A gain of 14.07% in 2019 for shares of Paycom Software, Inc. (PAYC) tells a story of a stock gaining alongside a high amount of unusual trading activity. It's bullish activity because the shares are heading higher on increasing volumes, indicating that a buyer is involved. Over time, we've learned how stocks with a history of strong fundamentals tend to rise in price. Smart money managers are always looking to bet on the next outlier stocks ... the best in class.

The main criteria we look for when betting on upside in a stock bouncing after a period of pressure are a history of strong fundamentals, strong technicals and big potential buying in the shares. I'll go into the fundamental picture later, but the true tell on the near-term trajectory of the stock lies in its trading activity. Simply put, it's all about supply and demand. When demand is higher than supply, the stock rises. When demand is lower than supply, stocks fall.

For most of 2018, Paycom was a stock gaining month after month. Beginning last October, the stock got caught up in the massive wave of selling that crushed the market. In our view, pullbacks = opportunities, especially a pullback we see as mechanical in nature.

For Mapsignals, when we look for an entry on a leading stock, we want to see an increase of potential buying. Just to show you graphically what our unusual trading activity signal looks like, have a look at all of the unusual institutional (UI) signals Paycom stock has made over the past year. Up until September 2018, you can see a lot of buy signals, which coincide with a lift in the shares. Then, beginning in October, the foot was let off of the gas as the whole market pulled back drastically. This is notable because stocks move based on supply and demand. Clearly, demand is outstripping supply this year:

Chart showing the unusual institutional (UI) signals made by Paycom Software, Inc. (PAYC)

So far in 2019, Paycom logged two unusually high-volume days, indicative of buying in the shares on Jan. 22, 2019 (see chart above). However, what gets our attention now is that Paycom is gaining quietly but in an unusual way, which suggests that demand for the stock is increasing. If you are going to make a bet on the direction of a stock, it is prudent to pay attention to how the shares are trading. Just like you don't want to fight the trend, you also do not want to fight a stock that shows increasing price alongside an increase in the volume traded. Someone could potentially be accumulating a position.

Mapsignals' goal is to identify tomorrow's top stocks today. We're basically looking for outlier companies with healthy fundamentals accompanied by outsized unusual institutional trading activity. By studying these data points, we can make an educated guess as to which equities institutions are trafficking in and marry this information with fundamentally sound companies. We want the odds on our side when looking for the highest-quality stocks.

When we decide on a strong candidate, we consider prior leaders that have a history of technical outperformance. When they show leadership, we see these as opportunities. The following are a few areas that grab our attention when it comes to Paycom stock:

  • One-year outperformance vs. market: +53.15% vs. SPDR S&P 500 ETF (SPY)
  • One-year outperformance vs. sector: +52.68% vs. Technology Select Sector SPDR ETF (XLK)
  • Recent bullish unusual trading signals

Now, we take it a step further and score the best stocks showing unusual trading activity. Below you can see the historical times since 2014 when Paycom stock made buy signals for Mapsignals. These are the highest-rated signals in our stock universe. Clearly, we have been all over the massive run-up over the past few years. We'd even venture to call this stock an outlier:

Chart showing the buy signals made by Paycom Software, Inc. (PAYC)

On top of a technical picture that is strong, one should also look under the hood to see if the fundamental picture supports a long-term investment. As you can see, Paycom's latest earnings report showed solid growth:

  • Q3 2018 year-over-year revenue growth rate: +32%
  • Q3 2018 year-over-year GAAP net income growth rate: +38%

Paycom is breaking out and has a history of great fundamentals. We believe that the current level for the shares is in position for further upside. The narrative for Paycom and other software companies is one of a growing business model. I am always on the lookout for great companies showing usual trading activity in the shares. The best companies tend to trend higher over the long run. All of this points to a long-term opportunity for the stock.

The Bottom Line

Paycom stock represents a potential buying opportunity for the long-term investor. Given the lift in price, historical fundamental outperformance and recent unusual buying signals, this stock could be worth a spot in a growth-oriented portfolio.

Disclosure: The author holds no position in Paycom shares at the time of publication.

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