When investors seek stocks that combine strong growth fundamentals with favorable chart patterns, they often turn to a dual-pronged approach that blends fundamental and technical analysis. The idea is straightforward: you want a company with a track record of earnings and revenue acceleration, solid profitability, and a healthy balance sheet, but you also want to time your entry based on technical signals that suggest a breakout from a consolidation phase. This method helps filter out companies that are simply “good on paper” but lack the immediate price momentum to generate returns in the short to medium term.
The screen that identified Paylocity Holding Corp (NASDAQ:PCTY) applies exactly that philosophy. It searches for strong growth stocks that are showing decent or better profitability and health scores, while also displaying a promising technical setup—a pattern where a stock has been trading in a narrow range and appears poised for a move higher. By merging these two lenses, the screen aims to uncover opportunities that might otherwise be overlooked by investors focusing on only one side of the analysis.
Strong Growth Fundamentals
Looking at the fundamental report for PCTY, available in full via ChartMill’s fundamental analysis page, the company scores a 7 out of 10 in the Growth category. This rating is built on a solid foundation:
- Earnings Per Share (EPS) Growth: Over the past year, EPS grew by 10.48%, which is solid on its own. However, looking at the longer-term trend, the average annual EPS growth comes in at a very strong 30.84%.
- Revenue Growth: Revenue increased by 12.08% last year, while the multi-year average annual growth rate is an impressive 23.23%.
- Future Expectations: Analysts expect EPS to continue growing at an average rate of 16.32% per year in the coming years, with revenue growth expected to average 9.51% annually.
This kind of consistent double-digit top- and bottom-line expansion is precisely what growth investors look for. It indicates that Paylocity is not just a one-hit wonder but is executing well over time and has a runway for continued expansion. The strong growth metrics are a core reason this stock was selected by the screen.
Solid Profitability and Acceptable Health
A key requirement for the screen is that a stock must have decent profitability and health. Paylocity scores an 8 out of 10 in Profitability and a 5 out of 10 in Health. While the health score is moderate, there are important nuances:
- Profitability Highlights: The company shows a Return on Equity (ROE) of 21.69%, outperforming 75.58% of its industry peers. Its Return on Invested Capital (ROIC) stands at 19.33%, which beats 84.88% of competitors. Furthermore, its operating margin of 20.11% and gross margin of 68.97% are among the best in the Professional Services industry.
- Health Check: While the Altman-Z score of 1.19 raises a flag (indicating some distress risk), the company holds very little debt. Its Debt-to-Equity ratio is just 0.07, and its debt-to-free-cash-flow ratio is an excellent 0.20—meaning it could theoretically pay off all its debt in less than three months if it directed all its free cash flow to that purpose. This strong liquidity position offsets some of the concerns from the Altman-Z model.
The screen requires decent profitability to ensure that growth is not being achieved at the expense of financial discipline. Paylocity’s high margins and strong returns on capital show that it is generating real value from its operations, which is a positive sign for long-term investors.
Technical Setup and Breakout Pattern
On the technical side, as detailed in the ChartMill technical analysis report, Paylocity receives a Setup Rating of 8 out of 10, despite an overall technical rating of 0. This may sound contradictory, but it highlights exactly what the screen is built to find: a stock with a poor recent trend but a promising chart setup.
The stock has been trading in a wide range between roughly $92.99 and $110.69 over the past month, and it is currently near the lower end of its 52-week range. More importantly, the setup analysis notes that there is resistance just above the current price, starting around $102.20. This zone is formed by a combination of trend lines and moving averages. The setup suggests that if the stock can break through this resistance, it could move higher, as the consolidation phase may finally resolve to the upside.
While the short-term and long-term trends are negative, and the stock has underperformed 93% of all stocks in the past year, the compression of price action near a key resistance level is exactly the kind of pattern that can precede a breakout. The high Setup Rating captures this potential for a reversal.
Bringing It All Together
What makes Paylocity an interesting candidate is that it checks several boxes from both the fundamental and technical sides. It has the growth engine (strong EPS and revenue expansion), the profitability to support that growth (high margins and returns on capital), and a chart pattern that is consolidating near a potential breakout point. The combination of a strong fundamental foundation with a technical setup that could signal an entry point is the essence of this screening strategy.
For investors looking to explore more stocks that meet these criteria—strong growth, decent health and profitability, and a promising technical setup—a broader list can be found via the screen that identified Paylocity. Click here to view the full list of strong growth stocks with good technical setup ratings.
Disclaimer: This article is for informational purposes only and does not constitute investment advice. Always conduct your own research and consider your financial situation before making any investment decisions.