Free NPV

Salesforce (CRM) reported on Thursday after the market closed. They slightly beat their guidance on revenues and adjusted earnings, but still managed to lose money on real earnings. They also guided sort of in line for the next quarter but also reinforced their commitment to revenue growth at the expense of profitability. They plan on reinvesting and new revenues into the business by hiring more people and stepping up marketing. This is probably the right business decision at this stage in the game for a company like salesforce. To ever hope to justify their share price, they need to keep growing revenue at a high pace for years and THEN convert that into real margins and real profits. They need to get big enough before Oracle really gets going in this cloud space and could wipe them out. Problem is that’s a tall task, and they have no margin for error at a $15 billion market cap.

Investors seemed to be getting impatient with the lack of earnings though and the stock fell from 134 on Wednesday to close around 112 Friday afternoon. Unfortunately this was just short of hitting my 110 put level, but I managed to flip my November 110 puts out in the am for a small loss and kept my Dec 110 puts for breakeven so far. Im going to put on a new trade that basically is just shorting CRM with a twist. Sometime next week I plan on buying some May 140-150 puts. These are obviously pretty deep in the money and will have a delta close to one, meaning if the share price drops by a buck, my options will gain by almost a buck. However, and my favorite part of the trade is, if CRM reports awesome numbers in February or QE3 comes and all the MOMO names start running wild again and CRM goes up to 180, I get to keep my puts on until end of may with a maximum loss of the cost of the put. Its basically a stop loss at whatever price I buy the puts at, but I won’t get faked out by the market and have to cover, only to see CRM then crumble. My may puts will be held.

I did the same thing when I shorted OPEN last January. I put jan 2012 55 puts for $8 when the stock was trading around $75. It then rallied to 120 in the next 2 months. Had I just been short, I would have been stopped out at that point for a big loss, and then missed the eventually crash. Instead im sitting on a nice gain now, that’s getting better every day.

However, nothings free in the market. In exchange for this gift of not getting stopped out, I pay around $5 more for my short than I would have if I just plain old shorted in. So if I buy the 145 puts im going to pay around $38 instead of the $33 intrinsic value of the puts today. To counteract this im most likely going to sell some Jan puts in the 90-100 range, or whatever gets me back my excess over intrinsic value. Im also doing this because I font think CRM will move downwards that much over the next 2 months, with earnings come and gone, there aren’t many catalysts that will move the stock too much in either direction. Ill hold the December 110 puts until I put this trade on sometime in this upcoming week.

Recently all the momo (a name reserved for stocks that have had exponential share price appreciation, due to positive momentum rather than fundamentals) stocks have been getting killed, as their growth stories slow down and miss lofty street expectations. Just glance at a 6 month chart for TZOO, NFLX, OPEN, GMCR to see what I mean. CRM or salesforce.com is one of the last remaining momos that has not yet been killed.

Salesforce sells customer relationship management software in the cloud. Most cloud stocks trade at crazy multiples as investors love it, despite most of these company making only a few million bucks. Salesforce trades at a insane 1200x P/E multiple. While this number will drop as salesforce becomes more profitable over time, it’s almost impossible for a stock to fulfill those high expectations and grow into a multiple like that. And when those expectations aren’t met, the bubble bursts.

Some of the reason for the high sales price may be due to takeover speculation, that is, one of the big software guys like SAP or Oracle buys out salesforce for a big premium. This is pretty unlikely as with a market cap of 17 billion + it would be a big purchase even for those guys. It would probably be easier for Oracle or SAP to buy a smaller competitor in the 1 billion range and just cross sell the new acquired products with their own, using their massive salesforce and existing customer relationship. Oh wai…..http://techcrunch.com/2011/10/24/oracle-buys-cloud-based-customer-service-company-rightnow-for-1-5-billion/

It seems like Oracle did just that 2 weeks ago. Based on that it seems like as good a time as any to short CRM. I bought some November and Dec 110 puts, hoping that an earnings miss or bad guidance this Thursday will be enough to drive the price down. If it doesn’t drop or actually goes up I might naked short it, based on the expectation that over the next year Oracle is going to eat CRM’s lunch and CRM will have stagnate sales growth.

Hey the puts are expensive, but as NFLX, TZOO, OPEN and GMCR has recently demonstrated, they can still be lucrative.

ps. heres an awesome xtra normal video making fun of investors who drink the CRM punch. This was posted a year ago and the stock has only gotten more expensive since then. http://www.xtranormal.com/watch/6985513/i-want-my-salesforcecom

Petrobakken (PBN), the company that each shae of Petrobank enetiles you to 1.03 shares of, reported numbers this week. Im following petrobakken more closely now because I took off my hedge some time in September, due to PBN becoming ridiculously cheap. Market rumors about a dividend cut and an analyst report that highlighted the risk of a large cash payment coming due in February 2013 drove the price down to a low of $6.

