|
| Home | About Us | Resources | Archive | Free Reports |
The Perfect Short Sale – RevisitedBy Jeff ClarkThursday, August 21, 2008 It was my pick for the "best idea of the year."
Last November, I told everyone at a conference put on by my publisher (Stansberry & Associates Investment Research) that my favorite trade for 2008 was to short Salesforce.com (CRM). CRM provides Internet-based customer relationship management software. The stock was a balloon looking for a pin, and it was easy to argue for its demise.
At the time, CRM was trading at $56.73 per share. That put its valuation at over 350 times earnings, 17 times book value, and 10 times sales. Sure, its high growth rate justified a premium valuation. But no stock deserves to be trading at 350 times earnings. I was convinced CRM would fall, and I called it "the perfect short sale."
And for nine months, I've been wrong.
Despite a ravaging bear market that trimmed 20% off the S&P 500, cut the financial and homebuilding sectors by 65%, split most technology stocks in half, and slapped around every other high-flying darling on Wall Street, CRM remained unscathed. In fact, it rallied.
As of yesterday, CRM was trading at $66 – about 16% above where I said to short it. But I don't mind. Sometimes it takes a while for the market to recognize the brilliance of my ideas.
Besides, rather than shorting shares of the stock itself, my recommendation was to use options to create a sort of "synthetic" short position.
Synthetic positions act like the underlying stocks, but they can often be structured to reduce risk to an infinitesimal level. The CRM synthetic position I recommended at the conference was designed to profit if the stock dropped, stayed the same, or even rallied a bit.
In fact, the only way we can lose money on this position is if CRM closes above $72.60 per share on option-expiration day in January 2009. That's 30% above the already inflated price when we entered the trade.
After yesterday's earnings announcement, it doesn't look like we'll have to worry about taking a loss on this trade anymore. In fact, it should be wildly profitable.
CRM announced earnings of $0.08 per share for the most recent quarter. That's right in line with analysts' expectations. But the shares are going to gap sharply lower this morning. I suppose when you're trading over 300 times earnings, merely meeting expectations isn't quite good enough.
CRM will likely open below $60 per share, which will put us in the black on our synthetic short sale. But this decline is only the beginning. The stock needs to lose another $15-$20 to bring it back into the realm of realistic valuations.
My bet is it will happen by January.
Best regards and good trading,
Jeff Clark
|
Mortgage crisis hits new low... Fannie Mae and Freddie Mac at lowest point since 1990.
British stocks fall... Lloyds TSB, BT Group, British Sky, and CurrencyShares British Pound make new lows.
Media giant News Corp at a five-year low... down 44% from October 2007 high.
|
