Among the many features found in each week’s edition of Value Line’s Selection & Opinion service is a list of the seven best and worst performing industries over the past six weeks. These rankings can be found on the inside back cover of Selection & Opinion. The roughly 1,700 stocks in the Value Line universe are currently divided among about 100 industries. Notably, for the purposes of calculating these results, the performance of each stock is equally weighted to the others in its industry (i.e., irrespective of market capitalization).  

The latest six-week period covered in our latest Industry Price Performance rankings was a relatively good stretch for the equity markets, as stock prices bounced back following some modest setbacks during August. For example, the S&P 500 Index increased 3.6% between September 3rd to October 15th and is holding onto a year-to-date gain of nearly 20%. 

In this environment, an industry needed to climb nearly 10% over the past six weeks to qualify for a spot in our top seven. The Steel Industry rose 13.2% to take home the top spot, narrowly edging out Human Resources (up 12.7%) and Air Transport (12.6%). Other groups helping to lead the market higher included Maritime (11.6%), Newspaper (11.5%), Semiconductor Capital Equipment (11.5%), and Chemical-Diversified (9.6%).

In looking for investment ideas among these seven industries, we are taking a closer look this week at two of the Human Resources stocks that have carried that group to the forefront of the latest rankings. The shares of Heidrick & Struggles (HSII) and Korn/Ferry International (KFY) advanced 27% and 29%, respectively, over the past six weeks and still appear to offer healthy upside for long-term investors. 

Heidrick & Struggles is an executive search firm offering worldwide staffing and leadership consulting services. The company is based in Chicago and has offices throughout the U.S. and in 29 countries around the world. It is one of the smaller human-resources providers that we follow, with annual revenues of roughly $460 million and a market capitalization of about $350 million.  

Like most of the Human Resources providers, the company’s sales and earnings track record in recent years won’t inspire much confidence. The top line should edge forward 3% to 5% in 2013, but remain about 25% below its 2007 peak of $620 million. Meanwhile, H&S earned nearly $3 a share in 2007, but has struggled to generate profits so far this decade.  

For 2013, share net will likely finish around $0.40, but we think better days are on the horizon, with annual earnings likely climbing to $0.75 next year and $1.50 by the 2016-2018 timeframe. This rebound should be helped along by the company’s expanding presence in high-growth markets, but is also contingent on a normalization in hiring activity in the labor markets. For instance, even with the last recession technically several years behind us, the unemployment rate in the United States remains north of 7%, well above where it stood when H&S was at the peak of its earnings power (below 5% for most of 2007).  

The company appears to be experiencing some uncertainty in its strategic direction. H&S has been reviewing its strategic options, but recently announced that it was no longer considering a possible sale of the company. The staffing services provider is also searching for a new CEO to replace Kevin Kelly, who stepped down in July and will be replaced on an interim basis by Jory Marino. Mr. Marino had been running the company’s operations in the Americas.     

Overall, HSII shares are likely to have the most appeal with patient investors seeking healthy total returns for the 3 to 5 years ahead. The stock’s current valuation (the P/E multiple exceeds 30) partly discounts the profit recovery we envision to 2016-2018, but long-term appreciation potential still exceeds the Value Line median by a comfortable margin. Too, the dividend provides a yield of nearly 3%, which should help to boost returns, though an elevated payout ratio means further increases are unlikely until the earnings recovery gains more traction. Meanwhile, this equity’s risk profile is about Average, as reflected in its Safety rank of 3. Granted, the recent activity at the corporate level creates some uncertainty surrounding H&S’s long-term direction, but it also adds some speculative flavor here, in our view, even with a sale of the company now seemingly off the table.

Shares of Korn/Ferry International, one of Heidrick & Struggles biggest rivals, also appear to be worthy of closer inspection. The Los Angeles-based company bills itself as a global provider of talent management solutions aimed at helping clients to attract and retain talent. It serves some of the world’s largest public and private companies, as well as governments and non-profit agencies.

Compared to H&S, the company’s operating results have held up relatively well in recent years. Lately, Korn/Ferry has been benefiting from reorganization and integration activities, and we expect these efforts to bear more fruit in the quarters ahead. For fiscal 2013, which ends April 30, 2014, earnings are on track to reach $1.35 a share, up 23% from last year and just 8% shy of the 2007 peak of $1.46. 

Meanwhile, the company finances are in good order, with no debt and more than $150 million in cash on the balance sheet. This, combined with a healthy stream of free cash flow, should provide Korn/Ferry with flexibility as it pursues ways to improve shareholder value. Acquisitions have been part of management’s growth strategy, and we expect more deals in the future. Meanwhile, KF doesn’t currently pay a dividend, but it has been utilizing share repurchases to return some cash to shareholders. 

Like HSII stock, Korn/Ferry shares offer good price-appreciation potential for the 3 to 5 years ahead. The aforementioned lack of a dividend will limit this equity’s appeal with income-oriented investors. Still, while the company’s earnings recovery appears to be much further along than is the case at H&S, we still see room for improvement, with annual share net likely reaching $1.80 by 2016-2018. International operations, in particular, have good growth prospects. Meanwhile, KFY stock carries a rank of 3 for Safety, indicating an Average level of investment risk.

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.