I doubt petrobakken will cut the dividend unless they absolutely have no other choice, because this is where petrobank gets all their funding from, and management still believes in petrobank. PBN would rather cut some grow capex or sell off some undeveloped assets instead. However, they would obviously prefer to grow their way out of this problem.

This seems to be the case. While production numbers for Q3 were crappy, again due to a late spring breakup and flooding in Saskatchewan, the early look at Q4 seems to be amazing. They managed to get october production to average above 46k BOE/D and indicated early November is already above 47.5k BOE/D. Thus they increased their exit guidance to over 49k BOE/D, which was their previous high end of the range. This means they their wells are producing at high rates, their drilling program is progressing well, and there are no more screwups occurring. Further, their netback in Q3 was quite high, meaning from an Opex side, they are executing well.

If petrobakken can exit at 49K +, and continues to perform moderately well in 2012, there is virtually no chance of a dividend cut or an asset sale. It would be a $20 stock again, which is double from where it is now.

I might reinstate my long petrobank short petrobakken hedge if the spread gets any more negative but for now im happy to have the positive exposure to petrobakken. Management has a proven track record and is now finally starting to show it. If the street regains confidence in this name again it will be a very profitable story indeed.

Heres a link to the quick 7 page earnings report. It contains some oil industry terms but I suggest you read it and google what you don’t understand. http://www.petrobakken.com/wp-content/uploads/2011/11/PBN-2011-11-08-PressRelease.pdf

From an article in late September:
“California Labor Commissioner Julie Su on Monday sued ZipRealty Inc. for more than $17 million, seeking to recover allegedly unpaid wages and overtime pay for “hundreds” of agents statewide.

Emeryville-based ZipRealty (NASDAQ:ZIPR), which lists on its website nearly 40 agents in San Jose, allegedly violated state law over a four-year period by paying its real estate agents “less than” minimum wage and “no premium” for overtime hours worked, according to the California Department of Industrial Relations, which oversees Su’s office.”

Baically, ZIPR is being sued for $17 million when it only has $24 million in cash and investments left on its balance sheet. Thus this lawsuit can be potentially bankrupting, especially with the legal fees involved. And the case is likely to win. The article goes on to state that the labour department of california was alerted to the illegal practices when ZIPR lost a similar lawsuit by 4 of its agents in California court earlier that month. Thus with precedent set, I can’t see the outcome being very good for ZIPR.

Wat does the company have to say about this? Nothing at the time. They also just reported results so you figure maybe they would at least mention a potentially life threatening case, but they don’t. Maybe they will in the 10-Q when it is finally released (they better or else the SEC should take a look).

Ill go over their earnings in another post. So far this trade has gone pretty well with me shorting them at 3.30 a year ago and then reshorting them in late June/July at around 3.00 when zillow went public. Its now trading for $1.74

So ive been short Opentable (OPEN) via some jan 2012 55 puts that I bought last January. I paid an extremely high premium for them ($8) due to the insane multiples and volatility that OPEN traded on. I also decided to buy puts instead of naked shorting the shares because I didnt want to be stopped out in case the shares continued their huge momo run. That turned out to be a good call as when I put the trade on the shares traded at 74 and then continued to run up all the way to $110 a share and I definitely would have been stopped out for a big loss and wouldn’t have lasted long enough to see my hypothesis validated. As many a people are now fond of saying, the market can stay irrational longer than you can stay solvent. Good spot for puts then.

Well after that OPEN has been cratering, down to $43 before going into earnings tonight. Well, they missed consensus by a little and guided horribly, and the stock is tanking, down something like 17% afterhours. When you are an internet growth company trading at 54x earnings, it’s not great when your growth stalls. OPEN added more restaurants during the quarter than in Q2, but they actually sat LESS diners, meaning their diners seated per restaurant on their network got killed.

During the call, they also guided to increased costs and no sequential growth from Q3. Pretty horrible stuff overall, and it looks like it will join one of the many momo names that have gotten chopped in half and then half again recently (NFLX, FSLR)

Hey guys,

I know I haven’t updated this blog in forever (3 months), and im sorry for that. I got hired officially by the firm I was interning at this summer on September 1st and am now working full time. Between getting used to the new job and switching apartments I found it hard to find the time to post.

Thats going to change now and im going to switch the style with which I post. Before most of my posts where pretty thought out and formal. Im still going to try to have them well thought out but ill tone down the formality and increase the frequency. Im going to try to post updates on positions I have and news that effects those companies, as well as providing my opinions on the market and macro events overall. Hopefully you guys like the new format.

Enjoy.
Jordan