Every once in a while we get a company that wows investors. Salesforce.com (NYSE:CRM) is one of them and Wall Street is in awe of it. The proof is that CRM stock’s momentum represents risk appetite in the whole market. It rallies fast and yes, it falls fast, but almost never to any fault of its own.
On Mar. 5, when traders were selling out of CRM stock, I wrote about how wrong they were to do that. It has since recovered and is back to near all-time highs. And yesterday, CRM stock was leading the charge before the China headline hit the ticker tape to cause a market wide sell off and stall the run.
The results show that for the long term, owning Salesforce stock is a winning proposition. Year-to-date, CRM is up 20% leading all indices. It is up 31% in 12 months and almost 200% in five years.
So those wanting to invest in CRM for the long term should not worry about timing a perfect entry into CRM stock. It’s a momentum stock, so it almost never leaves the door open for a clear entry point. The idea here is to buy high and sell higher much later.
Fundamentally, Salesforce stock is not cheap since it sells at a three-digit price-to-earnings ratio. It is more expensive than Amazon (NASDAQ:AMZN), which has been the poster child of expensive stocks. But when a company delivers hyper-growth as CRM and AMZN do, investors should award them a higher valuation. They are supposed to overspend, so they can continue to deliver outstanding growth.
How to Approach CRM Stock Now
Investors incorrectly sold CRM stock on softer guidance this month. But I listened to its high profile leader Mr. Benioff, who emphatically said that they will continue to set records on Wall Street, and I believe him.
For the short term, momentum stocks like CRM make for good trading vehicles because they move fast in both directions. The key to success here is finding the levels that matter. For that, I use the lower time frame charts.
At the end of January, CRM broke out of the $153 neckline and since then, it continues to trade inside a defined range. The breakout neckline was successfully tested twice already so it is short-term support. Anytime Salesforce stock falls to it, I can buy it for a swing trade with tight stops at $5 and $9 below it.
There is another mini support level at $159 per share. So if I am long already into a swing trade, I could use this as a stopping point depending on my trade intentions. I expect it to hold as natural support provided the geopolitical headlines or the Fed today don’t ruin the run.
Conversely, if the CRM bulls can breakout out of $166 per share they run into open space where there is virtually no resistance. The bears will have a hard time to stop the rally. The target of the breakout is really open to interpretation, so then I’d set trailing stops to lock in the profits and enjoy the ride. Those who know options can then sell calls against their stock to generate synthetic dividends.
The bottom line, CRM is an incredible success story for the long term and it presents many short-term trading opportunities. Today, it will also likely represents a leading indicator to the market-wide risk appetite. If CRM is getting bid, then the major indices will also be in the hands of the bulls. Shorting CRM stock long term is the equivalent of shorting markets in general. For now, this will not be my approach to the stock.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on Twitter and Stocktwits.