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Payroll Payday! BBQ Fish For Everyone! (PAYX)

Posted on July 15, 2021

Today’s trade is focused on the post-Batflu recovery that everyone is convinced will happen…

One day…

Soon.

Specifically, we’re zeroing in on payroll, HR and benefits management company Paychex Inc. (NASDAQ:PAYX), the Rochester, N.Y. outfit that prospers when small business goes on a tear.

Only problem is there is no tear.

More of a RIP, actually, since no one wants to work these days.

That said, expectations are expectations, and that’s what’s driven the price of PAYX inexorably higher over the last six months – to the tune of nearly 45%.

Well that’s not right at all!

And we agree.

Particularly after a survey of the fundamentals.

Consider –

  • P/E is a lofty 37.08,
  • Dividend Yield is 2.35% (and there’s no problem there, whatsoever),
  • Although Price to Book is an egregious 13.62,
  • And Quarter over Quarter sales AND earnings have declined by 2.70% and 1.60%, respectively.

Apparently, insiders are asking the same question.

In the last six months, they’ve dumped a Valemax super-carrier $50 million worth of stock.

And not only them!  Hedge funds have unloaded shares in a hurry, too.  Since the last quarterly 13F filing, a full 20% of those hedgies holding the stock have liquidated.

Now take a peek at the chart –

Technically, we’re at a fork in the road.

  1. RSI has twice bumped up against the 80 overbought marker (in green), and
  2. MACD is now beginning to roll lower.
  3. As for price, a very distinct three wave pattern higher has taken shape (in red), but the lowest trendline has NOT yet been broken.  That would have to happen before the pattern is confirmed.  In that sense, we’re early.
  4. We’re only engaging the trade because the past three week rise was so exorbitantly steep that we’re anticipating a top within the next short span.
  5. All the salient moving averages are unfurled and trending higher as of the beginning of May (in blue), a phenomenon that often precedes a snap-back.
  6. Strong support first emerges at the 137 DMA at 97 (and rising), then at the first Fibonacci retracement calculation at 87.

That said, the trade we’re structuring requires only a relatively modest decline to profit handsomely.

.And it look like this –

A Jew and His Gold recommends you consider selling the PAYX September 17th 110/115 CALL spread* for a credit of $2.40 (4.30/1.90), and buying the PAYX September 17th 110/100 PUT spread** for $2.45 (2.75/0.30).  Total debit on the trade is $0.05.

[*Sell the 110 CALL and buy the 115 CALL.  **Buy the 110 PUT and sell the 100 PUT.]

Rationale:  Cost is the best side of this trade, no question.  At just a nickel a unit, many will no doubt consider doubling or tripling the recipe.

Maximum Gain on the trade is a huge $10.00 (which would make for a corpulent 19,900% gain), while

Maximum Loss is $5.05 (difference between the CALL spread plus initial debit).

Breakeven is $109.95 – exactly two percent lower than last night’s close.

Depending upon overall market structure, we may consider closing the trade early.

May you find favor in the eyes of the Al-mighty.

Many happy returns,

Matt McAbby

 

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