Many stocks have a pattern to them. With growth stocks, it can be a steady upwards trend with few interruptions. But such stocks are expensive. With cyclical stocks, they tend to oscillate around a central tendency. In Kelly Services' (KELYA, Financial)(KELYB, Financial) case, the tendency is to oscillate around median price to book value. Just look at the 10-year chart below to see the pattern:
Kelly Services is a staffing agency which provides temporary and permanent staff for companies in North America and Europe. Kelly is especially useful for businesses who must ramp up and ramp down quickly to handle workload and who don't want to in the hiring and firing business. Kelly supplies the staff and handles their payroll and benefits and bills the cost to the client, plus a fee for Kelly's services.
It's a tough business, as many staffing agencies are competing for the business from a customer as well as competing for talent and workers. One requirement for such a business is that the company must maintain a lot of working capital to fund payroll, and there is usually a lag between what Kelly has to pay out to its workers and what it can bill its clients. The following diagram shows Kelly's working capital, which is around $400 million currently and about 8.5% of its annual revenue.
While the heavy working capital requirement is a drag on return on assets, Kelly has no long-term debt and no net debt. So, there's little solvency risk in the stock.
Tangible book value is far in excess of the stock price. Also, tangible book value has been increasing at the rate of about 7% over the last decade. This is mainly because of the accumulation of retained earnings.
Profits are slim and erratic because of intermittent non-cash write offs. However, the company generates healthy cash flows and can consistently increase book value.
Kelly's fortunes are tied to economic conditions. When the economy is booming, there is a lot of demand for temporary workers and other staff. Similarly, when the economy slows, Kelly's business dries up fast. But it recovers fast too; as temporary hiring and firing is the canary in the "economic coal mine." Because currently Kelly's stock price is so much below tangible book value, there is a huge margin of safety. However, I cannot say it's a buy and hold kind of investment on account of its relatively low return on assets and return on equity, as well as its cyclical nature.
In my opinion the strategy for investing in Kelly is simple: it's best to buy when the stock price is below the median price-book ratio and sell when the stock is above it. It's a reliable trading strategy which I have exploited for some time.