TickerTalk Headlines for June 27th
In this newsletter:
Why Paychex Stock's Dip is the Best Opportunity in Today's Cycle
After the company reported its full-year 2024 earnings results, shares of Paychex Inc. (NASDAQ: PAYX) are trading lower by as much as 5.5% in the morning’s trading session. The initial reaction to earnings came as a surprise, as the actual results were nothing to bearish about, although management’s guidance could have disappointed those used to easy profits.
The technology sector, which Paychex is part of, ran high relatively quickly due to stocks like NVIDIA Co. (NASDAQ: NVDA) riding on the artificial intelligence boom. Some investors may have wrongly assumed that any stock with a technology aspect would follow suit. That is where savvy investors can take today’s earnings dip on Paychex stock and suit up for a potential buying opportunity.
An argument could be made by bearish traders, pointing to Paychex’s services being essentially the same as its competitor Automatic Data Processing Inc. (NASDAQ: ADP), with the caveat being that Automatic Data Processing holds a larger market share over Paychex. However, this fact also makes Paychex the better pick in today’s economic cycle.
Analysts Predict Double-Digit Upside for Paychex Stock Despite Earnings Dip
After a stock sells off as much as Paychex stock did, it’s typical for Wall Street to back off from them and even relay some bearish outlooks. This is why investors should keep ratings at the forefront of their minds in this bearish price action, as Paychex stock traded down 10% from its 52-week high in the run-up to earnings.
Those at the Royal Bank of Canada kept their valuation forecasts for Paychex stock at $130 a share, daring it to rally by over 10% from its current level. While this remains a bold move from analysts, they aren’t the only ones on Wall Street keeping their chins up for the stock’s future.
The Vanguard Group, Paychex’s largest shareholder, boosted its stake by 0.4% over the past quarter. While that may not sound like much, it brought the asset manager’s net investment up to $3.75 billion today. Over the past 12 months, the rest of institutional ‘smart money’ flooded Paychex with $5 billion in inflows.
These institutions and analysts must have an excellent reason to continue backing this stock, and some of those reasons are revealed to investors through the company’s quarterly earnings results.
Reality Check: The Numbers Speak, Unrealistic Expectations Deceive
Overall, the quarter showed continued strength for Paychex’s business, despite what bearish traders may say, or even bored bulls used to the stratospheric rallies in other tech names may feel about this stock.
Net revenue grew by 5% over the year, most of which came from insurance solutions for new hires. While some fundamental investors may look at the 18-month contractions in the ISM manufacturing PMI index as a bearish sign for employment – affecting Paychex -the reality is that this company’s audience is elsewhere.
This brand serves small to medium-sized businesses rather than large corporations, where Paychex has an advantage over Automatic Data Processing. So, instead of looking at the big business cycle, here’s what the National Federation of Independent Business (NFIB) says.
The Future Looks Bright for Paychex Stock, According to Management
Business optimism, an index reading posted by the NFIB, shows that the 2023 low sentiment could now be over. In the past quarter, this index has risen from 88.5% to 90.5%, meaning that more business activity and demand are expected ahead for these entities, and that’s good for Paychex’s earnings.
Speaking of which, the past quarter delivered earnings per share (EPS) growth of 9% to investors. Rising optimism can lead most to believe that the company can let out a similar quarter coming up, if not better, making current projections for only 5.5% EPS growth seem to be on the conservative end of the spectrum.
Management agrees as they provided 2025 financial guidance showing potential for 7% EPS growth. To back these expectations, more than just relying on boosted sentiment, management laid out $169.2 million to repurchase up to 1.5 million shares in the open market.
When management buys back stock, it sends a twofold message to the market. First, they believe that the stock is currently undervalued compared to where it should be, and second—sort of redundant—they expect to see bullish price action in the near term.
More than that, the underlying financials were healthy – and strong – enough to enable a $1.3 billion dividend payout approval, or $3.65 a share. Considering where the stock trades today, this payout would translate into an annual dividend yield of up to 3.3%.
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Any Pullback in Tech May Signal a Rotation into These 3 Sectors
The rise of artificial intelligence has been a gift for investors who own one or more of the technology stocks that stand to benefit from AI. Not only has this been a good trade, but many of these stocks, such as NVIDIA Corp. (NASDAQ: NVDA) and Microsoft Corp. (NASDAQ: MSFT), are also great buy-and-hold stocks.
The problem for investors who believe in diversification is that the most significant gains have been limited to a small group of stocks, including the Magnificent 7 stocks. As 2024 reminds investors, technology stocks are volatile at any time, but particularly when many are trading for premium valuations.
But there is a sense that things are changing. It’s becoming more likely that the Federal Reserve will only lower interest rates once, if at all, in 2024. But the overwhelming sense is that the Fed’s next directional move will be to lower rates. That has investors looking for areas to deploy capital that’s either on the sidelines or currently invested in tech stocks.
This shift may have major benefits for investors in the sectors that institutions are buying. Here are three sectors that look like suitable investments for the second half of 2024.
Energy Stocks Will Heat Up
Energy stocks are cyclical in nature, and that cycle has been bearish. That’s confounded some investors because the OPEC+ nations show no inclination to increase production. They want and need the price of oil to be much higher.
But there are reasons to believe that there’s something else going on with oil prices outside of normal supply and demand dynamics. The Biden administration has repeatedly tapped the nation’s Strategic Petroleum Reserve (SPR) to ease prices at the pump.
