Event: SalesForce.com (CRM) reports Q4 results tonight after the close. The options market is implying about a 9% one day move, which is rich to its 4 qtr average one day move of about 5.5% and its 10 year average one day post earnings move of 7%.
Price Action / Technicals: CRM is down 21% in 2016, and down about 25% from its 52 week and all time high made in November. To state the obvious, the stock is an the midst of a fairly severe downtrend that saw a peak to trough decline of 36% to its recent lows. $65 appears to be near term technical resistance as it was a breakout level from a year ago and also approximately its August 24th low:
[caption id="attachment_61673" align="aligncenter" width="600"]
CRM 2 year chart from Bloomberg[/caption]
Taking a longer term view, the stock recently broke its uptrend that has been in place since its late 2008 lows, and past support in the mid $60s could now serve as important technical resistance, with little support to the low $50s:
[caption id="attachment_61675" align="aligncenter" width="600"]
CRM 10 yr chart from Bloomberg[/caption]
Sentiment: Despite the stock’s sharp decline in the last few months, Wall Street analysts remain overwhelmingly positive on the stock with 44 Buy ratings, only 3 Hold ratings and only 1 Sell rating, with an average 12 month price target of $87.33, up 41% from current levels. Short interest sits at less than 2% of the float.
Implied Volatility Snapshot: Short dated options prices recently shot to levels that are extremely high for a company of its size, currently $40 billion market cap, with 30 day at the money implied vol (blue below) reaching 80%, but has since come in hard to about 50%. Realized vol (white below, how much the stock is moving) has remained elevated, as the stock has had two 20% moves this month alone. With implied vol above realized heading into the earnings event, some traders might view the implied move as fair (not cheap, but possibly not expensive):
[caption id="attachment_61674" align="aligncenter" width="600"]
from Bloomberg[/caption]
No matter what the stock does after results, option prices should settle back into the low 40s, possibly high 30s.
MY VIEW: There are two main reasons for the investor love affair with CRM. First, the company is a first mover in one of the largest secular shifts in the way businesses and consumers interact with computers. Second,, because of the company’s positioning in cloud and SaaS offerings, CRM is considered to be a potential take-over candidate. A little more than a year ago, when the stock was in the mid to high $60s there were plenty of rumors that the company was “fielding” take-over offers possibly from the likes of Microsoft or Oracle. It would be hard to argue that the need for CRM’s platform is any less than a year ago for a potential acquirer like ORCL given their own lack of sales growth, but I think the way investors may view such a deal would be the big change.
CRM trades at 63x expected 2016 eps, which is expected to grow 30%, on 23% sales growth, which is basically flat with last year.
If the company were to post a beat and give upbeat guidance, I could easily see the stock up about 9% inline with the implied move, but I suspect it would settle back soon in the mid $60s.
If the company were to guide down then I think we see the stock down $5 or so.
So What’s the Trade?
We’re not getting involved here before earnings but we wanted to highlight a couple of trades for those that are already long (looking to hedge), thinking of getting long (with defined risk) or just want to be a playa.
Bullish:
The first is a stock alternative that identifies a level for decent gains while defining risk to a manageable percentage of the underlying:
In Lieu of 100 shares of CRM ($61.90) Buy the March 60/70/80 call fly for 3.10
- Buy 1 March 60 call for 4.50
- Sell 1 March 70 calls at .75 (1.50 total)
- Buy 1 March 80 call for .10
Rationale – This defines risk to 3.10 (the most that can be lost if the stock declines below $60) while allowing for profits up to 6.90 (maximum gain of 6.90 at $70) So this is a better position than stock in almost all cases as you know what you can lose, but can also target a fairly realistic upside. The risks of this trade are the stock going sideways to down slightly (to $60) where it will act worse than stock, but not by much as it starts nearly 2 dollars in the money, so it’s only really about a dollar in extra premium vs the stock (break-even of 63.10)
Bearish/Hedge:
For the second trade idea, this is just a simple hedge for the event for those that are long stock (or those looking to take a bearish shot with defined risk):
Against 100 shares of CRM (61.90) Buy the Feb 26th 60/55 put spread for 1.30
- Buy 1 Feb 26th 60 put for 1.80
- sell 1 Feb 26th 55 put at .50
Rationale – This risks less than 2% in the stock for protection down near recent lows (with a breakeven on stock 1 to 1 from 58.70 to 55. Below 55 there is no longer any protection.