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salesforce.com, inc. (CRM), Caterpillar Inc. (CAT), Bally Technologies Inc. (BYI): A Report on Shorts

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The best thing about the stock market is that you can make money in either direction. Historically, stock indexes have tended to trend up over the long term. But when you look at individual stocks, you’ll find plenty that lose money over the long haul. According to hedge fund institution Blackstar Funds, even with dividends included, between 1983 and 2006, 64% of stocks underperformed the Russell 3000, a broad-scope market index.

A large influx of short-sellers shouldn’t be a condemning factor to any company, but it could be a red flag from traders that something may not be as cut-and-dried as it appears. Let’s look at three companies that have seen a rapid increase in the number of shares sold short and see whether traders are blowing smoke or if their worry has some merit.

Company Short Increase April 15 to April 30 Short Shares as a % of Float
salesforce.com (NYSE:CRM) 276.1% 9.2%
Caterpillar (NYSE:CAT) 78.5% 4.5%
Bally Technologies (NYSE:BYI) 52.1% 22%

Source: The Wall Street Journal.

Is this valuation in the clouds?
I’m very much looking forward to the day when cloud-computing companies don’t present many of the same concerns endemic in the late 1990s and early 2000s of Internet companies.

salesforce.com, inc.salesforce.com, inc. (NYSE:CRM), in its most recent quarter, delivered incredible growth yet again: Revenue jumped 32% to $835 million as businesses continue their transition into the cloud in both social and mobile markets. Furthermore, salesforce.com, inc. (NYSE:CRM)’s revenue stream is almost entirely recurring, meaning there’s safety in its quarterly cash flow statements.

On the flip side, salesforce.com, inc. (NYSE:CRM) also presents catch-22s such as needing to expand rapidly in order to secure new clients. The higher-than-normal expenses related to customer capture have constrained salesforce.com, inc. (NYSE:CRM)’s profit potential and place the company at a frothy 74 times next year’s EPS projections. The other factor to consider here is that the law of big numbers says Salesforce’s growth rate is going to slow. In fiscal 2013, revenue grew by 32%. In the upcoming year, salesforce.com, inc. (NYSE:CRM) is projecting sales growth of just 27% to 28% — and who knows how that might be affected by the sequester or the Patient Protection and Affordable Care Act, which have caused many businesses to remain cautious in their spending habits.

While I have a hard time denying that Salesforce is a cloud juggernaut, I have an easy time understanding why short-sellers are skeptical with its astronomical valuation. I do believe the short-sellers may have some room to be pessimistic over the near term until Salesforce’s bottom line catches up to its current market value.

Will weak metal prices prove short-sellers right?
Caterpillar Inc. (NYSE:CAT) might be a monster among its peers with regard to manufacturing heavy machinery, but it’s acted more like a kitty-cat in recent months.

In September, Caterpillar Inc. (NYSE:CAT) lowered its 2015 EPS outlook to a range of $12 to $18 from a previous outlook of $15 to $20 because many global miners had reduced their capital expenditures forecast. I’m certain most capex budgets have become even sketchier with gold prices dipping $200 per ounce over just the past couple of weeks. Yet, Caterpillar Inc. (NYSE:CAT) — in spite of its 2013 outlook being cut in the first quarter — and its heavy-manufacturing peer Deere & Company (NYSE:DE) both look poised to take advantage of any strength overseas.

While certain aspects of mining may struggle to find their footing until global stock markets stop their perpetual uptrends, there are ample growth opportunities in overseas markets for Caterpillar Inc. (NYSE:CAT) and Deere’s construction equipment — especially in Asia and South America. Sales growth in China, while slower than expected for Caterpillar Inc. (NYSE:CAT), did point to lower machine inventory and a steady trend of outperformance to many other overseas markets. For Deere & Company (NYSE:DE), sales outside the U.S. rose by 9% in its first-quarter results reported last week.

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