In short: AI-disruption "fallen angel" in business services — "hit really hard," a "pretty good dividend grower"; the group is "an area of real interest right now." No position stated.
Paychex runs payroll and HR for small businesses. Investors have sold it hard on fear that AI will make its services cheaper to replicate. D'Agnes calls this kind of stock a "fallen angel": a company with a good record and a history of raising its dividend, sold off more than its earnings justify. He called the group "an area of real interest," not a position.
17:32— Mhm. — So we're seeing that too. Certainly within software, within business services, names like Paychecks and Faxet and Thompson Reuters have all been hit really hard. Some pretty good dividend growers in there. So that's an area of real interest right now.
In short: The monthly spotlight — the AI-fear case, not a ranked buy. "They have 800,000 clients; they manage payroll for 1 in 11 workers (!) in the United States; they are the second-largest provider in the U.S. (2.5 million worksite employees). But because it's a software based business, the market is very fearful that AI will disrupt it. Management disagrees on this." The rebuttal is stickiness: "payroll and tax compliance are incredibly important to a business. Switching providers comes with huge risks of operational disruptions, data loss, and legal/regulatory headaches. As a result, customers almost never leave Paychex," plus breadth of offering (HR, retirement, insurance outsourcing) rivals lack. Fundamentals cited: net margin 25-30%, ROIC 15-20%, "FCF consistently > 100% of Net Income." The 2025 Paycor deal ($4.1bn) is the growth lever into the 100+ employee mid-market.
Paychex runs payroll. When a small or mid-sized American business pays its staff, works out the tax withholding, files it correctly and administers the health plan and the retirement plan, there is a decent chance Paychex is doing it — 800,000 clients, and one in every eleven American workers.
The market's fear is simple: it is software, and AI eats software. Slegers' answer is that the product being sold is not really software, it is the absence of a catastrophe. Getting payroll or tax filing wrong means angry employees, regulators and lawsuits, so almost nobody switches provider to save a few percent — and the more services a client buys (HR outsourcing, retirement, insurance), the more unthinkable moving becomes.
The numbers he quotes back that up: a 25-30% net margin, a 15-20% return on invested capital, and free cash flow consistently above reported net income, which means the accounting profit is real cash rather than a bookkeeping figure. The growth lever is the 2025 purchase of Paycor for $4.1 billion, which pushes Paychex up-market into companies with more than a hundred employees — bigger clients, stickier relationships and more room to raise prices.
Note the status: this is the monthly spotlight, not one of the five ranked buys — a business being made ready for the list rather than one on it.
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