I have to say, I never understood the concept.  A research desk has never covered a particular company to this point.  The technology guy decides he is going to do a little research on cloud computing or virtualization software.  The obvious names to cover are VMWare (VMW), Salesforce.com (CRM), and then at some point the digging gets all the way down to this little $900 million dollar company called Netsuite Inc. (N).

Netsuite is small enough to be inconsequential to a company like Goldman.  After all, if three of Goldman’s biggest clients took a 1% position in the stock,  there would be no float left for anyone.  So why even bother looking at this stock?  And then the end result is even more illogical.  Goldman initiates the company at “neutral.”

“After digging deep into this opportunity, analyzing the cash-flow, balance sheet, business opportunities and threats, management strengths and weaknesses – we recommend you do NOTHING“

Oh, gee – thanks!  What the heck are traders supposed to do with that?  Why even publish a research report with no findings?

To be fair, I haven’t actually read the report.  My Goldman guy is out to lunch (literally AND figuratively).  Maybe it is full of Wall Street wisdom explaining what investors should be looking for and giving action points for the months ahead.  But I’ve read enough reports like this to know what’s going on.  The brokerage firm is likely giving a stealth (or not-so-stealth) sell signal to the market based on high valuation, competitive risks, and the recently soft revenue numbers.

We all know there’s an unspoken rule to never issue a “sell” recommendation on companies with potential investment banking business.  Netsuite could easily need help selling additional stock at some point in the future.  Management likely holds restricted stock in a Goldman account for crying out loud.  There’s no need to piss off the guys who have the ability to pay generous fees by issuing a sell recommendation.

But at the same time, Goldman’s hedge fund clients know exactly what “neutral” means.  It means “get the heck outta Dodge!”  Of course there is still uncertainty in the name – it could trade higher if speculators step back into the drivers seat.  VMWare could agree to buy little Netsuite as a charity acquisition or to increase their product line.

But with Netsuite trading at 180 times (yeah, you read that right) 2010 expected earnings and 80 times 2011 expectations, I’m betting the expectations are already fully accounting for the positive outcomes.  Goldman is too.

So today after seeing the relative flight away from speculative issues, I’m putting a small short on Netsuite – risking 20 basis points and watching for a breakdown in the industry.  If successful, I’ll likely add horizontal exposure, looking for breaks in competitors and other companies with similar technology, optimism, and inflated prices.

One important note: VMW announces earnings after the close and that will most definitely have an effect on the industry.  So I’m keeping my exposure light, but betting that the good news is already baked in and that the new market dynamic will lead to quality – not speculation.

Just call me less than neutral on Netsuite