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Cloud Computing: Own a Piece of a $126 Billion Future

Written By Brian Hicks

Posted August 28, 2010

Welcome to the Wealth Daily Weekend Edition — our insights from the week in investing and links to our most-read Wealth Daily and sister publication articles.

It doesn’t matter how “down in the dumps” this market is…

Find a stock with blind momentum, and it could pay off from both a long and short position.

Take a look at stocks like (CRM) and Netflix (NFLX), for example…

Both went hyperbolic — and just keep running on nothing more than sheer momentum. August chart

But is really this hot? is involved with cloud computing — services, applications, and the ability to collect, store, and process data over the Internet. This sector is expected to grow at an annual rate of 28% from $47 billion in 2008 to more than $126 billion by 2012, according to IBM. 

Heck, if you’re using Yahoo! Mail, Hotmail, or even Gmail, you’re working in clouds. You may be in a cloud right now… and not even know it!

And the sector is heating up… fast.

Just look at how out of control the bidding war was for 3Par (PAR), whose technology is seen as key in offering cloud services. I wouldn’t be shocked to see a buyout offer for at some point… or even for Akamai (AKAM) or Brocade (BRCD).

But while growth will remain red hot, hold off on CRM until it pulls back; CRM’s technical and fundamentals say it’s best to wait.

How to play cloud computing and near-term

Two things have happened with so far:

  1. The stock pulled back $4 after running above the upper Bollinger Band and putting in an overbought read on Williams % Range (W%R)… just as we called for in Options Trading Pit.
  2. As we called for, the blind momentum crowd came back, jetting the stock higher and repeating the same pattern we saw with Netflix. (This happened to both stocks even though fundamentals and technicals screamed “Sell.”)

As if we were back the Internet boom of 1999, these stocks are just exploding.

But it’s only a matter of time before they fall back to reasonable valuations… Here’s why: CRM revenue is growing 25% a year, but the stock is trading at 150 times trailing earnings, 90 times this year’s earnings, and more than 55 times 2013 earnings. That’s absurd.

Insiders are unloading, selling another 6.5 million shares last week. And operating margins fell in the most recent quarter despite CEO cheerleading.

So what do you do here… Buy it? Sell it?

One of two things can happen from here… The stock could break down from above the upper Bollinger Band, and oversold reads on fundamentals again; on the other hand, the blind momentum crowd could come flooding in again, and we could have another Netflix-type runner on our hands.

I suggest the following: If you’re interested in buying, use a tight stop loss of -30% and hedge with a short position. 

Or, just buy and hold Brocade (BRCD), another player in the cloud computing space.

But if these plays seem too risky for you, below are some other of the week’s best investment advice from the pages of Wealth Daily and our sister publication, Energy and Capital.

Also, be on the lookout for a buying opportunity from Options Trading Pit next week. This is one you can’t afford to pass up next week… Plus, we’ve got a new special report headed your way within the next few weeks.

Stay Ahead of the Curve,

Ian L. Cooper
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