Even though I use a lot of technical information to trade, I’m still a fundamental trader at heart. Oracle (NYSE:ORCL) is a dinosaur company that survived the near extinction event of the dot-com bubble. Moreover, ORCL stock is up 57% in a year. I just wouldn’t advise newcomers to the stock to get in at these levels.
I give it all the respect it deserves from that perspective. But that’s where the good news ends for me. I usually don’t mind chasing this runaway stock — unless it is into the stratosphere. That’s why I deem it a good stock but too rich for me at this stage. At these altitudes, I don’t see commensurate improvement in the financial statements.
I’m sure there are experts who would criticize my simplified assessment, so I will elaborate.
The company has not improved its revenues nearly enough to command the premium. It has done a good job managing profitability especially in a pandemic year. For that it deserves stock upside … but not this much stock upside. There are dozens of better tech alternatives.
ORCL Stock Has Outdone Itself
To be clear, its stock appreciation dwarfs the returns from companies with much faster growth scores. ORCL is up twice as much as Advanced Micro Devices (NASDAQ:AMD) and Salesforce.com (NYSE:CRM) in a year, to name just two. This is in spite of both of them boasting surging revenues and net income. From that perspective, ORCL has gone too far ahead.
I had no issues calling it a bargain when I saw value in it. In 2018 I shared a bullish article in March and reiterated it in December. Those were great entry points in hindsight, but now I would rather be patient.
My caution is not a knock against management’s efforts, because they are growing profitability. My point of view today is looking at new investors coming into it fresh. And for those investors, this is not an obvious point of entry. In addition to ORCL stock seeing such high altitude, the whole market is in the clouds — pun intended. We haven’t had losing streaks in months, so the odds of a correction are relatively high.
Of course, that alone is not a reason to short neither the market or Oracle. However it would be prudent to wait out a bit to gather more data. This week could be very volatile because it is heavy on major events. Wednesday the Federal Reserve will tell us their decision on quantitative easing. And the giga-cap companies are reporting all week long. Tesla (Nasdaq:TSLA) reported yesterday. AMD, Microsoft (NASDAQ:MSFT) and Alphabet (NASDAQ:GOOGL, NASDAQ:GOOG) report tonight. And let’s not forget the slew of economic data including U.S. GDP. Anything can happen and we’ve seen equities crash up of late. Risk appetite is astonishing.
It’s Time We Bring Back “Cautious Optimism”
The term “cautious optimism” seems to be dead. The full weight of the Fed and the White House behind stocks make for monster bulls. They went miles out of their way to reflate the U.S. economy. They’ve done too good a job and created serious inflation. Everything we buy right now has never been more expensive. They are calling it transitory. I don’t believe that for a second — the only way this inflation will unwind itself is if we crash. Chipotle (NYSE:CMG) and McDonald’s (NYSE:MCD), to name two, just raised prices. They don’t do this just to roll them back within a few months.
Higher prices are not slowing consumer spending down. Therefore companies are reporting excellent earnings. Stocks are not necessarily egregiously expensive. But some, like ORCL, have gone too far without a breather. There is a lack of worry from the masses. These tailwinds will end and will leave a giant gap behind. Equity prices could fall through it in a damaging way.
I think it’s time we bring back the term cautiously optimistic. This means booking profits earlier than normal and lowering conviction levels on new trades. Both of these notions make Oracle stock a risky proposition for new entries now.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Nicolas Chahine is the managing director of SellSpreads.com.