I'm not answering why the stock will rise, because I also don't agree with speculators valuing the stock at more than $30 when it hasn't broken through that barrier in the past four years. Of course, if all of Microsoft's initiatives bear fruit, the market may get excited and push its price north of $30. But that's merely speculation!
Turnaround is fair play, so I'm wondering why Microsoft should be at $19? Did I miss anything? The market's overreaction to Microsoft's $2 billion investment plans to grow and protect its business in April presented me with an opportunity to play contrarian during the low low $20s. You're probably wondering how I can justify the overreaction, right?
Why Was It Oversold?
Rather than pretending that everything is status quo, Microsoft comes out swinging as only a cash-rich goaliath can. Long-term shareholders were happy that Microsoft was not taking the threat of Google lightly, but the market evaporated more than 20% of the company's market cap in only 6 weeks! I treated the announcement as neutral, since nothing can be known of whether Micrsoft's re-investment will succeed or fail. But I did know that the $2 billion price tag represented only approximately 6% of Microsoft's cash reserve. Do you still think it wasn't an overreaction?
The Empire Buys Back?
Share buy backs are a fleeting fancy for investors. They make for good speculation until their 15 minutes are up. Its impact only compared relative to its stock price du jour. For example, how many investors still remember that Microsoft announced a $30 billion buyback on July 21, 2004? Let's face it, share buy backs are no big deal! But the recent shareholder reluctance to tender shares has inspired thoughts that management thinks the stock is worth less and needs support.
My main observation during buy back announcements is whether management acts rationally in its use of cash; of which Microsoft has too much. I often cringe when boards buy back shares at or near their highest price. I'd prefer seeing management make smart use of capital by selectively buying shares back at its lowest points. Why can't boards look to buy a dollar for 50 cents just like investors? Should share buybacks be viewed as a corporate admission of what the shares are worth or as an investment opportunity?
In Need of A Breakthrough?
This question is a rally point for both Microsoft speculators and critics. But I wonder when was the last time Altria innovated a new product or had a business breakthrough? My point is that cash-cow companies that continue to enjoy extremely high cash generation remain "innocent until proven gulity". The burden of proof lies not on how growth is slowing but whether cash generation is eroding. In Microsoft's case, the jury's still very much out on deliberation with reasonable doubt.
How many companies can throw out a billion dollar in free cash every month while enjoying high operating margins? Microsoft's fundamentals is sufficient enough to support its stock price, not the buy-back games that management plays. In fact, at its current 15x forward P/E, Microsoft may actually be strangely, fairly valued.
Why Did I Buy Microsoft?
I totally agree with Sheldon that no company has a must-own stock. Mr. Market's manic-depressive tendencies provided a good opportunity for me to own a cash-generating machine. My own valuation placed Microsoft at fair value above $24 but below $30. Based on that consideration, it was a worthwhile pick-up at my purchase price. I find it interesting that any analyst can pinpoint exactly what a stock is worth, so I opt'd for a range instead. It also happened to be the range where MSFT has been languishing for the past four years. From an investor-owner perspective, I'm also happy to hear that Microsoft is willing to defend its title as king-of-the-hill.
In the near future, I hope to break down Micrsoft by its business segments in detail to give a more complete response to Sheldon; time-permitting of course. But I'm wondering if there's anything you'd like to see in that follow-up? Feel free to share your comments and suggestions below!
[Disclosure: I own MSFT shares as of 8-25-06]
Vince Chan is an InvestorGeek, and blogs about investment / financial media at Investorial.com.
Rather than pretending that everything is status quo, Microsoft comes out swinging as only a cash-rich goaliath can. Long-term shareholders were happy that Microsoft was not taking the threat of Google lightly, but the market evaporated more than 20% of the company's market cap in only 6 weeks! I treated the announcement as neutral, since nothing can be known of whether Micrsoft's re-investment will succeed or fail. But I did know that the $2 billion price tag represented only approximately 6% of Microsoft's cash reserve. Do you still think it wasn't an overreaction?
The Empire Buys Back?
