The Cloud King
You all know that I have been pounding the table for the cloud in general for quite some time. The crew over at Action Alerts PLUS refers to the evolution of modern cutting edge technology as the "fourth industrial revolution." I like those guys. They're smart. When they do that, they refer to "the cloud", artificial intelligence, big data, machine learning, and the like. Salesforce (CRM) has made themselves a leader in this latest industrial revolution. Oh, I still need my exposure to other cloud players such as Amazon (AMZN) , Microsoft (MSFT) , and Adobe (ADBE) . You all know that my 2019 sleeper is Zuora (ZUO) . Likely you all know that when it comes to modern business, and gaining a better read on a firm's clientele, what they need, what serves them best, then Salesforce is your leader.
You also know if you read me often that this revolution likely has a long way to go, particularly for the global economy. Notice the new "health cloud" tools? Notice the increased price target at Wedbush based on revenue acceleration related to the Mulesoft acquisition. What Mulesoft does for the firm is allow legacy data on old school corporate systems to move toward the Salesforce cloud platform. Enough on the virtues of Salesforce. You know I like the firm. You know that I'm long the shares.
Are You Ready For Some Football?
No? How about Monday Night Earnings? For the fourth quarter, Wall Street industry consensus is for EPS of $0.55 on revenue of $3.56 billion. These numbers if realized would amount to growth in sales of 24.9% on earnings growth of 57%. The street is looking for billings of $6.43 billion. Obviously, the growth has been there, and is expected to be there. That's what we are paying for when we buy these shares. We're not paying for the fundamentals.
There is no free lunch in these markets. The shares trade at a still gaudy 59 times forward looking earnings. Total debt has been on the rise. Gross profit margin has remained robust, but operating margin has contracted. Current and Quick ratios are indeed below levels that give me, the investor, the comfort I crave. More than 10% of the float is held short, which can be a contrary indicator, but does tell one something about investor mindset. I allow the percentage of the float held short to impact my thinking when that number hits the high single digits by the way.
Basically, I am telling you that I would not initiate a long position on this day ahead of a news event as this stock has been on a tear. Yes, I see the profit taking that seems to be happening this morning. The shares are still trading a rough 44% above their November lows, and are up about 17% year to date.
As one can see, this stock only recently completed a 100% retracement of the October/November selloff. This morning, the shares are re-testing that spot from above. That spot was also the result of a break-out created by a (double barreled) cup and handle formation. I will tell you this. Though I am cautious, I feel a lot better with these shares selling off in front of the numbers than I would have if they had moved above Friday's all time high of 166 plus range.
Long-term, I do think that this name resumes long-term trend and that the late selloff of 2018 becomes less noticeable on a broader chart. Take a look below, as these shares have been driven to the point of regaining the lower trend line of a Pitchfork model that I had drawn for this stock long ago.
At this point, traders just need to best know how to protect themselves while not abandoning prospects for continued long-term growth.
Trade Ideas Three (minimal Lots)
- A) Long Like Me?
-Sell 100 shares (minority portion of long position) at or close to last sale of $160 (if protecting a nice profit)
-Purchase one March 8th $160 call (last: $5.50)
-Sell (write) one March 8th $170 call (last $1.90)
-Sell one March 8th $147 put (last $1.04)
Note: The options trades allow for a $10 upside that expires this Friday at a net cost of $2.56. Hopefully any profits realized by the equity sale will easily cover this expense. If disaster strikes this issue, the investor would be committed to re-purchase the shares sold earlier at $160... at $147. Not too bad, really.
- B) Flat The Name?
At this point I wait as far as the equity is concerned. However, an interested trader could still put on the bull call spread idea (trades number 2 & 3 of the four in the example above) to play the game in a risk averse way. A bearish trader could flip that idea around so that it becomes a bear put spread.
- C) Short This Stock?
You're even crazier than I am. You probably drink milk past the expiration date, don't you?