MILLBURN, N.J. (Stockpickr) -- This year's Nobel Prize in Economic Sciences was awarded to three academics, Peter A. Diamond, Dale Mortensen and Christopher Pissarides, for their research into the relationship between the supply of unemployed laborers and demand for labor. They also delved into the impact of employee benefits and payroll taxes upon the labor market dynamics.
Some people would argue that had William Phillips lived longer, he might have won the same prize for his work on the relationship between unemployment and inflation, taught to economic students as the Phillips curve. According to Phillips' theories, high rates of inflation will lead to low levels of unemployment. In other words, there is an inverse relationship between the two economic factors.
There are those that take issue with the Phillips curve -- myself included. We have had many instances of relatively low or high levels of unemployment and inflation that the theory does not explain.
With that in mind, I've compiled a list of
. These stocks could offer opportunity if jobs and inflation kick together, as I expect they will, despite the Phillips curve theory.
The first stock that comes to mind is
Automatic Data Processing
, which is referred to by investors and the media by its operating company name ADP. ADP is a payroll and benefits administration services company, best known for processing payrolls and issuing paychecks for its customer and their employees. Recently, ADP purchased MasterTax, a payroll tax compliance company.
ADP makes its money in two ways. Its first revenue-driver is based on the number of transactions that the company processes. The more customers that ADP services and the more employees on a company's payroll, the more ADP will make.
ADP also makes money on what is called the float. Payroll customers will have money transferred from their accounts to ADP in advance of the paychecks being processed. Then, as the employees cash their paychecks, ADP will pay those monies that they are holding to the employees. This explains why, if you look at ADPs financial statement, you see an unusually high level of cash on its balance sheet -- nearly $20.5 billion as of the end of the June quarter and nearly as much accounts payable, about $19.7 billion as of the June quarter. As a result, ADP earns the float, or the interest spread that ADP keeps on those cash balances, on employers' cash before it is paid to employees. Thus, as interest rates rise, so does the float.
Right now, ADP is subject to the double whammy of low interest rates and high unemployment. Just think how much ADP has to benefit from a 1% rise in interest rates or a 1% drop in unemployment. If employment and inflation both begin to pick up as I expect they will, then ADP could be the right stock to have for the future.
>>Who Owns ADP?:
I believe that there are two important themes to the current labor conundrum. Today, employers are hiring part-timers more than ever. These people would normally not qualify for unemployment insurance. Also, the shadow employment roles are ever-increasing, in the form of small business owners, independent contractors and, of course, the people who get paid cash off the books or for very short period of time. Labor is becoming ever more transitory.
There are two companies that best suited to benefit from these trends:
. Both are well-established companies that provide staffing and outsourcing services in the U.S. and internationally, and both are well-suited to take advantage of the employment themes I've addressed above.
>>Who Owns Manpower?:
Here is a comparison of the major fundamental metrics for these two companies:
The fundamental metrics for both companies are very strong, and they're for the most part comparable, with one exception: the balance sheet. Clearly, Robert Half has a stronger financial position given that it carries a net cash position, whereas Manpower has a net indebtedness. On the other hand, Manpower generates more cash flow than Robert Half and has used that excess cash flow to pay down its debt.
The bottom line is that you can flip a coin and buy either of these company's stocks to take advantage of this part of my labor and employment thesis.
-- Written by Scott Rothbort in Millburn, N.J.
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At the time of publication, Rothbort was long MAN stock and calls, although positions can change at any time.
Scott Rothbort has over 25 years of experience in the financial services industry. He is the Founder and President of
, a registered investment advisor specializing in customized separate account management for high net worth individuals. In addition, he is the founder of
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. Rothbort is also a Term Professor of Finance at Seton Hall University's Stillman School of Business, where he teaches courses in finance and economics. He is the Chief Market Strategist for The Stillman School of Business and the co-supervisor of the Center for Securities Trading and Analysis.
Mr. Rothbort is a regular contributor to
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website and has frequently appeared as a professional guest on
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and local television. As an expert in the field of derivatives and exchange-traded funds (ETFs), he frequently speaks at industry conferences. He is an ETF advisory board member for the Information Management Network, a global organizer of institutional finance and investment conferences. In addition, he is widely quoted in interviews in the printed press and on the internet.
Mr. Rothbort founded LakeView Asset Management in 2002. Prior to that, since 1991, he worked at Merrill Lynch, where he held a wide variety of senior-level management positions, including Business Director for the Global Equity Derivative Department, Global Director for Equity Swaps Trading and Risk Management, and Director for secured funding and collateral management for the Global Capital Markets Group and Corporate Treasury. Prior to working at Merrill Lynch, within the financial services industry, he worked for County Nat West Securities and Morgan Stanley, where he had international assignments in Tokyo, Hong Kong and London. He began his career working at Price Waterhouse from 1982 to 1984.
Mr. Rothbort received an M.B.A., majoring in Finance and International Business from the Stern School of Business, New York University, in 1992, and a B.Sc. in Economics, majoring in Accounting, from the Wharton School of Business, University of Pennsylvania, in 1982. He is also a graduate of the prestigious Stuyvesant High School in New York City. Mr. Rothbort is married to Layni Horowitz Rothbort, a real estate attorney, and together they have five children.