Stocks to sell

In December 2022, I discussed three overpaid CEOs and why investors should sell their underperforming stocks. One of the CEOs was Chad Richison, the founder and chief executive of Oklahoma-based Paycom Software (NYSE:PAYC), a cloud-based payroll and human capital management software provider. PAYC stock had gone sideways for 36 months. I wasn’t impressed. 

Paycom shares have lost 34% of their value in the year since. They are now trading at the same level they did in March 2020, severely underperforming the S&P 500

As a result of the company’s underperformance, only five analysts out of 21 covering PAYC stock rate it Overweight or a Buy, with a median target price of $194, below where it’s currently trading. 

You don’t have to be a rocket scientist to know Richison hasn’t delivered for shareholders in many years. 

Here’s why the founder has got to go.

Paycom’s Peers Have Performed Better

Paycom reported disappointing Q3 2023 results on Nov. 1 that severely deflated its share price. Between missing the analyst sales estimate and exceptionally weak guidance for Q4, its shares fell more than 38% on the day. It’s regained 53% of its single-day losses but remains down 34% over the past year. 

All of its competitors’ stocks have done better over the past 52 weeks, notably Workday (NASDAQ:WDAY), up 71%, and Intuit (NASDAQ:INTU), up more than 53%. It’s also underperformed its peers over the past five years.

The company’s guidance calls for at least $1.68 billion in revenue (22% year-over-year increase) and $712 million adjusted EBITDA (23% higher YOY) for 2023. Both of those are lower than the previous year. In 2024, it expects a further sales slowdown with 11% growth in 2024. 

However, analysts expect 2024 earnings per share of $9.27 (21.6x earnings) and $11.16 in 2025 (18.0x), which isn’t excessive given it’s still growing. 

The question for investors is for how long? 

An Ongoing Pay Problem

In the company’s past three fiscal years, Richison’s total compensation has been $3.14 million (2022), $2.96 million (2021), and $211.13 million (2020), which was mentioned in the introduction. 

You might think that $3 million in annual compensation isn’t unusual for a $12 billion market cap, but investors can’t overlook the $209.6 million in stock and unit awards. Fifty percent will vest within six years from the Nov. 23, 2020, grant date if its share price trades at or over $1,000 for 20 consecutive trading days, and the other 50% within 10 years if it exceeds $1,750. He loses them all if the share price doesn’t meet the targets. 

So, the company will argue that he’ll only be compensated if the stock performs. 

However, in 2022, he made $5.96 million off vested stock before 2020, $51.8 million in 2021, and $45.4 million in 2020. That’s $103.2 million in actual compensation in addition to Richison’s salary and non-equity compensation.

From Dec. 31, 2019, to Dec. 31, 2022, its shares gained 15.4%. Over the same period, the S&P 500 gained 47%, 3x PAYC’s performance.            

There Are Better Options

As I mentioned in the section about its peers performing better in all periods, it’s hard to understand why an investor wouldn’t put their money into one of them. After all, I can guarantee that the CEO pay of those companies won’t be more egregious than Richison. 

For example, Workday Co-CEO Aneel Bhusri (also a co-founder) and Carl Eschenbach earned total compensation in 2023 of $17.3 million and $102.7 million, respectively. The large number for Eschenbach was to incentivize the Workday board member and former Sequoia Capital partner to join its management team in late 2022, taking over as permanent CEO sometime in 2024. 

I’ve always said that hired guns should be compensated well because they give up other opportunities. Founders should not be issued stock grants like candy because they’re original management. They usually already have a significant amount of stock as co-founders. 

There are better options. PAYC stock remains a sell. 

On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.

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