For many years, traders have been looking for the next
Microsoft (Nasdaq: MSFT)
or the next
. They want to find a small company that is about to become amarket
leader and the dominant force in its field.
Finding winners that are just beginning to define new consumer
markets can be tricky. Take
Apple (Nasdaq: AAPL)
, for example. In the beginning, few traders expected Apple to be
among the biggest winners of the currentbull market . The computer
maker with a relatively small share of the PC market became the
market leader in smartphones and downloaded content.
The biggest winners can also suffer large price drops, as Apple
has made abundantly clear recently. This was a fate shared by
Microsoft and Wal-Mart, which both peaked in 1999 before falling
more than 40% and spending years in a trading range.
Based on this pattern of boom and bust, it might be easier to
findstocks set to suffer big drops than it is to uncover the next
big winner. After screening for stocks with triple-digit
price-to-earnings (P/E ) ratios, a potential indicator of strong
investor interest (perhaps exuberance) in a company,
rises to the top of a list of stocks that could soon disappoint
Salesforce provides cloud computing and social enterprise
software that helps businesses make the most of their sales
processes and other internal functions. Its products are popular
with businesses, and in the past 12 months, Salesforce has recorded
$2.85 billion inrevenue . But the company has not been enjoying
exceptional profits from those sales. Heavy spending on R&D has
contributed to operating losses in each of the past sevenquarters
.Analysts are looking for aturnaround and expect to see profits
this quarter andearnings growth of 27% a year going forward.
Earnings per share (
) are expected to be $1.52 thisfiscal year , ended in January, and
$1.95 next year. At the time of this writing, Salesforce is trading
at $172.50, giving it a P/E ratio of 113 based on this year's
expected earnings and 88 times next year's forecasted earnings.
Even if the company meets expectations, thestock seems to be
overpriced and vulnerable to a sell-off.
The daily Salesforce stock chart confirms potential weakness and
shows a double-top pattern could be forming with a downside target
In addition to thebearish pattern formation, Salesforce stock
shows a bearish momentum divergence in both thestochastics
andMoving Average Convergence/Divergence (MACD ) indicators. On the
weekly chart (not shown), stochastics just gave a sell signal while
MACD is declining. All signs point to a possible drop when
Salesforce reports earnings, which is scheduled for Feb. 28.
Put options allow traders to benefit from a potential price
decline without needing to incur the expenses of shorting this
high-priced stock. Marchput options with astrike price of $170 are
trading at about $7.40 and could almost double to $14.50 based on
the target provided by the topping pattern.
With momentum indicators also pointing to the fact that a top
has likely formed, traders should consider buying these options
expecting to see a significant price move take place no later than
theearnings announcement .
Action to Take -->
Buy CRM March 170Puts at $8 or less. Set stop-loss at $5.50 (about
one-third of the potential gain). Set initialprice target at $14.50
for a potential 81% gain in six weeks.
This article originally appeared on ProfitableTrading.com: