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We had a huge down day Wednesday June 1. If the Initial Claims number Thursday is not too bad, the market may rebound partially Thursday. It could go right back to moving downward on Friday, if the Nonfarm Payrolls data misses by close to the amount one would predict from the ADP Employment Change number (38K). I note there were 159K more Initial Claims during this four-week reporting period than in the last one. The +38K ADP employment gain is not far off from the last Nonfarm Payrolls number of 244K if you subtract 159K (= +85K). The ISM Services number at 10am ET could be important too.

If the market starts to trend downward, you might want stocks to short that will outperform the market to the downside. If the USD is rising (the safe haven play), overpriced technology stocks may be among the most likely to fall quickly. A stronger USD makes their products less saleable abroad. Even if the company does not sell abroad, it will tend to move with its sector (only more so). If you wish to attempt this strategy, you might consider the stocks on the following list: Vital Images, Inc. (NASDAQ:VTAL), Concur Technologies (NASDAQ:CNQR), Salesforce.com (NYSE:CRM), PMFG, Inc. (NASDAQ:PMFG), and The Knot, Inc. (KNOT).

Some of the fundamental financial data is in the table below. The data is from TDameritrade and Yahoo Finance.

Stock

VTAL

CNQR

CRM

PMFG

KNOT

Price

$18.71

$48.85

$145.78

$18.15

$10.03

1 yr. Analyst Avg. Target Price

$18.75

$54.67

$164.19

$17.33

$11.33

PE

1336.43

307.23

310.17

127.82

105.58

FPE

155.92

44.82

77.96

64.82

45.59

Avg. Analysts’ Opinion

3.8

2.6

2.2

3.0

2.5

Avg. Volume

83,743

501.902

2,799,750

30,931

140,869

Market Cap

$262.46M

$2.63B

$19.38B

$318.41M

$316.78M

# of EPS Misses In Last 4 Quarters

2

0

0

3

2

5 yr. EPS Growth Estimate per annum

10.00%

22.94%

26.56%

25.00%

19.25%

EPS Growth Estimate for Current Quarter

90.90%

5.30%

3.40%

113.30%

100.00%

EPS Growth Estimate for Next Quarter

-25.00%

36.80%

-3.10%

166.70%

33.30%

FY2011 Estimated EPS

$0.04

$0.83

$1.31

-$0.06

$0.12

FY2012 Estimated EPS

$0.12

$1.09

$1.87

$0.28

$0.22

Beta

1.18

1.32

1.29

1.66

1.12

Total Cash per Share (mrq)

$8.45

$10.51

$3.74

$1.07

$3.20

Short Interest as a % of Float

2.97%

17.28%

8.31%

6.28%

4.96%

Price/Book

1.81

3.87

16.24

4.23

1.88

Price/Cash Flow

74.82

78.77

139.46

69.63

38.60

Total Debt/Total Capital (mrq)

0%

25.12%

27.59%

12.97%

0%

Quick Ratio (mrq)

--

--

--

2.08

5.42

Interest Coverage (mrq)

--

--

--

--

--

Return on Equity

0.12%

1.31%

3.95%

3.85%

1.63%

EPS Growth (mrq)

104.00%

-138.60%

-97.20%

-13.84%

-545.19%

EPS Growth (ttm)

100.90%

-69.72%

-43.05%

204.10%

176.64%

Revenue Growth (mrq)

0.63%

16.22%

33.85%

5.47%

0.15%

Revenue Growth (ttm)

2.75%

18.62%

32.02%

-7.75%

2.47%

Annual Dividend Rate

--

--

--

--

--

Gross Profit Margin (ttm)

71.79%

72.79%

80.09%

33.02%

79.98%

Operating Profit Margin (ttm)

-0.38%

8.33%

3.45%

1.89%

5.06%

Net Profit Margin (ttm)

0.28%

2.58%

2.82%

3.39%

2.71%

All of these companies seem to share the following attributes: They all have bad Price/Cash Flow ratios, high PEs and FPEs, significant short interest, low Return on Equity, and low Net Profit Margins (ttm).

