Another day, another interesting session in the markets. After rocketing over 2% yesterday, the risk trade continued for a second day. The best gainers were found in the NASDAQ and the Russell 2000. The Dow and S&P 500 underperformed.
One of hottest sectors in the market today involved those firms projected to benefit by the move to “Cloud Computing”. Both VMware (NYSE:VMW
) and Salesforce.com (NYSE:CRM
) continued their recent large runs by adding another 7% in today’s market. Salesforce in particular looks priced for absolute perfection at these levels and might be approaching a good area to initiate a small short position.
10 reasons to avoid CRM at this price:
- Stock is priced at more than 154 times trailing earnings.
- Of the 291 insider transactions in the last six months, ALL were sells representing 12% of shares held by insiders. If insiders were selling starting in the 60’s earlier in the year, do you want to be buying in the 90's?
- Although net income has increased over 400% over the last two years through last fiscal year ending December 2009, operating cash flow has only increased a little over 30% during same time period.
- Stock is selling at over 8 times trailing annual revenues.
- Price action and appreciation that is being driven by the Cloud Computing story seems eerily similar to the valuations achieved during the height of the internet boom of 1999.
- Net income seems stuck between 19mm to 21mm over the last four quarters despite significant revenue gains.
- SAP (NYSE:SAP) will be launching a competing product during this summer.
- Stock is selling at 10 times book value.
- Consensus earnings estimates for this year and for 2011 have come down over last ninety days.
- Stock is selling at 90 times consensus earnings for this year while only projected to achieve 30% revenue growth.
Given this, I would avoid this stock as it seems very susceptible to a significant pullback at these valuation levels. For more aggressive investors, a short position might be warranted. Be careful out there.
Disclosure: Short CRM