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Tech stocks - Wednesday, February 25, 2009

Only Investors Are Getting Stress Tested

Fed Chairman Ben Bernake tried to buy some time for President Obama today. If you think the “stress test” concept is anything but, then the staff at tech:stocker has a nice bridge to sell you.

When the Fed was doling out billions last Fall, they had to have a decent idea what the books held at Bank of America (BAC:NYSE), Citigroup (C:NYSE), and the rest of the top 20 banks. After all, giving $25 billion to bank without knowing what there assets looked like would not be a smart idea.

A few rebellious staff members at tech:stocker believe that Mr. Bernake is stalling so that Citigroup, and possibly Bank of America, fail during the stress period. That way, Mr. Bernanke could go back on his statement of being against nationalizing the banks and take over one or two. This is a little bit of a stretch for most of us, but a definite possibility.

Regardless of what you think the motivations are behind the stress test, we still have a hard time recommending investing in a bank right now. Even banks like Wells Fargo (WFC:NYSE) and JPMorgan Chase (JPM:NYSE), ones we believe will survive, are still dicey in this economy. With foreclosures and unemployment on the rise, it’s only a matter of time before supposedly good mortgages become toxic.

We are predicting the bottom of the housing market in late September, early October of this year. Buying a bank stock before the housing market hits bottom is definitely a risky move. If you do bet on the right one, you stand a chance of making up for the many losses that are probably accumulating in your portfolio. But you won’t know which bank is a good bet until Mr. Bernake finish his stress tests. We’re going to do our best to keep our blood pressure low by waiting for Mr. Bernake to deliver a solid plan.

When we’re wrong, we’re not afraid to admit it. A few weeks ago we though Salesforce.com (CRM:NASDAQ) was going to have a lousy quarter. Executives were fleeing the company and the company was hinting at lower profits for the quarter. It really seemed as if the Salesforce.com was going to show the world what we have believed all along, that the company is overvalued.

But instead of making us look right, Salesforce.com beat its Q4 2009 expectations by coming in with profit of $13.8 million or $0.11 per share. Revenue was up 34 percent as it increased to $290 million, beating analyst expectations of $285 million.

CEO Marc Beninoff did lower expectations for the year over previous guidance issued last November. Not enough to make devout investors run from the company, but enough to raise an eyebrow or two.

Salesforce.com has always sold software that is critical for supporting the sales teams of many businesses. And selling it in a subscription model that does not require companies to lay out large amounts of capital in a cash conscious environment is a better sell than the traditional software model.

Our problem with Salesforce.com is that even though they had a good quarter, the company’s P/E ratio of 80.3 is still too high for us, especially in this environment. When we see a high quality company like IBM (IBM:NYSE) sitting with a P/E of 9.6, we have a hard time throwing our investment dollars at a company sporting a P/E almost 10x that amount.

If you have nimble fingers and T1 line, Salesforce.com might give you a quick day trade profit over the next few days before the stock settles back down. But if you are accessing TD Ameritrade (AMTD:NASDAQ) via a dial-up connection, don’t even try this play.