Buy Paycom Stock, But Only On a Sharp Pullback

Paycom (NYSE:PAYC) stock is a cloud company that investors need to keep on their radar. The software-as-a-service company has benefited from massive profit and stock price growth since its IPO in 2014. As a result, the question for investors is not if they should buy PAYC stock, but when they should do so.


Paycom Is Not As Expensive As It Appears

Paycom provides value by automating internal activities within companies. It does that by increasing the efficiency of training, benefits, payroll, and other HR-related activities. Moreover, unlike Workday’s (NASDAQ:WDAY) products, Paycom’s solutions also work well for small businesses. So with no other company offering a comparable product, Paycom can continue to grow rapidly while maintaining high gross margins.

Paycom stock has soared by nearly 18 fold since its 2014 IPO at $15 per share. Since its IPO, it has risen steadily.  Any interruptions in the company’s growth resulted in modest pullbacks and quick recoveries by Paycom stock. Now, with the PAYC stock price exceeding $255 per share, it seems to defy gravity.

I often talk about stocks that are cheap for a reason. PAYC stock is pricey for a reason, and the rapid growth of its profit helps explain why. Analysts, on average,  forecast earnings increases of 28.1% this year and 25.4% in 2020. Most analysts expect similar levels of growth to continue well into the 2020s. Consequently, traders have bid the forward price-earnings (PE) ratio of PAYC stock to 89.

The valuation of PAYC stock is cheap compared to other cloud equities. Twilio (NYSE:TWLO) sells for more than 383 times its forward earnings. Shopify (NYSE:SHOP) trades at 400 times its forward earnings. Unlike Paycom stock, both trade well below their highs and have become further removed from fundamentals than Paycom. Meanwhile,  Paycom’s balance sheet and competitive position are stronger than those of its rivals.

Buy PAYC During Its Steep Drops

As I mentioned before, the hardest thing about PAYC stock is knowing when to buy its shares. Put simply, I see PAYC as an equity that traders should buy during its sharp pullbacks. The current price places it nearly 10% below its all-time high, which PAYC reached late in November. At that level, we do not know yet whether this drop is a breather or the beginning of another steep retreat.

As recently as this fall, PAYC stock corrected by about 25% before fully recovering that loss and rebounding an additional 11% in November. In the last three months of 2018, it lost close to one-third of its value before staging a quick recovery.

With PAYC stock, I think traders will profit most by buying the shares on pullbacks of 20% or more. Not only will they benefit from the longer term gains of Paycom stock, but its quick recoveries  in the past indicate that it’s more likely to rise quickly after sinking 20%.

Concluding Thoughts on PAYC Stock

Paycom has proven itself to be a stable company whose shares will climb over the long-term. Through the cloud, Paycom has increased the efficiency of HR-related functions. Best of all, it has brought this benefit to small businesses, which make up the overwhelming majority of firms in the U.S. As a result, PAYC stock has produced massive returns for investors

However, that does not mean investors should buy PAYC stock at the moment. Though it may seem to rise endlessly, PAYC has has some notable corrections.

But Paycom stock has shown that it can recover quickly from large declines. Analysts, on average, forecast annual earnings growth of 25% per year for the foreseeable future. So Paycom stock will likely keep climbing for years. 

As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.


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