There is a long history of mean reversion in the stock market. And considering the soon-to-be dueling monetary policies of the hawkish US Fed and the dovish ECB, combined with 2015 year-to-date performance, small-cap value stocks with high dividend yields look very attractive heading into 2016.
Ben Graham’s Margin of Safety and Current Market Opportunities
When Coca-Cola replaced their classic formula with “New Coke” in 1985 the stock tanked, and when they brought back “Coca-Cola Classic” less than three months later the stock rebounded significantly. Similarly, when McDonald’s had trouble with Chinese meat suppliers in 2014 the stock tanked, and since rebuilding customer confidence the stock has come roaring back. Chipotle Mexican Grill's (CMG) recent setbacks may be providing enough margin of safety for brave long-term investors to do something very smart.
Know Your Goals, Hold Your Ground.
Our favorite cloud-based small cap holding is up 31% in the last month, and it beat the market again this week despite the broad sell off we are experiencing. If you are a diversified long-term investor, there is no reason to change your strategy just because volatility has picked up. Buying and holding quality stocks is a proven winning strategy.
Paylocity Update – Increasing Price Target
Paylocity (PCTY)
Rating: BUY
Current Price: $43.48
Price Target: $55
Paylocity (PCTY) announced expectation-beating earnings last week, and raised its fiscal 2016 revenue guidance significantly (from $199-203 million to $210-214 million). As a result of the company’s faster than expected revenue and earnings growth, we are increasing our price target from $45 per share to $55 per share. The $55 per share price reflects our same conservative 27.2% annual growth rate which is well below the company’s current growth rate of around 40%.
Paylocity continues to be a company that offers a highly compelling solution without the legacy baggage of its larger industry-leading competitor ADP. Unlike ADP, Paylocity’s solutions are primarily cloud-based meeting a growing customer demand. Additionally, Paylocity is a less costly solution as it does not require all the bells and whistles of ADP which many newer smaller companies don’t want anyway.
According to Steve Beauchamp (President and Chief Executive Officer of Paylocity):
"Fiscal 2016 is off to a very strong start, with first quarter total revenue growth of 45%. We continue to see strong demand for our unified payroll and HCM platform and are encouraged by the response to our ACA Enhanced product offering." (source: WSJ).
Overall, Paylocity continues to offer amazing growth opportunities, and if the company continues to grow ahead of expectations we will likely be increasing our price target again in the not-so-distant future. This company has a lot of room to run, and it has the potential to eventually turn into an exceptional "cash cow" when it grows to a point where it can stop spending on growth and instead just rake in the profits. Keep in mind this is a high-customer-retention business because customers are extremely hesitant to change service providers once they’ve gotten their payroll processing set up. (You can read our original full Paylocity thesis and research report here).