Dear Reader,

It's the fourth Sunday of July and that can only mean one thing...

It's stock pick time!

This week, I'll be sharing with you an HR tech gem where the fundamentals and stock price are dancing out of sync.

Look at this chart. The blue line shows the operating income, while the gray line indicates the market cap:

Every time I uncover a chart like this, my investment senses tingle.

Yes, usually there's a reason for such disparity, but when there isn't? Jackpot. A great buying opp often awaits.

And I believe this is one of those golden moments.

So, without further ado, let me introduce this week's stock pick: Paycom!

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What does Paycom do?

Paycom is a user-friendly cloud-based platform designed to streamline and manage all human resources tasks for medium to large businesses. It simplifies and automates various HR functions, including:

Payroll Management: Ensuring accurate and timely employee payments.

Benefits Administration: Managing employee benefits efficiently.

Hiring Processes: Streamlining recruitment and onboarding of new employees.

Employee Retention: Implementing strategies to keep valuable employees engaged and satisfied.

By integrating these functions into a single platform, Paycom significantly reduces the HR workload and minimizes errors, making it an essential tool for efficient human resources management.

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How do Paycom's key metrics look like?

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What does science say about Paycom's future?

The quantiative analysis says Paycom is an excellent investment based on the fundamental factors that science has identified as the most reliable predictors of future returns.

Let's see now what it looks like from a qualitative point of view:

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Why Invest in Paycom?

Stable Recurring Revenue: 90% of Paycom's revenue comes from subscriptions. That means predictable, steady cash flow.

Prime Market Position: Paycom serves over 36k happy clients, which means both, that it’s a leading employee management software provider for mid-to-large-sized businesses, —and that still has a massive growth potential.

Innovative Edge with BETI: BETI is a game-changing feature that lets employees handle their own payroll. This cuts down on HR mistakes and makes the HR teams more productive. This new feature positions Paycom miles ahead of its competitors.

High customer loyalty: A key part of Paycom's moat is its high customer loyalty. For a business, switching HR providers can be a big problem. Paycom customers have even less reasons to switch as client employees love Paycom's mobile app rating it 4.8 out of 5. Paycom says it has a 90% retention rate, which makes sense when you add BETI to the story.

Solid Financial Performance: Paycom's operational success is shown by their high margins (83% gross margin) and return on invested capital (31% ROIC). And while recent revenue growth has slowed to about 18%, Paycom used to see strong 30% growth (more on this below).

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What Could Go Wrong?

Growth Concerns: Revenue growth slowed from 30% to 18% due to BETI. Although a game-changer feature for efficiency, it cuts billable errors as employees are able to fix payroll mistakes themselves. Analysts frown about this, but it was the right move for the clients. Temporary bump ahead?

Economic Sensitivity: Paycom's revenue follows the job market. Less jobs = less clients = lower revenue. In other words, Paycom depends a lot on how the economy is doing as a whole.

Competition is fierce: To outshine giants like ADP and Paychex, Paycom must innovate non-stop. Relentless product evolution and world-class service are non-negotiable in this arena.

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Warning

Paycom unveils its Q4 earnings this Wednesday. While I beleive its long term prospects look great, I can't predict what its quarterly results will look like. So, if you don't like suprises (might be positive or negative), you might want to wait until after the results to pull the trigger.

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Conclusion

In a nutshell, investing in Paycom may offer a blend of stability and growth, backed by innovation and a prime market spot. Despite the recent slowdown in revenue growth, the company's innovative edge and market position suggest significant long-term potential. The current disparity between its operating income and market cap presents a unique buying opportunity. However, investors should remain mindful of macroeconomic conditions and upcoming earnings.

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3 Important Things to Know About These Emails

1. Success Rate: Let’s set the record straight from the beginning—not every stock I recommend will beat the market. I estimate around 60% will outperform the S&P 500, and that should be enough to build a portfolio that outperforms.

2. Selection Process: I'm not personally investing in each and every one of these stocks. These picks are driven by quantitative analysis and may not always pass my qualitative tests.

3. Updates: I'll provide frequent (probably quarterly) updates on how an equal-weighted portfolio of these stocks performs for full transparency.

As always, please remember this isn't investing advice—make sure to read our ​disclaimer​. Invest at your own risk.

Happy investing!