In early May we made the case for a bearish trade in CRM (at about the same level as it is now) largely based on what we felt was a poor technical set up and quickly changing investor sentiment towards high valuation stocks in SaaS, internet, solar and biotech (see below).
Today’s price action in CRM is downright horrible. After opening up 3% on news of a new cloud computing partnership with Microsoft the stock has spent the rest of the day reversing early gains and is now down 3%. The failure at key technical resistance, $55, which was the break down level from April also corresponded with the stock’s 50 and 200 day moving averages (50/purple & 200/yellow below.) This emboldens us to get back in this trade looking for a break this summer of what I would call MASSIVE support at $50.
Since our last trade rolled off, investors have digested CRM’s recent Q1 results (summary here from Barron’s.com) and it is our view that while CRM is a very good company with strong management and positioning within one of the largest secular trends in software in decades, its relative under-performance as large cap tech has roared back and the SPX has made new highs portends lower lows over the course of the Summer.
Looking at 30 day implied vol (the price of options) vs the 30 day realized volatility (how much the stock has actually been moving) shows a relative cheapness of owning options for directional bets at current levels. What the chart below shows is the vol crush since their May 20th Q1 results (blue – IV) vs the realized (white) near the highs of the year. This says that the stock’s movement is increasing, as options prices are declining:
Given my bearish view on CRM, the poor price action in SaaS, Solar, Social Media stocks and Biotech this could mean we are headed for round 2 of high valuation selling.
TRADE: CRM ($52.80) Bought to Open August 50 Puts for 2.00
Break-Even on August Expiration:
Profits: below 48
Losses: between 48 and 50 lose up to 2.00, max loss of 2 above 50
Rationale: With the first move lower towards our strike we will look to spread by selling a lower strike put (possibly of a shorter dated expiration to offset some decay).
Previous Post May 7th, 2014: Trade Update – Salesforce (CRM): Closing Half May23rd Weekly Puts For Quick Double
Yesterday we placed a short term bearish bet in CRM as we thought the stock’s bounce back from 6 month lows back to the downtrend line made for a very good entry on the short side for a re-test of the neckline of the Triangle of Death that the chart looked poised to exit to the downside. Since placing the trade yesterday afternoon the stock is down 6.5% in a strightline and now through the important $50 support level, a close below today would signal lower lows in my opinion. But in an effort to remain disciplined with an eye towards risk managing a short biased position in a very oversold stock I am going to take profits on half of the position and take my cost off of the table.
Action: CRM ($49.50) Sold to Close May 23rd 50 Puts at 2.60 for a 1.30 profit, letting other half ride
Original Post May 6th, 2014: New Trade – Salesforce (CRM): Cloudy The Price Action Is
Last week I highlighted the technical set up in Salesforce.com (CRM) in a CotD post. The stock’s quick move from the high $50s to below support at $50 (or the neckline of the “Triangle of Death”) looked like a precarious set up for the high valuation high flier. The stock has since bounced nicely from below $50, while not quite to the prior breakdown level at $55, it has stalled at a key near term technical resistance level (its 200 day moving average – yellow line below):
The set up is a textbook head and shoulders, and while I was not willing to press it on the short side, on support at the $50 neckline, but now with a move back to the downtrend line, the entry looks a bit more attractive.
The company is set to report their Q1 results on May 20th after the close, and the options market is already implying about a 6% one day move, which for now a tad shy of the 4 qtr avg of about 7%.
CRM is seeing unusual options activity today with 18,000 of the May 55 calls bought, most look opening as there was 5400 open interest in the line. When the stock was 53.08 at 9:51am, 4600 were bought for .72 (this could have been to close, and then at 10:01am the same strike started trading on the offer at .85 with the stock a bit higher at $53.25. Clearly bullish opening action.
I guess that’s all fine and good, but the price action in TWTR today reinforces my belief that high valuation, high growth stocks are on their last legs. They may have sharp rallies after steep sell offs, and it won’t be a one way street on the way down. But the fever has broken, and I believe that without results that offer material upside, these stocks will all see lower lows in the coming months.
I offer this view with our routine caveat. We would not be pressing the shorts in most of these stocks without defining our risk with options. Most are very oversold, and we have no assurances that we will be right. We are obviously putting our money where our mouths are, but these are trading positions and we are not betting the ranch today on any one stock’s collapse. Rather, we are spreading our bets around and trying to take profits when we have them.
With CRM’s Q1 due after May expiration, I am going to isolate the event using the May 23rd weekly options, I am merely going to buy an out of the money put because I feel the stock will be near the strike soon enough and I will look to spread.
Trade: CRM ($52.70) Bought the May 23rd weekly 50 Put for 1.30
Break-Even on May 23rd weekly expiration:
Profits: below 48.70
Losses: between 48.70 and 50 lose up to 1.30, max loss of 1.30 above 50
Rationale: The stock was just last week below 50 and If this weakness in high valuation continues the stock will be back there again soon and I will look to spread by selling a lower strike put to lower my break-even. If I am wrong and the stock breaks above the downtrend line then I will look to cut my losses and not hold a low delta put into the event. Either way, I don’t plan to hold this put at the time of the earnings report.
Original Post April 28th, 2014: Chart of the Day – Salesforce (CRM): Mostly Cloudy
Back on April 2nd I wrote about the rotation out of high valuation SaaS stocks like CRM, NOW and RHT, and into large cap old software names like MSFT & ORCL but specifically focused on CRM as I had detailed some unusual bullish options activity:
Personally I don’t have a strong view on CRM. The stock trades at 118x this year’s expected earnings that are expected to grow 42%, but off of a very low base (from .35 to .50) with decelerating sales growth. With a nearly $36 billion market cap, trading at a Price to Sales of almost 7 for the current year, the company can NOT be taken over by anyone, so the company could take years and years to grow into its valuation, and in my mind the risks do not outweigh the potential rewards. I would rather side with those playing old tech looking to encroach on the believe it or not cloud market.
Lastly, the move out of high valuation cloud names from the all time highs (NOW had a peak to trough decline of 23% over the last month, RHT down 16%), came just before the moment when old tech software behemoths like MSFT and ORCL broke out to new 13 year highs.
Since April 2nd the relative under-performance of many of the cloud software plays has gotten more pronounced with CRM down 25% from the highs (down 14% from April 2nd), NOW down 35% (25% since April 2nd) and RHT down 22% from the highs (down 10% from April 2nd), while MSFT is down 1% and ORCL down 3.5%.
I want to focus again on CRM as it has the most dramatic market cap decline (nearly $10 billion) and is probably one of the most expensive stocks on the planet with a $30 billion market cap.
The one year chart below shows how the stock has round-tripped the year to date breakout, and now sits on very important long term support at $50:
There is no support in this stock until $46, and if things get sloppy it is going straight there. The company is not scheduled to report their Q1 yet, but it is likely to be the last week of May, prior to Memorial Day. If this has been the sort of stock on your shopping list then you will want to buy it on a day when it appears that no one else on Earth wants to own it. I would need to see a little panic before I get moderately interested in these stocks that have enjoyed their fair share of irrational exuberance in the last couple years.