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Outsourced HR firm
PAYX) provides small and medium-sized businesses with payroll and more specialized HR services -- working with around 550,000 clients in all. Paychex benefits from the complexity and administrative burden of payroll processing. Because of the bevy of tax and compliance issues involved in a small business paying its people, the firm is able to earn profits for its expertise. That gives PAYX a role that isn't easily replicated, but that also requires very limited capital to operate in.
The firm has expanded that role in recent years, pulling out its massive customer rolodex to offer other ancillary HR services such as 401k management and worker's comp insurance. Adding new services onto its menu gives Paychex another big revenue driver from its existing client base, without the economic pressures of the job market. Historically, Paychex has earned considerable profits from its float portfolio -- the huge amount of cash it holds between the time employers deposit it and employees cash their paychecks. While extremely low interest rates have hurt PAYX's float income, there's a huge revenue stream waiting to be unlocked when rates perk back up.
Jobs numbers continue to be a black cloud over Paycheck. Because the firm's business is dependent on employment, the prolonged high levels of unemployment we've encountered since the Great Recession have piled up bets against it -- and pushed PAYX's short interest ratio up to 10.35. That makes this large-cap stock a short squeeze candidate.