Stockwatch: This momentum play could hit new share price highs

Is a bullish trading update from recruitment group Hays worth buying into, or is it fundamentally too "late-cycle" to back recruiters? This FTSE 250 stock has risen about 6p to 168p on news of 8% underlying growth in net fee income or 10% on a like-for-like basis, in Hays' third quarter to end-March 2017.

Growth was further enhanced to 21% at the headline level due to the higher euro and Australian dollar against sterling. Operating profit for the full year to end-June is indicated at the top end of market estimates, thus the consensus for at least 9p earnings per share looks secure – representing a forward price/earnings (PE) of 18 reducing to 17 based on forecasts for about 8% annual earnings growth.

At first sight this implies a PEG ratio over 2 times where in a growth stock context you are looking for sub 1.0. As a rough proxy the table shows Hays' annual average PE of 24.0 in 2014 and 23.0 in 2015, correlating reasonably with an earnings growth hump around 20% then moderating. Yet if Europe continues to prosper like it is doing for Hays then, potentially, upgrades lie ahead.

ECB stimulus is revitalising Europe

Continental Europe and rest-of-world, Hays' largest division representing 50% of net fee income, is the most dynamic currently with 18% like-for-like growth at constant exchange rates. Germany in particular has seen 23% growth driven by Hays' IT and engineering business with newer specialties in accountancy & finance up 17% and life science up 37%.

11 other European countries delivered over 10% growth and Spain leapt 22%, although Italy was flat. Altogether this bodes well for Hays growing its overall double-digit growth rate. The European Central Bank (ECB) has reiterated a commitment to extend aggressive monetary stimulus until end-2017, despite some conflict with Germany after its inflation jumped on the back of higher oil prices.

But the ECB council sees weak core inflation and a "gradually firming recovery" which if correct augers well for recruiters' medium-term prospects. The US economy has shown a reduction in quantitative easing is not something to be feared.

Moreover the worry how European business could be disrupted by the Chinese prioritising other export markets if the US became protectionist, should abate now Presidents Trump and Xi have achieved "great chemistry".

Off-chance of a wild card in French elections

A lingering disrupter of this positive story for having European investment exposure is whether opinion polls under-estimate Marine Le Pen in the second round of the French presidential elections, on 7 May. Le Pen is anti the euro and promises France's own EU referendum within six months of being elected.

After the initial 23 April round, the expectation is for votes to transfer mainly to centrist candidate Emmanuel Macron versus Le Pen – with the caveat that pollsters under-estimated Brexit and Trump last year because voters supporting nationalist policies keep a low profile. But I'm unconvinced France is ready for a president even of a reformed National Front party.

The more likely outcome is Macron's party members not constituting a majority in the French parliament which would make policy-making difficult. That would be a minor risk in the wider European context, ECB pump-priming is anyway poised to offset. The residual risk is data for 2018 onwards reflecting a candy-floss recovery abating; however quibbling is to miss out on a one-year view.

Mixed Asia Pacific and Britain dragging its heels

Asia Pacific, at 24% of net fee income, has recently seen 12% growth overall with Australia and New Zealand enjoying 15% amid broad-based growth across Hays' specialties, although Asia was overall flat with Malaysia and China offset by Singapore and Japan. The outcome quite reflects the long-term strategy of Robert Walters, a small-cap professionals' recruiter, to prioritise Australia in its Asia Pacific revenue mix.

Only Britain and Ireland are Hays' problem areas: at 26% of net fee income, down 4% mainly due to tough conditions in public sector recruitment where net fees fell 13%, although on the private sector side the largest division – accountancy & finance – grew only 2%.

Such performance is interesting in the wider context, if a worrying hint the UK economy is being propped up by consumer spending linked to credit. As yet it's not a serious drag but does shave the overall growth rate.

Stock call is largely a macro call

I prioritise these wider observations because recruiters generally declared a good start to 2016 then saw their stocks slide on global concerns – Brexit especially. Operating results affirm rebounds from EU referendum lows but after the longest upturn in many years since 2009 it's natural for cyclical stocks to be sensitive.

Ideally you want to be "in" around the low point of a cycle when depressed by uncertainty: the last time I drew attention to Hays was back in October 2011 at 70p after the price had halved that year to 66p, quite re-visiting its end-2008 low of 55p. Like now, the group was managing to buck modest weakness in the UK with strong growth internationally.

But its stock also had the advantage of a prospective yield then around 8% based on a 5.8p payout – the table showing it took until 2013 to de-rate to 2.5p where it had more prudent earnings cover as a base for growth.

So at 168p to buy currently you don't have similar yield support and February's interims showed goodwill/intangibles representing 48.7% of net assets i.e. net tangible assets per share of just 17.8p. So be aware of the lack of downside protection.

While Hays doesn't operate in the US I would still take encouragement how president Trump's backtracking could help support the global economy – by way of the US avoiding an inflation-led boom/bust.

With most of his policy proposals mired and no anti-Chinese measures emerging, Congress would need to substantially raise the US debt ceiling to enable radical tax cuts and infrastructure spending. I see it as less likely and while it would imply US stocks turn soggy it's probably good for the wider world how Trump's whacky ideas are hitting the reality wall.

Be aware, Hays and other recruiters should not nowadays be treated as long-term investments, instead momentum plays where you need to keep up with events. But I'd anticipate upgrades working through to effect new share price highs in respect of record performance being achieved.