Chances are, you’ve already heard that Salesforce (NYSE:CRM) joined the 30-member Dow Jones Industrial Average index as of Aug. 31. With that exciting development in mind, you may be tempted to load up on CRM stock.
Salesforce as a company isn’t suddenly different because it’s joining the Dow. We can compare it to a movie winning an Academy Award. It’s the same movie, but now it’s just being recognized.
In other words, the fundamentals and financials of the company aren’t any different than they were before. On the other hand, joining the Dow, like winning an Academy Award, tends to bring positive publicity and clout.
The thing is, if you and I know all of this, then so does everyone else. According to the efficient market theory, all known events and data, along with future projections, are already priced into assets. Informed investors, then, must consider the possibility that the benefits of joining the Dow have already been baked into the pie when it comes to CRM stock.
CRM Stock at a Glance
Even prior to August of this year, CRM stock was on a fairly relentless upward trajectory. There was price pressure during the onset of the novel coronavirus, but the bulls soon pushed the stock price back up and then some.
Then, in August the angle of Saleforce’s ascent steeped considerably. The investing community got wind of Salesforce’s addition to the Dow on Aug. 24, a week in advance of the event. Most likely as a result of this, CRM stock gained 3.6% on that day.
Surely, this was a nice surprise for CRM stock holders. Hardly anyone had predicted this specific event, so the 3.6% pop was basically a gift to lucky shareholders.
That, however, was a drop in the bucket compared to what came next. On Aug. 25, CRM stock leaped 26%. What exactly happened on this day? Was it merely a delayed reaction to Salesforce’s inclusion in the Dow? Let’s dig a little deeper and find out.
An Earnings Shocker
It’s funny how catalysts come in pairs sometimes. It’s like a one-two punch that sends a stock price high, and then even higher.
The Dow surprise might have been enough to push the CRM stock price higher over the next several trading sessions. After all, inclusion in the Dow means that Salesforce could now be included in more index funds, pension funds and so on.
But again, none of that means that Salesforce is a better company, financially speaking. Yet, on Aug. 25 investors found out that Salesforce actually is doing extremely well from a fiscal standpoint.
That was the day when Salesforce released its second-quarter earnings data. Thus, the Dow bump was immediately followed up with an earnings bump. Suffice it to say that CRM shareholders had a terrific week.
Fundamentals Still Matter
Of course, Salesforce wouldn’t have been included in the Dow if the company hadn’t already proved itself as a serious moneymaker. Salesforce’s outstanding second quarter cemented the notion that the company is robustly profitable.
For instance, as reported by Refinitiv, analysts were expecting quarterly adjusted earnings of 67 cents per share. In actuality, Salesforce blew that away with a result of $1.44 per share. Moreover, Wall Street was only projecting $4.9 billion in quarterly revenues, whereas Salesforce delivered $5.15 billion.
Perhaps Salesforce’s inclusion in the Dow is entirely justified. But this shouldn’t be your motivation for buying CRM shares today. If you’re going to take a long position, do it because you like the company from a fundamental standpoint.
The Takeaway
Salesforce probably does deserve its spot on the illustrious Dow Jones index. As far as the Dow catalyst is concerned, that train has already left the station. You can still own CRM stock, however, as the company has earned a high rating based on its strong financial position.
On the date of publication, neither Louis Navellier nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article.
