1 Services Stock for Long-Term Investors and 2 We Brush Off

The Role of Business Services Providers in Today's Market

Companies that offer business services are essential partners for organizations, supporting everything from technology upgrades to strategic consulting and marketing initiatives. However, the sector has recently faced headwinds as artificial intelligence disrupts traditional models and corporate spending becomes more cautious. As a result, investor confidence has waned, leading to a 5.3% decline in business services stocks over the past half-year, even as the S&P 500 advanced by 3.1% during the same period.

Not All Business Services Companies Are Created Equal

Despite these challenges, some standout businesses continue to deliver strong earnings growth regardless of market conditions. Below, we highlight one promising services stock with the potential for sustained outperformance, as well as two companies we believe investors should avoid.

Two Business Services Stocks to Consider Selling

Cogent Communications (CCOI)

Market Cap: $1.05 billion

Cogent Communications (NASDAQ: CCOI) operates an extensive global network, featuring 20,000 miles of fiber optic infrastructure and connections to more than 3,200 buildings in 54 countries. The company offers high-speed internet, private networking, and data center colocation services to organizations with significant bandwidth needs.

Reasons for Caution with CCOI:

• Revenue growth has been sluggish, averaging just 1.8% annually over the past two years—trailing the broader industry.
• Returns on capital have declined, indicating that earlier profit opportunities may be diminishing.
• A limited cash cushion raises the risk of future capital raises, which could dilute current shareholders.

Currently, Cogent trades at $21.91 per share, representing a forward EV-to-EBITDA multiple of 10.2.

Cisco Systems (CSCO)

Market Cap: $306.9 billion

Established in 1984 by a Stanford couple aiming to connect computers across universities, Cisco (NASDAQ: CSCO) is a global leader in networking hardware, cybersecurity, and collaboration tools, enabling businesses to link and protect their digital operations.

Concerns About CSCO:

• Revenue growth has been modest, with a 1.6% annual increase over the past two years—below the sector average.
• The company’s capital requirements have grown, as evidenced by a 5.9 percentage point drop in free cash flow margin over the last five years.
• Returns on capital are shrinking, suggesting that rising competition is pressuring profitability.

Cisco’s shares are priced at $77.58, equating to a forward P/E of 17.8.

One Business Services Stock Worth Watching

Barrett Business Services (BBSI)

Market Cap: $696.1 million

Barrett Business Services (NASDAQ: BBSI) operates as a professional employer organization (PEO), supporting over 8,000 businesses and more than 120,000 worksite employees. The company specializes in providing HR management, payroll processing, workers’ compensation, and other administrative solutions for small and mid-sized firms.

Why BBSI Stands Out:

• Barrett has achieved 7.7% annual revenue growth over the past two years, outpacing industry averages and highlighting the strength of its offerings.
• Free cash flow margin has improved by 6.1 percentage points in the last five years, giving the company greater flexibility to invest in growth, repurchase shares, or pay dividends.
• A leading 54.7% return on capital demonstrates management’s effectiveness in deploying resources for high returns.

With shares trading at $27.61 and a forward P/E of 15.2, is now the right time to invest?

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