EOT Trade Alert – August 23, 2011

Corey Williams | August 23, 2011

August 23, 2011

Trade Alert:

Buy N October 2011 $25 Puts at $2.30 or better

Company Background:

Netsuite (N) provides cloud-based business software. Their software enables companies to manage most of their operations in a single integrated suite. The suite is delivered over the Internet as a subscription service using the software-as-a-service (“SaaS”) model.

Short-Term Catalyst:

Netsuite is a cloud company, but their recent performance left investors in a fog!

Cloud software services are supposed to be the next step in the evolution of business technology. And over the last few years, investors bid up cloud computing stocks to dot com bubble-esque valuations.

Get this, Netsuite has yet to turn a single penny of profit. But in just a year, the stock soared from $12 to more than $40 in July.

Sure, revenues are going up… but they’re not growing as fast as investors expected. And at the same time, expenses are soaring.

What’s more, even with analysts’ optimistic earnings projections, N’s forward PE ratio is a whopping 105x. That’s just a crazy multiple… It’s a clear sign investors’ expectations are completely unrealistic.

And overly optimistic growth projections have put N in a dangerous position.

The only reason investors have bid up the stock is growth potential. But if Netsuite’s not growing as fast as expected, the stock’s going to get hammered. And that’s exactly what’s happened lately…

At this point, even senior management can see the writing on the wall. Over the last year, insider selling has reached epic proportions. Everyone from the CEO on down the line are exercising stock options and selling stock. That’s never a good sign…

And now, the fear that another recession is derailing economic growth is giving investors another reason to sell.

What’s more, the recent selloff pushed N below the 200-day moving average. This key technical support zone is often a line in the sand for red hot growth stocks like N. And now that N is below this level, the uptrend fueled by bullish momentum has been broken.

I think we could see the stock price get cut in half as investors bail out of risky growth stocks with no history of generating profits.

Let’s grab put options on N now to profit as the air is let out of this bubble!

Trade Details:

Underlying Stock Symbol:	N
Current Bid-Ask Price:	$1.30 – $2.15
Option “Buy Up To” Price:	$2.30
Break-Even On Stock At Expiration:	$22.70
Maximum Risk Per Contract:	$230

Exit Strategy:

N is trading at $27.61 per share. Resistance levels will be at $31 and again at $35. Remember, we want this stock to move lower. Support levels will be at $25 and $20. Conservative investors should look to exit at the first support or resistance level. Aggressive investors may want to hold for a bigger move.

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