Salesforce.com Confirms the Risk of Short Selling
The slightest postive guidance has longs sticking to their positions.
If Chappelle were using a stock for the skit, he might pick Salesforce.com (CRM). The short-sellers (including me, until a painful cover this morning) recognize the company's status in the growing "cloud computing" world, but also find its valuation nonsensical by any measure.
The problem with Salesforce.com is that the longs don't sell on the way up. They only want out together. It's a great stock for a big long to mark up performance. Most of the sell-side liquidity comes from shorts.
Unfortunately, the inherently poor risk/reward profile of shorting has come home to roost big-time in this one. The mildest of positive guidance reinforces the tacit code among the tight group of longs to stick with their positions, with the momentum of news flow on their side. The company's chairman, Marc Benioff, is as good a stock promoter as modern times have seen. Benioff is a billionaire and a visionary; I give him his due. But he also knows how to hype a stock like nobody's business.
So you get mildly positive results this morning and a 15% pop. I'm sure there's some real money buying, but much of this is short covering, as I know from experience. Every now and then you have to be reminded that shorting because of valuation -- as reasonable as it may sound -- is a recipe for disaster. Rich can get richer can get richer still. Shorting because of valuation is a rookie mistake this veteran still makes a couple of times a year.
When the longs decide to sell in unison, as they surely will, the first tranche of shorts will gladly cover to get out of a bad trade. With the first buyers out of the way, the stock is a good candidate for a mighty fall. But most of the shorts will already have been carried out. The longs, looking to sell, will be reminded of the story of the speculator who keeps pushing a stock higher, then tells his broker to sell.
"To whom, sir?" asks the broker.
It won't happen today or next week, but at some point, the longs in Salesforce.com will be asking this question. Don't blame the shorts -- they tried to keep it real, and it went wrong.
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