If there is a slow down, these already troubled businesses might easily become unprofitable and experience serious cash flow problems. Some do have significant cash on their books, but that could be used up quickly if business conditions deteriorated enough. Not only would these stocks not be growth stocks, they would lose money. They could in no way justify their incredibly high multiples. For instance, CRM has a PE of 310. Yet it has a Return on Equity of only 3.95% and a Net Profit Margin of only 2.82%. Its EPS estimates for the next two quarterly reports are +3.40% and -3.10%. It is highly questionable how valid estimates beyond that are. The “cloud” industry is becoming increasingly crowded. CRM will face stiffer and stiffer competition as time goes on. Its five-year EPS growth estimate per annum of 26.56% might in reality be much less.

The idea that CRM deserves a PE of 310 is absurd. The analysts may tout it, but no accountant could invest in this stock. It once marketed its products as “simple.” They no longer are. They are increasingly complex. They require significant training. I don’t think an accountant would approve of the valuations of any of the other stocks above either. Some people might scoff, “bean counter”; but ultimately the beans have to be counted. CRM is no spring chicken. It is a $2B+/year revenue business. It has a market cap of nearly $20B. People need to view it as the big company it is.

A large cap like ORCL, which has a competing cloud customer relationship management product, has a Net Profit Margin (ttm) of 22.42%, a return on equity of 23.66%, and a PE of 22.71. ORCL even pays a small dividend. Its next two quarters’ EPS Growth Estimates are +18.30% and +9.50%. These are higher than CRM’s. ORCL has little chance of becoming unprofitable in the near term. Yet CRM trades at almost a 14-fold multiple to ORCL. There is really no rational way to explain this. CRM has simply been hyped beyond all reason by momentum investors and market manipulating analysts.

The end of QE2 may spell the end to some of the hype. An economic slow down on top of that might well decimate the stock price. Paying all of those extra salespeople that CRM recently hired is not cheap. Even with all of the new ones the Revenue Estimates for FY2011 of $2.18B and FY2012 of $2.68B are only decent growth (keep the net profit margin in mind). If you consider that a good part of that revenue growth is due to revenue from newly bought companies, you begin to see that not everything is kosher. The base of the company is not growing that much. The “one time charges” for integration of the newly bought companies into CRM keep analysts from trash talking the stock. However, when those same charges come every quarter, they are not really one time charges. Plus the company is slowly becoming more cumbersome.

The figures the analysts prefer to look at keep them playing along. They keep raising target price estimates. Yet the PE seems to go up each quarter because it is based on the GAAP figures. What will stockholders finally say is a too high a PE, 500? 1000? I think 310 is far too high. For the stockholders it may be like the famous shell game. They won’t be able to find the pea because the pea won’t be there by the time they are told to make a choice. I know Cramer keeps touting this stock, but he should be embarrassed at himself for doing that.

The financial data on the other stocks above indicates the same weaknesses. They are smaller. That 0.28% to 3.39% in net profit margin can disappear quickly in a smaller company. Examine them some more yourself. Keep in mind that small volume stocks are illiquid. If people start selling them they could really crash quickly. One can only hope to be short at that time. However, you need to be careful, short squeezes on illiquid stocks can mean strong movements to the upside. Shorting CRM may actually be a safer action. As one strategy you might consider selling short. Then you could sell “out of the money puts” against your short position. This might limit your gains, but it would provide you with some upside protection in case the stock reversed on you.

The one-year chart of CRM is below [click all to enlarge]:

CRM looks like it is putting in a double top. The Slow Stochastic shows that it is still over bought, even after Wednesday’s dramatic fall. Technically it could fall $20 or more in the next two weeks. It could fall a lot more than that if you consider fundamentals. Cramer’s touting probably won’t help, but the above data are real. They are not hype. That should make a difference to serious investors.

Disclosure: I have no positions in any stocks mentioned, but may initiate a short position in CRM over the next 72 hours.

Source: Tech Stocks to Short in a Downturn