there are few more attractive value stocks. With a balance sheet that will allow Carnival Cruise Lines to withstand the storm, the company is likely to come out on the other side with valuation metrics that investors dream about. The company has a nearly $30-per-share book value but trades at below $15 per share. Metrics like that are hard to ignore.
The bottom line is simple: Every day, we get closer to the end of the COVID-19 pandemic. Vaccines are expected as early as the end of the year, and there are several promising therapies under development to treat those who do get sick. As the pandemic comes to an end, people are going to want to travel. An investment in Carnival Cruise Lines now, at historically low valuation ratios, represents a discounted opportunity to capitalize on a coming resurgence in travel.
4. Southwest Airlines (LUV)
Southwest Airlines is another big bet in the travel sphere. The company is one of the largest airlines in the world and caters specifically to the low-cost domestic flight market.
Unfortunately, like Carnival Cruise, Southwest Airlines took a major hit as the COVID-19 pandemic started to take hold in the United States. To date, the stock is down more than 30%, and a recovery seems to be a long way off.
Nonetheless, there’s something to be said about today’s discounted stock price. Before COVID-19, and still today, Southwest Airlines is an enormous company. In 2019, the company generated more than $22 billion in revenue, 97% of which came from low-cost domestic flights. This in and of itself is a major strategic advantage.
As the COVID-19 pandemic falls into the past and consumers resume travel, they’re more likely to travel domestically than internationally at first. With an already cemented leadership in the low-cost domestic market, Southwest Airlines has a unique opportunity to capitalize on a recovery in travel as it takes place.
Another similarity Southwest Airlines has with Carnival Cruise Lines is the fact that the company has a strong enough balance sheet to withstand the storm brought on by COVID-19. Not to mention, even if it didn’t, the airline industry tends to be supported by massive bailouts from the United States government when it becomes threatened — a trend that’s not likely to change.
Southwest Airlines was a big player in air travel prior to COVID-19, and it will continue to be a big player in air travel following the pandemic. The only difference now is that investors can get in at a price not seen in the stock since 2014.
5. Walt Disney Company (DIS)
Walt Disney is a household name in the U.S. and around the world. The iconic entertainment company is responsible for Mickey Mouse and a slew of other well-known brands in entertainment, both cartoon and in living flesh.
Due to the COVID-19 pandemic, the company took a powerful hit. Forced to shut down its theme parks and retail stores, revenue slumped dramatically in the second quarter. Unfortunately, so too did the value of the stock, which is still down more than 10%.
Nonetheless, the declines in shares of the Walt Disney empire are nothing more than a discount. Although the company won’t be serving its full capacity of customers in its theme parks for some time to come, it’s important to remember that theme parks are only a fraction of the company’s services.
Walt Disney recently made a splash when it jumped into the streaming entertainment space with Disney+ and ESPN+, taking share from the likes of Netflix. These streaming ventures continue to be a success as COVID-19 leads more people to look for in-home entertainment options while reducing costs by cutting the cable cord. Not to mention, the company also owns Hulu, one of the largest streaming video players on the field.
So, while Walt Disney continues to work toward a recovery in theme park revenue, the company is an entertainment powerhouse with plenty of revenue streams. This, combined with a strong history of leadership in entertainment, a strong balance sheet, and expanding leadership in the streaming video space, suggests that Disney stock has the potential for gains ahead.
COVID-19 has changed the shape of the service industry as we know it. Some of these changes, like a shift to online shopping and work-from-home opportunities, are likely to stay for the long haul, creating compelling investment opportunities in companies that serve these markets.
At the same time, there are some short-term changes that have devalued stocks, which are now poised for a strong recovery. People aren’t going to stay home forever. Discounts created among leaders of the travel industry represent opportunities for strong potential gains ahead as consumers with pent up energy look for something new following the COVID-19 pandemic. Once again, this opens up its own set of strong investment opportunities to consider.
No matter which direction you go, you have the opportunity to find success. However, there is also always the risk of loss. Always take the time to research investments before making them and keep in mind that educated investment decisions generally relate to profits.
Are you expecting to see a strong recovery in travel? How has COVID-19 changed the way you shop?