Paychex Inc. is a leading human capital management solutions provider in the US and Northern Europe. Given its growth rate, profit margins and strong balance sheet, the company seems to be enjoying a strong competitive advantage, or ‘moat‘ as Warren Buffett calls it. That didn’t prevent the stock from falling 26.7% between April, 2022, and late-May, 2023.
Paychex closed a few cents below $111.50 a share yesterday, so it is still ~$30 per share below its all-time high of $141.92. While the S&P 500 has already recouped more than half of its 2022 losses, PAYX’s uptrend has yet to resume. Does this mean it is a lost cause? Or isn’t this precisely what makes it a good investment at these prices? The chart below provides some clues.
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Paychex went public in 1983 and it is fair to say that it’s been a decent wealth compounder over the following four decades. That doesn’t mean the stock hasn’t had its fair share of significant downturns, though. Besides the recent drop from $142 to $104, it also fell 47% during the 2020 Covid-19 panic. Not to mention the ‘lost decade’ at the start of the 21st century, when Paychex lost more than 60% of its market value.
Paychex Stock Keeps The Fibonacci Ratio In Mind
Fortunately for the bulls, the chart above shows that Paychex stock is likely to recovery from the current slump, as well. Given the financial stability and leading market position of the company, it makes sense to expect the long-term uptrend to continue. In terms of Elliott Wave analysis, it looks like a huge five-wave impulse is still under construction.
Wave I ended in late-2000 and was followed by a nine-year bear market in wave II. That major correction ended in 2009 shortly after touching the 61.8% Fibonacci support level for the second time. Wave (1) of III lasted until the panic of 2020, before wave (2) dragged Paychex down to the 61.8% level again. Then, wave (3) of III reached an all-time high of $141.92. The 38.2% Fibonacci support has so far been able to stop the bears in wave (4).
It seems that somehow this stock likes to keep the Fibonacci levels in mind. If this count is correct, we can expect another rally in wave (5) to complete wave III. Upside targets in the $150-$160 area look plausible. Once there, however, investors would do well to take some profits. It would be time for another long-lasting correction in wave IV, which could drag Paychex stock below the $100 mark. It would be years before the bulls see a new record again in wave V.
A ‘Buy’ With a Caveat
To conclude, Paychex is a wonderful business and its long-term Elliott Wave chart looks bullish. That being said, the stock also trades at a forward P/E of nearly 24, which is quite expensive, in our opinion. So, we plan to just watch and applaud from a safe distance. There are 17 other positions in our stock portfolio at the moment, whose risk/reward ratios we like a lot more. In case you’re wondering, here is our stock picking track record so far:
Instead of buying every stock that seems poised to rise, we like to keep valuation in mind, as well. So far, this approach has served us quite well. In order to be successful in the long run, investors have to pick their battles. As legendary fund manager Peter Lynch once put it, “you don’t have to kiss all the girls“.
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