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February 11, 2005

Read the disclaimer

First, the stock pick I gave for my investment and portfolio mgmt class:

Paychex Inc. (PAYX, NASDAQ; $30.76, 2/9/05), the second largest U.S. payroll processor, is best positioned to benefit from an improving hiring climate and continued shift to outsource HR functions. Q2 2005 (Nov. 2004) quarterly revenue grew 11% year-to-year with 9% growth in core payroll processing and 32% growth in HR and benefits outsourcing. The firm continues to leverage existing customer information gathered in the payroll processing service into secondary products such as taxes and regulatory compliance.

Paychex demonstrated strong market power in 2004 through meaningful price increases and movement upstream with the Major Market Services (MMS) offering for larger customers. MMS currently makes up 12% of total revenue but is rapidly growing and will be a driver behind increased margins. The company has a long history of solid execution and will be one of the first to benefit from the current labor market recovery as small business formation grows and hiring picks up across the board. We think Paychex has room for top-line and margin growth both upmarket and internationally, as early reports of the company’s German startup are very positive.
The other students in my group chose Lexmark and Mohawk Industries.

Second, the disclaimer. I absolutely believe that small investors like you or I cannot make returns greater than the market by choosing individual stocks. If you assume that markets are characterized by 1) greed and fear in the short term and 2) efficiency in the long term; I can think of only three ways to earn excess returns:

  1. Rationality (greed) in a climate of fear
  2. Rationality (fear) in a climate of greed
  3. An informational advantage compared to other investors
The first two would be called market timing, which is notoriously difficult and is generally a good way to lose your shirt. And the third... please contact me first if you do in fact come across such information.

If you read my quote above about Paychex, nothing I've said is anything but common knowledge. Which means it should all be reflected in the current value of the company. Buying Paychex then, is a bet that hiring will pick up faster than expected. Personally, I don't have enough information to make that judgement.

What does that mean? Our money will be going into mutual funds, entrepreneurial activities and an occasional individual stock for entertainment purposes.

Posted by sam at 01:36 PM