VMware, Inc. (VMW) — This leading supplier of virtualization software has shown strong earnings growth over the past five years, and analysts forecast a 12.6% increase this year to $4.01 per share.
However, S&P Capital IQ raised concerns about soft IT spending and economic uncertainties in a number of geographic regions. For example, VMware has a strong presence in China, where growth is slowing. Its analysts also noted the possibility of cuts in federal government spending that could impact the company.
Higher operating expenses coupled with an overall global slowdown could eat into sales and profits. VMW stock is trading at 20 times 2015 EPS estimates, and the company pays no dividend to support it shares in a general market decline.
The technical picture for VMW stock is even more uncertain than its fundamental picture. Shares fell from a high of nearly $113 in April 2014 to a low under $74 in January of this year.
Since then, VMW stock has been consolidating in a broad horn. This is a basic bearish formation usually seen at or close to market tops and is characterized by an increase in selling at its support line. For VMW stock, that line is at about $80.
In addition to a pickup in selling volume, note the sell signal from my proprietary internal indicator, the Collins-Bollinger Reversal (CBR), at about $82.
Sell VMW stock short at $80 with a trading target of $60 for a potential return of 25%. As with all short sales, ask your broker if there are any restrictions and be aware that if you hold shares short through a dividend payment, you will be responsible for it. A stop-loss order should be placed at $85 at the time of the short sale.