That move has worked, with the Federal Reserve keeping interest rates at a level that keeps demand in check. But any drop in interest rates will be bullish for oil prices. Investors should also be looking at companies that produce natural gas, which is likely to see high demand from data centers.
There’s further evidence that energy stocks are likely to move higher. That is, institutional ownership in the Energy Select Sector SPDR Fund (NYSEARCA: XLE) shows significant institutional buying in the last three quarters.
Industrials Continue to Be an Infrastructure Play
The Inflation Reduction Act was the government’s effort to jump-start the rebuilding of our national infrastructure, including roads, bridges, water treatment facilities, and updating our aging electrical grid.
Investors may first notice this activity in the price of commodities such as steel, aluminum, and copper. And as these projects advance, it should be bullish for industrial stocks such as Caterpillar Inc. (NYSE: CAT) and Deere & Company (NYSE: DE).
Unlike the energy sector, some of the individual names in the industrial sector have been pulling back in recent months. However, the Industrial Select Sector SPDR Fund (NYSEARCA: XLI) shows buyers have outnumbered sellers for the last six quarters.
Consumer Discretionary Stocks May Be a Holiday Gift
The consumer discretionary sector will likely be among the biggest beneficiaries of lower interest rates. As the name of this sector highlights, these companies produce goods and services that are nice to have but not must-haves for consumers.
Some consumer discretionary stocks held up well as inflation surged, as rising wages helped consumers keep up with the rising prices. Companies with pricing power, like PepsiCo Inc. (NASDAQ: PEP), continued to post solid earnings. However, as the inflation rate remains above “normal” levels, these companies are facing more complex comparisons.
However, once again, investors would do well to follow the money. In the case of the Consumer Discretionary Select Sector SPDR Fund (NYSEARCA: XLY), buying activity is nearly triple that of selling activity in the last 12 months. And going back 18 months, you still see institutions gearing up for a sector rotation.
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3 Stocks to Watch: Oracle, Casey's, FedEx Signal Big Gains
Stock market trends come in many forms, but this article will focus on the price trend. A trend is a general direction in which something develops; in the case of investing, the upward price trend is essential. Like they say, it pays to trade with your friend; the trend is your friend. This article looks at three stocks with impressive price trends set up for gains in the second half. Each fires a trend-following signal that investors can copy. The signals include price action, volume, moving averages, and technical indicators. Because fundamental factors support the price action and signals, they have a higher-than-average chance of paying off.
Oracle Breaks Out of a Triangle Pattern
Oracle’s (NYSE: ORCL) last earnings report confirmed its position as a primary player in the global AI infrastructure industry. That news helped the stock advance 10% in a week to break above its critical resistance point. That point was near $130; a move above it confirms upward momentum in the near-term rally and breaks the market out of a major consolidation. The consolidation manifested as a triangle pattern valued at $30 or 30% in magnitude, bringing a target of +$30 to +30% from the breakout point into play. Those projections range from $160 to $169, the low end of the range indicated by the charts.
The triangle pattern consolidated a larger rally that began last year. That rally is worth over $65, or about 100% of the 2023 low. Those projections bring targets of $195 to $260, a much more extensive range and well above the analysts' highest forecasts. However, the trend in analysts' sentiment is also upward and leading the market, with a consensus of $145 and a high end of $175. In this scenario, the market is well-supported with upward momentum that should continue to drive higher prices. As it is, the market is showing a small flag pattern that suggests $160 could be reached by summer.
Casey’s General Stores Builds Momentum
Casey’s General Stores (NASDAQ: CASY) has been in rally mode for three years, driven by store count growth, market penetration, and margins. The company uses its cash wisely to maintain a fortress balance sheet, self-fund growth, pay dividends, and repurchase shares, driving share prices higher. The latest report triggered a significant trend-following signal, driving the market up by 20%, to confirm support at a cluster of moving averages.
Subsequent price action suggests a bullish flag pattern and a continuation signal is in play. The base-case scenario is for another $55 to 20% gain, which gives a target range of $435 to $456, which aligns with the high end of the analysts' target range.
The bull-case scenario is for this stock to continue rallying indefinitely, periodic corrections aside. The company is set up to increase its dividend annually at a double-digit CAGR without impairing its financial health, an outlook aided by share repurchases. The company’s repurchasing efforts reduced the count by an average of 0.8% for the last reported quarter, and the authorization in place is sufficient to do the same by next year.
FedEx Delivers a Trend-Following Signal
FedEx’s (NYSE: FDX) FQ4 results were tepid, with growth below 1%, but the critical details were that it returned to growth, volume growth was positive in the core segment, margins widened, and the bottom line was strong. The company’s efforts are expected to sustain improvement through the year’s end, which will aid the balance sheet and capital return outlook. That includes dividends, dividend growth, and share repurchases.
The market surged 15% on the news to break above critical resistance. Critical resistance aligns with the top of a recent trading range and prior resistance levels that should now become support. The move confirms support at a cluster of moving averages and is MACD and stochastic compound the signal.
The MACD and stochastic are in the early phases of a strong entry signal that could increase the market by $50 or 21% from the $280 level. Those projections give targets of $330 to $336, aligning with the analysts' consensus estimate. Because the analysts are raising their targets and leading the market to the high end of their range, a move to the $340 to $360 range is expected.
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