The Clouds Are Sky High

Includes: IBM, ORCL, SAP, TLEO
by: Robert Weinstein

Cloud computing is hot, and many companies are scrambling to get a larger share of the space.

As recently as this last weekend, SAP (NYSE:SAP) of Germany released a statement of its intention to take over SuccessFactors (NYSE:SFSF), sending shares of SuccessFactors up over 50% on Monday’s trading. SAP is offering $3.4 billion which amounts to $40 per share. It appears SuccessFactors investors will have a very happy holiday this year pending approvals from regulatory agencies. The buyout appears to be fast tracked with an expected deal closing within the first quarter of 2012.

While most SuccessFactors’ investors may be singing songs of joy, not everyone is happy with the $40 price. The law firm of Brower Piven announced its investigation into possible breaches of fiduciary duty to current shareholders of SuccessFactors. Even a 50% premium doesn’t keep the lawyers at bay, it would appear. For SAP the outcome of the transaction may be less certain to bring such a windfall in gains. SAP is down over $1.00 per share (1.3%) for the day. Standard & Poor’s equity analyst Angelo Zino cut the target price for SAP.

The amount of negativity with the SAP buyout of SuccessFactors didn’t appear to slow down investor enthusiasm over trying to catch the next gravy train. Shares of Taleo Corporation (NASDAQ:TLEO) blasted off with an opening price over $38, up over 10% from Friday’s closing price of $32.96. Taleo’s stock price didn’t stop there, with heavy buying throughout the morning trading session. Taleo traded above $40 for the first time this year and marking today as a new 52 week high. Taleo Corporation provides on-demand talent management software solutions.

Taleo may become the object of desire for Oracle (NASDAQ:ORCL) which is a major competitor of SAP. Just the possibility of Taleo receiving a buyout offer from Oracle moved Taleo up 20% by the end of the day from Friday’s closing price. Taleo closed today at $39.50 per share. If Oracle makes a move for Taleo Corporation it would not be the first acquisition. As recently as two months ago in October, Oracle bought Software-as-a-Service provider RightNow Technologies Inc., with a price tag of $1.4 billion. Not everyone was cheering for Taleo to continue moving higher in price. As of November 15 (the latest reporting date), Taleo had a short interest of almost 10% of the float. Even if all shares are counted the short interest is near 8%. This certainly explains the rapid move higher in price after the open as anyone short today found out first-hand what a real short squeeze feels like.

The total short interest number of shares for TLEO. short interest tool. The total short interest number of shares for TLEO

The number of days to cover short interest based on average daily trading volume for TLEO. number of days to cover short interest based on average daily trading volume for TLEO

Kenexa Corporation (KNXA) is another company riding the wave of software-as-a-service euphoria. While shares of Kenexa Corporation didn’t perform as well as Taleo percentage wise, the chart looks better. Kenexa closed out today at $29.44, up $4.12 (16.2%) over Friday’s close, and the close was near the high of the day. Unlike Taleo, Kenexa did not make a new 52-week high today. While far off recent lows, Kevexa must trade above $32 to begin looking at a breach of the last 52-week high. Regardless, Kevexa price action today demonstrates continuous buying through the day and most importantly, into the closing. I will be looking for Kenexa to continue higher tomorrow.

If Kenexa or Taleo are able to continue higher tomorrow, I will be looking to fade the move. In both cases, I will want to see the price well above today’s high and closing near or at the high tomorrow. I will be looking at shorting out of the money call options above $30 for Kenexa and shorting out of the money call options above $45 for Taleo. Currently neither stock has strike prices available I would be interested in. I expect tomorrow to see new strike prices added, especially with Taleo considering the volume in both the stock and the options. I will only consider the front month strikes for maximum decay. I like shorting calls as a method of fading for two reasons. One, selling calls has less risk than shorting the stock outright, and secondly, after the second day volatility generally moves lower.

Thank you for reading my article. Please also feel free to share your thoughts and comments.

I use a proprietary blend of technical analysis, financial crowd behavior and fundamentals in my short-term trades, and while not totally the same in longer swing trades to investments, the concepts used are similar. You may want to use this article as a starting point of your own research with your financial planner. I use Seeking Alpha, Edgar Online and Yahoo Finance for most of my data.

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