Consider Put Options With These 3 Stocks

Includes: CRM, FB, MSFT
by: Kevin M. O'Brien

There are three stocks that I consider extremely overvalued right now: LinkedIn (LNKD), Facebook (NASDAQ:FB), and (NYSE:CRM). I am very familiar with all these stocks as I use them all with my daily options trading strategy, which you can read more about here on Seeking Alpha. These stocks are so overvalued, in my opinion, that I will only buy call options with the daily strategy when there is such an extreme oversold level daily that it is too good to pass up, with the expectation that I will be out of the trade in minutes.

1.) LinkedIn

I will start with my opinion on LinkedIn. First, I simply cannot endorse a stock that has a price-to-earnings ratio of 971.72. That is ridiculous.

Currently, LinkedIn is trading at $119.03/share as of Thursday, September 27, 2012.

Here are some other relevant key statistics:

Income Statement
Revenue (NYSE:TTM): 723.88M
Revenue Per Share : 7.21
Qtrly Revenue Growth (yoy): 88.50%
Gross Profit : 440.74M
EBITDA 6: 91.11M
Net Income Avl to Common : 13.12M
Diluted EPS : 0.12
Qtrly Earnings Growth (yoy): -37.70%
Balance Sheet
Total Cash (mrq): 617.14M
Total Cash Per Share (mrq): 5.84
Total Debt (mrq): 0.00
Total Debt/Equity (mrq): N/A
Current Ratio (mrq): 2.71
Book Value Per Share (mrq): 7.44
Cash Flow Statement
Operating Cash Flow : 181.09M
Levered Free Cash Flow : 76.25M

If there is one statistic that really troubles me about LinkedIn is the book value per share, at 7.44. If there is really anything I can say positive about this company it is that they have no debt. This is important, of course, but I still cannot see how LinkedIn can remain profitable (even though it still only currently has an earnings-per-share of a measly 0.12). If you take the extremely high P/E ratio and the low EPS and want to go bullish on LinkedIn, you are setting yourself up for a disaster. This stock reminds me of a reincarnation of the bubble, where valuation was too high on too many stocks that did not deserve that valuation.

Another issue that plagues "internet" stocks is innovation. Who is to say that another start-up company won't completely make LinkedIn irrelevant. Facebook did this to MySpace, and it seems to happen a lot more in the computer age. In many ways, Apple (NASDAQ:AAPL) did that to Research In Motion (RIMM).

The stock has come off its highs of $125.50/share recently, but I do not feel the bleeding is done-- not by any stretch. I recommend purchasing November 2012 $115.00 strike put options. This trade should profit early. Please do not hesitate to take profits early.

2.) Facebook

I could literally write all day about what I do not like about this stock. From the botched IPO, their offering of too many shares from the start, the lock-up that will possibly send billions of more shares into the market, and the high price-to-earnings ratio, this stock is just too risky for my tastes. Even though the stock has plunged from its high of $45.00/share on the first day it opened on the Nasdaq, I feel a fair price on this stock is still around $9.00/share. That price is the point that I will consider going long on Facebook. I will also not consider that until the lock-up period is officially over. Here is a link that shows the approximate days when insiders and the like can sell their stake in Facebook.

I am fully expecting this stock to tank in the coming months. A share price of $13.00/share by December 2012 will not surprise me at all. I already own both November and December $17.00 strike put options, and plan to add to my position. The stock is currently trading at $20.73/share.

Income Statement
Revenue : 4.33B
Revenue Per Share : 1.96
Qtrly Revenue Growth (yoy): 32.30%
Gross Profit : N/A
EBITDA 6: 1.05B
Net Income Avl to Common : 714.00M
Diluted EPS : 0.29
Qtrly Earnings Growth (yoy): N/A
Balance Sheet
Total Cash (mrq): 10.19B
Total Cash Per Share (mrq): 4.76
Total Debt (mrq): 706.00M
Total Debt/Equity (mrq): 5.31
Current Ratio (mrq): 11.57
Book Value Per Share (mrq): 6.22
Cash Flow Statement
Operating Cash Flow : 1.76B
Levered Free Cash Flow : N/A

While I use Facebook sometimes, I have never once clicked on one of their ads. Ever. While Facebook believes mobile will increase the amount of ads that will be clicked, I find this hard to believe. If anything, I think it will be less than on the standard platform. I asked most of my friends if they ever click on any Facebook ads out of curiosity. Every single person told me they may have clicked on an ad maybe two or three times in years. That is not a very good endorsement for future prospects, in my opinion. When General Motors (NYSE:GM) decided to remove their ads from Facebook, for a measly $100,000 it would cost them, there is a problem. GM is one of the world's biggest advertisers. That money was peanuts to them, yet they still walked away.

I am recommending buying December 2012 or January 2013 $18.00 put options. If you want to minimize your investment, you can always choose a lower strike price. This seems like a good way to play this inevitable drop from current levels.

3.) is, in my opinion, one of the easier stocks to spot a high or a low. It has shown a pattern to fall once it reaches near $160.00/share and it rises when it trades near $100.00/share. Still, this is not the only reason I feel it is a good time to purchase put options.

Cloud computing is a highly competitive field. The next big thing can simply wipe away previous sector leaders. If there is a cloud company I want to own right now, it would be VMware (NYSE:VMW).

Here is a closer look at's financials:

Income Statement
Revenue : 2.64B
Revenue Per Share : 19.22
Qtrly Revenue Growth (yoy): 34.00%
Gross Profit : 1.78B
EBITDA 6: 116.25M
Net Income Avl to Common : -37.14M
Diluted EPS : -0.27
Qtrly Earnings Growth (yoy): N/A
Balance Sheet
Total Cash (mrq): 1.11B
Total Cash Per Share (mrq): 7.97
Total Debt (mrq): 558.32M
Total Debt/Equity (mrq): 29.51
Current Ratio (mrq): 0.80
Book Value Per Share (mrq): 13.61
Cash Flow Statement
Operating Cash Flow : 718.47M
Levered Free Cash Flow : 699.81M also has a negative earnings-per-share of 0.27, along with a ridiculous price-to-earnings ratio. This company has had plenty of time to fix their lackluster EPS, yet continues to not do so.

I would also like to point out that has a beta listed as 1.1. I can tell you as someone who watches this stock on a daily basis that this statistic is very misleading. has wild price moves daily. I mention this because it is hard for some traders to be able to take extremely large price moves daily, which has happened with this stock quite frequently.

Currently, the stock is trading at $153.67/share. The 52-week range is $94.09 - $164.75.

I will be adding to my position of put options by purchasing January 2013 $140.00 strike put options. I expect this trade to profit soon, so do not hesitate to take profits early. There was a nice run-up in the stock (about 3%) on Thursday, so I would take advantage of that and try to get into the trade as soon as possible.

Disclosure: I am short CRM, FB, LNKD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.