Stock Checkup: Automatic Data Processing, Inc. (ADP)

I initiated a write up on Automatic Data Processing (ADP) on July 15th followed with a checkup on the 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 that level until May 1985, two years follow.

As a result, I believe it may be time for investor to begin unloading shares of ADP. At the current price of $41.90, it is trading 34% above yearly low and 3.6% away from the yearly high. I see this as a 34% risk and 3.6% reward profile, not very compelling argument to buy.

If one which to hold shares of ADP, one will be sitting on a yield of 3.8% (assuming a purchase price of $35). Surely that return is much greater than the average CD account and fractionally higher than treasury, but your principal has returned a whopping 23% (given you sell around $43). While the company can and has raised dividend at a double digit rate (15% CAGR since 1993), I assume that the company may not be able to continue such action unless growth return to the employment market.

I'm not suggesting that investor be short sighted and take any gain that come 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 wise to take some if not all of the profit and search for a better opportunity in the new low list.

P.S. Exxon (XOM) and SUPERVALU (SVU) are currently dislike by the street for whatever reason. They may prove to be a better opportunity.

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