Oil fell below $36 this week, the stock market turned negative for the year, junk bonds sold off dramatically, and the fed is set to begin raising rates next week. It seems our multi-year stock market party is about to change, and this provides a great opportunity for us to make two important points: (1) Diversified long-term investors don’t need to make a single change to their investment strategy, and (2) Many terrific stock-specific investment opportunities remain for those willing to do their homework. For example, this week’s Weekly highlights several specific stocks related to cloud-based human capital management that are set to climb from an accelerating secular trend.
As we’ve pointed out in the past, many “income-investors” have piled into specific sectors (for example oil-and-gas) and junk-bonds because they offer higher yields. However, this strategy results in an undiversified portfolio with higher risk. And this risk can really hurt when the market turns against you. In this morning’s Wall Street Journal, Jason Zweig aptly points out:
“Many income-craving investors plunged into energy stocks for their high yield. But oil-and-gas companies have fallen so far, so fast, that more than four years’ worth of income have been wiped out by the recent capital loses.”
At Blue Harbinger, we believe in diversifying across market sectors and styles to avoid the pain that weeks like last week can cause. Additionally, our Blue Harbinger 15 strategy believes in identifying specific stocks that can perform well regardless of macroeconomic headwinds. For example, we believe there is tremendous growth opportunity in cloud-based human capital management (HCM) solutions.
Specifically, companies like Automatic Data Processing (ADP), Paylocity (PCTY), Paycom (PAYC), Paychex (PAYX), and Ultimate Software (ULTI) will all benefit from the growing preference for cloud-based solutions that enable employees to access payroll and human resources data outside of the office and from mobile devices. We currently own Paylocity within our Blue Harbinger 15 portfolio, and Automatic Data Processing will likely be next week’s Stock of the Week. Our basic thesis on the sector is that old companies (ADP, Paychex) will continue to migrate clients to the cloud (because clients are demanding it), and newer companies will continue to offer cloud-based solutions because customers demand it.
There is currently an aggressive race within the industry to capture the business of newer startup companies. Smaller HCM companies (e.g. Paylocity and Paycom) are spending heavily on marketing and sales because it helps capture new customers, and customers are very “sticky” in this industry. Once a company has their HR/payroll solution set up then they are unlikely to switch. It’s easier to just stick with the provider they have. And it is this “sticky-ness” that is causing the race (and very heavy spending) to capture as much new business as possible. Also, older companies (e.g. ADP) are working aggressively to migrate existing customer to cloud solutions before they leave.
We’ll have more information on the industry in next week’s Stock of the Week, but Paylocity is still our favorite (it’s a BH15 stock). Additionally, ADP is attractive, especially if you like a dividend.
Lastly, we will likely continue to see volatility next week with oil price and the Fed interest rate announcement. And while we believe it’s better to buy low than high, we also believe it’s impossible to exactly call the bottom. Don’t do anything rash as the market gyrates. Lots of trading will only generate lots of trading costs. Buying and holding a diversified portfolio of stocks is a proven strategy for long-term success.