Value investor Whitney Tilson recently gave a presentation where he highlighted Salesforce.com (CRM, Financial) as one of his favorite short stock picks.
The problem with Tilson's short thesis is that he continually analyzes short positions as if he were making a value investment on the long side. They are two different animals, and Tilson has been burned several times following the same script with Lululemon (LULU, Financial) and Netflix (NFLX, Financial).
All of these stocks are favorites of the momentum speculators and day traders. For these chart watchers, value is unimportant. Of course, in the long term, value and price will merge together, but when one is speculating on the short side, timing is of the essence.
Value investors always forget that successful short sales require catalysts. These are events where the perception of a company is drastically changed.
What would be some examples of catalysts that could derail the CRM share price?
- Due to the generous stock option plans the company continues to dilute shareholders — the share count rose 7.3% YOY last year
- High levels of insider selling — the CEO is selling $1.3 million per day and CRM has the second highest level of insider selling in all of corporate America.
- In particular, due to the stock option compensation, CRM has almost no GAAP earnings, and the company resorts to using pro forma earnings (reminiscent of the dot-com bubble).
- Using a 30X multiple on pro forma earnings of $1.38 would give the stock a value of $51.40.
The problem with Tilson's short thesis is that he continually analyzes short positions as if he were making a value investment on the long side. They are two different animals, and Tilson has been burned several times following the same script with Lululemon (LULU, Financial) and Netflix (NFLX, Financial).
All of these stocks are favorites of the momentum speculators and day traders. For these chart watchers, value is unimportant. Of course, in the long term, value and price will merge together, but when one is speculating on the short side, timing is of the essence.
Value investors always forget that successful short sales require catalysts. These are events where the perception of a company is drastically changed.
What would be some examples of catalysts that could derail the CRM share price?
- SEC problems due to the stock-based compensation. It should be noted that there is nothing illegal about pro forma earnings. Key executive departures particularly of the CFO would be a red flag
- Loss of market share due to competition from Microsoft (MSFT, Financial). Microsoft has quietly entered in to the CRM "cloud" area and is directly competing with Salesforce.com. Most likely Salesforce.com will miss revenue guidance when the competition from MSFT heats up. Short sellers need to determine in which quarter the problems might become obvious to CRM shareholders.
