Salesforce.com: Pull-back Is a Buy Opportunity

Posted Dec 18th 2009 2:30PM by Joseph Lazzaro
Filed under: salesforce.com inc (CRM), Stocks to Buy

At this pace, the major 'hurdle' Salesforce.com (CRM) is going to face will be difficult, quarterly sales comparisons, commonly known in Wall Street circles as 'difficult comps,' but that's a good thing, which is why I'm reiterating my buy rating for the company's shares, first recommended on June 18, 2009, at a price of $40.16. If you bought CRM in June, you're up an impressive 64%.

CRM's 2010 revenue should increase 20-25%. Is the recent gain in Salesforce.com's shares telegraphing something about the U.S. economic recovery? Indeed it is. Put CRM's share gain in this context: if the share gain holds, it's not a bearish sign for the U.S. economy.

Salesforce.com's business model is linked to the overall success of the economy. When that economic recovery was distant, institutional investors shunned CRM, which designs software that lowers up-front investment, increases vendor accountability, and enables flexible subscription pricing, among other benefits.

However, as it became clear that the U.S. economic recovery had started in late summer/early fall, IIs suddenly developed an affinity for CRM, perhaps on the likelihood of stronger-than-expected enterprise information technology spending, and CRM's market leadership position. The First Call FY2009/FY2010 EPS estimates for CRM are 63 cents to 83 cents.

Technically, Salesforce.com's stock chart is strong -- an uptrend with minor, constructive pull-backs, and a price that continually stays above the key, 50-day moving average -- a sign that IIs are adding/establishing positions. CRM also cleared psychological resistance at $60 this fall with relative ease.

The recommendation is to buy CRM on a pull-back to $62-64; keep in mind that CRM may not retreat to that level.

Finally, the Sell/Stop Loss has been raised to $43 from $37, or to just above the entry point; hence, this is a zero-risk trade for your June-bought shares.

Stock Analysis: Salesforce.com is a moderate-risk stock. If you've already purchased the company's shares, hold them. If not, consider buying a 25% position in CRM on a pull-back to $62-64 if given the chance; then buy another 25% in one month, if U.S. and global economic conditions don't worsen substantially. Under any circumstance, don't buy more than 75% of your CRM position before February 2010. Revised Sell/Stop Loss if you bought shares in this company: $43.

Disclosure: Lazzaro has no positions in stocks, but does own shares in two Pimco Bond Funds: PHDAX and PYMAX.

Tags: crm