I initiated a write up on Automatic Data Processing (ADP) on July 15th followed with a checkup on the July 30th. My original thesis of ADP was that the stock discounted the unemployment rate. The chart below shows the previous peak in the unemployment in the 1980's. Shortly after, shares of ADP peaked in May 1983. The stock didn't trade higher than the 1983 level until May 1985, two years follow.
As a result, I believe it may be time for investors to begin unloading shares of ADP. At the current price of $41.90, it is trading 34% above the yearly low and 3.6% away from the yearly high. I see this as a 34% downside risk and 3.6% reward profile, which is not much of a compelling argument to buy.
If you were to hold shares of ADP, you'd be sitting on a yield of 3.8% (assuming the original purchase price of $35). Surely that return is much greater than the average CD account and fractionally higher than treasuries. However, your principal has returned a whopping 23% is sold at or near the current price. While the company can and has raised the dividend at a double digit rate (15% CAGR since 1993), I assume that the company may not be able to retain such a pace unless growth return to the employment market.
I'm not suggesting that investor be short sighted and take any gain that comes their way, but I suggest investors to look at the valuation and the technical aspect of the stock. Currently, ADP is trading near its 2007 peak ($46.25). How likely is it that they can better their all-time high? And if they break that level, how much further can it go? See chart below.
As mentioned before, I see ADP as a bargain below $41. At $42.90, it would be wise to take some, if not all, of the profits and search for a better opportunity in the New Low Observer Watch List.