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These 2 Wednesday Winners Prove the Value of Diversification

By Dan Caplinger – Aug 4, 2021 at 12:33PM

Key Points

  • Markets were mixed on Wednesday morning.
  • Earnings reports lifted some stocks.
  • Two in particular from very different parts of the market showed the value of diversification in your portfolio.

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Amid mixed markets, these two stocks focus on very different businesses.

The stock market remained choppy on Wednesday morning, as investors tried to figure out whether they should start to pull back from their enthusiasm from earlier in the summer. Worries about public health weighed on sentiment, even as earnings season continued to deliver solid results from many high-profile companies. As of 11:15 a.m. EDT, the Dow Jones Industrial Average (^DJI 0.10%) was down 243 points to 34,874. The S&P 500 (^GSPC -0.12%) dropped 14 points to 4,409, while the Nasdaq Composite (^IXIC -0.18%) managed to inch higher by 13 points to 14,774.

Many investors concentrate their portfolios in single sectors of the market. That can work well when times are good for that industry, but when things go poorly, it can be devastating. Today, big moves higher for Paycom Software (PAYC -1.83%) and MGP Growth Properties (MGP) showed that a more diversified approach that mixes growth and income investing strategies can be successful.

Paycom heads into the clouds

Paycom Software saw its stock gain ground, jumping almost 10% Wednesday morning following its latest release of financial results. The move helped push Paycom's share price toward the record levels it set last December.

Paycom's numbers reflected ongoing improvement in the employment sector. The provider of a cloud-based software platform for human capital management saw revenue increase 33% year over year, with adjusted earnings of $0.97 per share rising by more than half from the same period last year. Founder and CEO Chad Richison pointed to stronger fundamentals for Paycom's business, especially as its platform streamlines relationships between employers and employees to make payroll and other human resources functions more efficient.

Several workers in an office greeting each other.

Image source: Getty Images.

Paycom also sees further growth ahead. The company gave guidance for about $250 million in sales for the third quarter, with expectations for full-year revenue of $1.036 billion to $1.038 billion. Those projections were higher than what most of those following Paycom's stock were expecting to see.

Cloud computing has created efficiency gains in a wide range of areas, and Paycom's success in human capital management isn't surprising. If the economy keeps gaining steam, however, it could provide an even bigger push higher to Paycom's business in the years to come.

MGM Growth makes a deal

Elsewhere, MGM Growth Properties saw its shares rise almost 8%. The casino property-owning real estate investment trust (REIT) announced a deal involving another REIT that put a premium value on MGM Growth's shares.

Under the terms of the deal, VICI Properties (VICI 0.50%), which owns real estate including Caesars Palace in Las Vegas and a host of other casinos and resort properties across the U.S., will exchange 1.366 shares of VICI stock for every MGM Growth share owned by shareholders. That values the deal at roughly $43 per share, or $17.2 billion in total consideration overall. MGM Resorts (MGM -0.51%) will have the majority of its partnership units in MGM Growth bought out for $43 per share in cash, while also retaining an interest in a partnership with VICI.

The move comes at a pivotal time for Las Vegas. MGM Growth owns properties including Mirage and Mandalay Bay, with triple net leases with MGM Resorts producing rental income that the REIT pays to shareholders. The pandemic created a huge disruption to the casino business, and now, it's uncertain whether efforts to reopen quickly could get reversed by new waves of COVID-19 infections.

Income investors should be pleased that VICI will maintain a dividend that should replace the income that MGM Growth provided. Getting a modest capital gain to go with what's been a better-than-5% dividend yield is a nice bonus for MGM Growth investors.

Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Paycom Software. The Motley Fool recommends MGM Growth Properties (Class A). The Motley Fool has a disclosure policy.

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