Investing in recruitment companies

Recruitment consultants don’t have the best reputation. Terrible suits, unctuous phone calls, and lots of sales talk mean they aren’t usually the people most of us enjoy working with.

And yet, like many other intermediaries in business, they play a vital function in the economy by matching prospective employers with new employees. 

Doing this can also be big business as successful placements result in more money for the recruitment company. Indeed, in the year prior to Covid, the UK alone made recruitment companies in excess of £40bn.

Boom and bust

That amount of cash floating about means there are some large companies active in the recruitment sector, many of which are listed. 

The big names here are Hays and PageGroup, although others, like Robert Walters and SThree, have been popular with investors over the past few years too.

All of those companies have had a strange couple of years. It goes without saying that Covid was disastrous for the recruitment sector. 

Profits at Hays dropped from £162m to £47.5m. It was a similar story at PageGroup, where profits fell to £17m from £147m the year before, a nearly 90% decline.

Bouncing back

But the sector appears to be bouncing back as the global economy starts to reopen following vaccine drives.

In the UK, there are over 1.1m vacancies and the unemployment rate is 4.5%, a slight increase on the pre-pandemic figure of 4%.

This is naturally driving more business to recruitment companies. Hays noted in a trading update earlier this month that it had hired 1,200 members of staff in 2021 alone to deal with this surge in demand. Even then, it said productivity per staff member was still at a record high.

It’s a similar story with PageGroup, which has hired over 600 people so far this year. The firm predicted a full-year operating profit of £155m in early October, which would be a record if it does happen.

Hostage to macroeconomics

Such dramatic drops and increases in earnings are unusual but also indicative of the cyclical nature of the recruitment business.

When the economy is doing poorly, the odds are recruitment firms are going to suffer. A booming economy is likely to produce the opposite result.

The past couple of years have provided an extreme example of that process but the principles still apply and need to be considered before investing into a recruitment company.

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Hays’ share price performance over the past 20 years is illustrative of this. It peaked during the Dot Com boom, then crashed when the bubble burst. After that it rose slightly before crashing again during the 2008 financial crisis. 

Since then Brexit and the pandemic have also hit its share price. Despite some reversals, Hays shares have never reached the same level they did during the Dot Com bubble. Anyone buying shares at that peak would’ve lost a substantial amount, even if they’d held them until today and received all dividends paid out.

Past performance doesn’t define future results but that suggests that thinkingHays, along with other recruitment stocks, is an awesome ‘buy’ just because the jobs market is doing well today can easily lead to losses if that trend reverses. 

Not your regular ‘buy-and-hold’ stock

It’s also pretty hard to predict when or if there’s going to be a downturn. How many people actually predicted the coronavirus crash, for example?

One positive of companies like Hays and PageGroup is they’re highly cash generative and have been fairly consistent in paying out dividends.

Ideally those payments would smooth out the rough times to compensate for any resulting declines in share price. But as we’ve seen with Hays, that’s not always going to happen.

As a result, buying into a recruitment company doesn’t necessarily follow the same buy and hold pattern that we tend to associate with sensible long-term investing. They’re so subject to market forces that positive gains can be wiped out very quickly.

Speculative investors may be able to ride out the gains they see during the good times but can easily get burned if things come crashing down unexpectedly. 

Long-term investors might see some gains but they’ll need to prepared for some major bumps along the way.

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Buying into the job market boom? Let us know on the community forum:

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