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Salesforce is a Good Short

Shorting a stock is a dangerous game — especially with stock market leaders. Often these stocks continue higher even though they shouldn’t. Salesforce.com (CRM) is a stock that looks like a good short right now, but the stock has the ability to bolt higher just to teach us a lesson.

One Year Chart

CRM has formed a bullish cup-and-handle chart pattern that often leads to big gains ahead. I don’t think that’s going to happen here. Two reasons why. First the stock has a P/E of 103 — that’s really high. Last quarter the P/E was 111 and the stock failed to break out. Notice Profit growth was only 40% last quarter — that’s good but not enough to push a 100 P/E stock higher.

Second, the Estimates look poor. CRM has beaten the street by three cents in each of the last four quarters. If that happens again you’re looking at 2% profit growth next quarter. Not nearly enough to push the stock past resistance at $160.

Fair Value

I think this stock is worth 40 times earnings, but even with a P/E of 60 on next year’s estimates you get a $120 stock. With CRM selling for around $150 that would be a nice short sale. By the way, Salesforce had a  60 P/E during the fourth quarter of last year.

Sharek’s Take

I’m not going to be afraid of saying these high-octane stocks aren’t short candidates anymore. 2012 has showed us overvalued Web 2.0 stocks can come down in a hurry. Although I like CRM, I feel its just sky high and needs to come back down to reality.

View the Earnings Table here.
View the Ten Year Chart here.

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