Automatic Data Processing (ADP)

Is -20% this year on fears that AI will replace it. He doesn't believe it himself, but he has seen what this sentiment has done to Paychex.

It's a stretch that some AI tool will come along and replace what they do. The baby is being thrown out with the bathwater with these kinds of stocks that are information providers, not necessarily software. It enables AI in its own software. Their retention rate is 99%. Trades at an attractive valuation. Buy now and hold long term.

Significant regulatory payment moat. Sold off on back of AI. Quite easy to build a payroll-processing platform, but you have to connect to everything from banks to regulators to revenue agencies. Consider spousal and debt garnishment and the like. 

On sale. 51 years of consecutive dividend increases. Processes 1 of every 6 employees in the US. Yield is 3.30%.

It reported last Wednesday and shares faded, but they reported a top and bottom line beat and raised their sales forecast. But the market thinks the payroll processors are doomed in the face of AI. Is the market getting this wrong?

Admittedly, there are threats from AI to software, but this is a trusted outsourcer. Processes roughly 1 in 6 paycheques for NA workers. Handles $2.5T of clients' money every year. Large market share. Double-digit EPS growth. Not a down year in revenues this century, even during the global financial crisis. 

Over 1M clients in 140 countries, but NA is 80+% of the business and it really is a US company. High 20s PE multiple. Yield is 2.09%.

Likes it. Largest payroll provider in NA. Outperformed PAYX over the last 1-, 5-, and 10-year periods. Extremely good growth, incredibly efficient. Huge market share. Expanding offerings by expanding services into related areas, but it's all automated so labour costs avoided. Still room to grow.

Huge FCF, buying back shares, raising dividend.

(A Top Pick Jan 13/20, Down 5%) A play in payroll in the US. The company has increased dividends for 45 consecutive years. Effectively the same as Visa in terms of payment processing. Buy when it's on sale. A great company and a core holding. Would add on weakness.

non-FANG suggestion? He likes the payment processing space -- ADP, Paychex, Visa, or Mastercard. He would like to buy on a dip.

A payroll and HR company. A fairly pricey stock. Trades at about a 40% premium to the market. 70% of their business comes from payroll services and 30% from Human Resources operations. Over the last 6-7 years, the US has produced 15 million private sector jobs, which is great for a company like this. This is now a little too rich, and a little too late to the cycle.