Red Flag Alert – Something Doesn’t Add Up
The Curious Case of Paycom
Sometimes something is so bad that you just know there’s more to the story.
Such is the case with Paycom Software ($PAYC), a onetime growth stock superstar and maker of payroll and human resources software… whose shares over the past two years have gone through a series of upheavals.
It was the latest, however, that makes you wonder what’s really going on. And which is why, even after the stock’s latest collapse three months ago – in response to third quarter earnings – Paycom warrants a red flag as a stock to avoid...
And that won’t likely change anytime soon, even if numbers are good when the company reports its fourth quarter after the market’s close tomorrow.
That’s because what happened a quarter ago can’t or shouldn’t right or reverse itself so quickly – and certainly not without a good explanation.
I’d go so far as to say that if it did or does, that would raise even more red flags.
Where Our Story Begins…
Remarkably, outside of a few headlines and quick summaries, virtually nothing has been written about why Paycom’s stock tumbled by 37% overnight on shockingly bad revenue guidance... prompting a herd of analyst downgrades.
Nothing, that is, but an exceptionally well-done chronology in this class action lawsuit, which I stumbled on after I had heard the story and dug in myself.
Many investors ignore shareholder class action lawsuits. But this one tells quite a tale. (The company, the best I can tell, hasn’t yet responded.) And I’m guessing the amended suit, if there is one, will be even better, since amended suits tend to include interviews with former employees.
Even without any insider insights, everything that happened was in plain sight in public filings and transcripts.
The Setup…
With a history of seemingly solid execution, investors had come to expect 20%-plus revenue growth at Paycom. The company had initially set its 2023 revenue growth rate at 24% in February, raising it to 25% in May. By August, it had raised the actual dollar amount slightly, keeping the growth rate at 25%.
Enter the third quarter call in November... CFO Craig Bolete stunned investors when he said that fourth quarter growth would be around 14%. But the real jolt was two minutes later, as he wrapped up the scripted portion of his call, when he went on to say...
...we believe it is prudent for us to set expectations for 2024 year-over-year revenue growth of between 10% and 12%.
As the chart below (courtesy Aiera) shows, during the call savvy investors immediately started to sell.
That was after the market closed. The real action, as this six-month chart shows, was the next day.
And while the stock has recovered some, it’s still far off its pre-call highs.
No Warning
Here’s the thing...