Investors could consider paying up for Paycom
Paycom Software (NYSE: PAYC) is a leading provider of human resources and payroll-management software.
Its offerings help businesses and institutions streamline operations by reducing costs, saving time and improving overall efficiency.
In fact, its Beti software platform has arguably been too efficient recently.
On its third-quarter earnings call, Paycom noted that some customers cut back on certain services because the Beti platform had made them nonessential.
Paycom’s stock was recently down more than 45% from its 52-week high, in part due to weaker-than-expected third quarter performance and lowered management projections.
No doubt about it, recent deceleration in sales growth has been disappointing.
On the other hand, the enterprise software specialist is still posting impressive margins – it had an 18.5% net profit margin and an 83% gross margin in this year’s third quarter – and may be able to return to stronger sales growth down the line.
If economic conditions improve, the total number of workers managed through the company’s software ecosystem will probably increase and lead to improved revenue.
Paycom also has opportunities to expand in new territories, add new services and restructure how it monetizes its software.
The stock’s recent low price presents a promising opportunity for patient buy-and-hold investors. (The Motley Fool owns shares of and has recommended Paycom Software.)
Ask the Fool
Q. What’s going on if a company is “stuffing the channel”? – S.P., Biddeford, Maine
A. Something sneaky – and potentially fraudulent – because stuffing the channel involves inflating sales figures by sending out much more product than can be sold (perhaps by offering deep discounts and incentives) and thereby posting strong sales.
That’s problematic because many items will likely end up returned and won’t have actually been sold.
To see how well a company is doing, investors and stock analysts look at its financial statements.
Revenue – also known as sales – is one important metric, and it’s smart to look out for signs of channel stuffing.
If a company’s accounts receivable are growing faster than sales, that’s a red flag. To find out, you can track the “days sales outstanding” (DSO) figure, which reflects how long it typically takes a company to receive payment for sales.
To calculate it, divide accounts receivable (money owed to the company) by sales, then multiply the result by the number of days in the period (such as 91 for a quarter or 365 for a year). Less than 45 days is considered low.
A company with a low DSO is getting its cash back quickly.
A high DSO might reflect generous payment terms. Rising numbers can signify channel stuffing. (This doesn’t apply to every industry, though; some, such as restaurants, receive much of their income immediately.)
Q. How many mutual funds are there? – H.V., Alpharetta, Georgia
A. There were 137,892 regulated open-end funds worldwide as of the end of 2022, per the Investment Company Institute, and 8,763 mutual funds in the U.S. (some of which are funds that invest primarily in other funds).
My Dumbest Investment
My most regrettable investment was actually not an investment but a failure to invest.
I was eager to buy into Fastly, a computing services company, but was waiting for it to fall by a dollar per share – from $23 to $22 – before buying.
Well, it surged to $36 per share days later and never looked back. Argh! – F.A.B., online
The Fool responds: After you wrote to us in 2020, Fastly’s stock did look back.
In fact, its shares were recently down more than 87% from a high late in 2020.
It appears that the stock simply got quite overvalued.
After Fastly posted reasonably impressive earnings results – its revenue was up 35% year over year in 2021’s first quarter – many investors who had expected even faster growth bailed, sending shares down.
If you’re still interested in Fastly, it’s certainly much more attractively valued now.
Bulls expect it to keep growing and to do well in the long run, but bears note that it’s posted losses instead of gains for many years.
Fastly aside, your experience is a reminder that when you really want to invest in a company (ideally, after you’ve researched it and found it a promising grower and good value), it’s often best to just invest in it.
Waiting for a modest price drop before buying can lock you out of the stock.