According to Warren Buffett, Benjamin Graham once told him to imagine stock quotes coming from a man named Mr. Market. Sometimes Mr. Market wakes up euphoric, other times he's depressed. As investors, it's important to be prepared to buy shares in great businesses when all Mr. Market sees is doom and gloom.
Paycom Software (NYSE:PAYC), EPAM Systems (NYSE:EPAM), and lululemon athletica (NASDAQ:LULU) have been consistently winning new customers and raking in profits for years. Here's why I'll be taking advantage the next time the stock market gets a case of the blues.
1. Paycom Software
When the company started in 1998, the payroll industry hadn't changed much in decades. CEO Chad Richison, who spent a few years in sales for industry giant ADP, thought the payroll market was ripe for disruption. His company went public in 2014 and the stock is up 2,300% since.
Despite the growth, Paycom still holds less than 5% market share in the workforce management software industry.
The company has grown consistently by focusing on simplicity and security, as well as providing a more user-friendly experience for its customers. Unlike larger competitors, which pieced together different applications through acquisitions, Paycom was one of the first to integrate everything into one app and process payrolls completely online. Today, 1 out of every 2 new customers comes to Paycom from ADP and Paychex.
Job losses during the pandemic have dented the company's growth this year. Although headcount may be stagnant, the company is expanding its customer base. Paycom traditionally focused on businesses with 100 to 2,500 employees, but it is now moving into larger enterprises. That should provide plenty of opportunity to take share from larger rivals. When the stock market takes another big drop and gets wrapped up in near-term challenges, I'll be filling my portfolio with shares of Paycom for its demonstrated success and the long-term opportunity.
2. EPAM Systems
EPAM Systems is a different kind of consulting firm. The company, co-founded by Belarusian Arkadiy Dobkin in 1993, combines business consulting and engineering expertise to develop solutions for clients across virtually every industry. Its employee base is also unique. EPAM has connected the international business world with software development talent from Central and Eastern Europe, including the former Soviet Union. The company generates about 60% of sales from North America and a third from Europe.
While financial services has historically generated more revenue for the company than any other industry (about 22% of sales in 2019), the business information and media segment overtook it after growing 46%, 43%, and 32% year over year in the first three quarters of 2020.
As the prevalence of software turns every company into a technology company, it gets more difficult to find people with the programming and development skills required to compete. EPAM offers an outsourcing alternative that allows customers to reduce costs and have a top-tier development team simultaneously. The approach has worked. The stock is up 2,380% since its IPO in 2012 on the back of 1,430% sales growth. Management estimates revenue for 2020 will be $2.6 million, 15% more than last year, a COVID-19-induced slowdown from the 28% annual growth over the past decade.
While some customer verticals, like travel companies, may curb spending for the next few years, others are picking up some of the slack. Meanwhile, the company has demonstrated its management prowess by reducing expenses during the pandemic, realizing a slight uptick in profitability despite the slower growth. With the demand for programming skills unlikely to abate anytime soon, I'll be taking advantage of any market downturn that offers a discount on shares.
Many might remember the jokes about $100 see-through yoga pants in 2013 when the company had a series of brand-damaging missteps. Over the next five years, the company continued to make great workout clothes while its leadership did and said things that, in the company's words, did not "exemplify the highest levels of integrity and respect for one another." Since CEO Laurent Potdevin stepped down in 2018, the stock is up 320%.
Leading up to the CEO exit, sales had grown an average of 14% over the previous five years. In the subsequent two years, sales grew 24% and 21%, respectively. Lululemon has bolstered its product lineup by focusing on men's clothing and the move is paying off. The category grew 39% in 2019, before the pandemic stunted in-person shopping. After lower sales earlier this year, the year-over-year comparison has turned positive, fueled by 93% growth in online sales for the third quarter ended Nov. 3, 2020.
|Quarter Ended||Revenue||YOY Growth|
|May 3, 2020||$652 million||(17%)|
|Aug. 4, 2020||$903 million||2%|
|Nov. 3, 2020||$1,117 million||22%|
Lululemon continues to rebound, recently revising its fourth-quarter estimate for revenue growth to mid- to high teens, the top of its previous guidance. With competent management, great products, and a successful shift to e-commerce, it appears the apparel maker has not only navigated the pandemic, but has improved the business during it. Fashion is notoriously fickle, but the broad appeal of athletic wear that looks stylish even when you're nowhere near the gym is likely to remain. If the market does a downward dog, I'll be adding shares of Lululemon to my portfolio.