Out of all the sectors of the stock market, the services sector is the most compartmentalized. Unlike other sectors which tend to move up or down based on the performance of a certain aspect of the economy, the services sector is compartmentalized.
The services sector is made of companies and stocks which provide a service to either individuals or businesses. This can include a wide array of companies, from anything to doing payroll for a business to providing consulting services, or even providing a service to individuals, such as television or phone service.
Note that many service sector businesses may be squared away into other sectors, such as financial services like accounting (which are part of the finance sector).
How to Invest in Services
When the stock market is still in a recession (like it is now in September 2011), there are two things you are looking for when looking to invest in companies in the services sector: those which provide essential services and good companies which have unfairly lost stock prices.
The first type of company you are looking for is one that provides an essential service. For example, a company can’t cut back on its payroll services, after all, it has to pay its employees. On the other hand, they can cut back on services like leases on printers or consulting services.
The reason these service sector stocks are good is obvious: these companies are less likely to tank in a recession. However, sometimes they can be prohibitively expensive, so you still have to analyze things like p/e ratio, the amount of cash on hand, and how much room for growth they have.
The other type of service sector stock is services that aren’t essential and as a result are cyclical. In a recession, you want to try invest in the stock market with a company which provides a valuable service and is still a good company, but has “unfairly” lost value due to the overall decline of the market.
This happens in all sorts of sectors during a recession: when recessions happen, companies stocks often go down to the point where their earnings per share are very high. These are always good buys, as strong companies will recover not only as the uses of their services go up and investors are ready to buy again.
There are three additional questions you have to ask yourself when investing in a service company:
Does this company provide a valuable service which its clients cannot afford to cut?
Does this company provide a service that could be done cheaper overseas?
Does this company provide a service which could be done better by machines or computers?
Ideally, the answer is yes to the first question. The second of the two questions is up to interpretation.
If the answer to either of these questions is yes, then the companies you are investing in should be taking advantage of globalization and technology, not being left behind by them.
Investing in Service Sector Stocks
Investing in the service sector follows the same basics principles of how to invest that you would apply to any other stock. Make sure you do your research on companies and be very selective about the stocks you pick. During any recession, you want to try to find companies both which have lost value due to poor market conditions rather than company performance as well as investing in stocks which provide irreplaceable services.