Share buy backs are a fleeting fancy for investors. They make for good speculation until their 15 minutes are up. Its impact only compared relative to its stock price du jour. For example, how many investors still remember that Microsoft announced a $30 billion buyback on July 21, 2004? Let's face it, share buy backs are no big deal! But the recent shareholder reluctance to tender shares has inspired thoughts that management thinks the stock is worth less and needs support.
My main observation during buy back announcements is whether management acts rationally in its use of cash; of which Microsoft has too much. I often cringe when boards buy back shares at or near their highest price. I'd prefer seeing management make smart use of capital by selectively buying shares back at its lowest points. Why can't boards look to buy a dollar for 50 cents just like investors? Should share buybacks be viewed as a corporate admission of what the shares are worth or as an investment opportunity?
In Need of A Breakthrough?
This question is a rally point for both Microsoft speculators and critics. But I wonder when was the last time Altria innovated a new product or had a business breakthrough? My point is that cash-cow companies that continue to enjoy extremely high cash generation remain "innocent until proven gulity". The burden of proof lies not on how growth is slowing but whether cash generation is eroding. In Microsoft's case, the jury's still very much out on deliberation with reasonable doubt.
How many companies can throw out a billion dollar in free cash every month while enjoying high operating margins? Microsoft's fundamentals is sufficient enough to support its stock price, not the buy-back games that management plays. In fact, at its current 15x forward P/E, Microsoft may actually be strangely, fairly valued.
Why Did I Buy Microsoft?
I totally agree with Sheldon that no company has a must-own stock. Mr. Market's manic-depressive tendencies provided a good opportunity for me to own a cash-generating machine. My own valuation placed Microsoft at fair value above $24 but below $30. Based on that consideration, it was a worthwhile pick-up at my purchase price. I find it interesting that any analyst can pinpoint exactly what a stock is worth, so I opt'd for a range instead. It also happened to be the range where MSFT has been languishing for the past four years. From an investor-owner perspective, I'm also happy to hear that Microsoft is willing to defend its title as king-of-the-hill.
In the near future, I hope to break down Micrsoft by its business segments in detail to give a more complete response to Sheldon; time-permitting of course. But I'm wondering if there's anything you'd like to see in that follow-up? Feel free to share your comments and suggestions below!
[Disclosure: I own MSFT shares as of 8-25-06]
Vince Chan is an InvestorGeek, and blogs about investment / financial media at Investorial.com.
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Reader Comments (Page 1 of 1)
8-25-2006 @ 10:31AM
Sheldon said...
Let me be the first to say welcome aboard Vince.
8-25-2006 @ 7:31PM
Vince said...
Thanks Sheldon, I hope to do my part in blogging and drawing out some good discussions like you did with the eBay stories.
8-26-2006 @ 10:14AM
Mr. noitall said...
Welcome to Bloggingstocks Vince,
Good article. Do you really think the one's who are valuing MSFT at more that $30 are speculators that are "speculating"? My guess is that most of them consider themselves investors who believe that you should "buy & hold" stock in good companies. If you re-read some of the comments from Brian's blog, most sound like this...( I will not sell!!, I'm in for the long haul, I'll keep it as long as it takes, 10 years from now...). I've commented in the past that I believe the "buy & hold" theory is seriously flawed. What's your opinion? Based on your analysis of MSFT, I guess you either don't think it qualifies as a buy & hold type of stock, or you don't think the "buy & hold" theory is valid.
8-26-2006 @ 11:32AM
Vince said...
Noitall,
Thanks for the welcome! I've added a link to Brian's BloggingStocks post (that you mentioned) to clarify where I'm finding these "speculating" comments.
My observation was that the majority of those comments didn't simply say "I will not sell" but they said "I will not sell for $xx.xx". Meaning they're more than happy to let it go if in the next few months, it reaches a level close to that. I often blog about how information in the media can be dangerous if misinterpreted. For somebody researching on whether to buy Microsoft, they may be emotionally swayed by such a statement thinking that there's a huge upside when nothing has been justified about it. The company may head higher, but if that hope is only based on a "gut feeling", then it's merely investing truthiness -- something I've blogged about.
In regards to "buy and hold", Microsoft isn't a big enough dividend player right now to reward me to wait out the tough times. But there's always a special dividend around the corner! And they definitely have the ability to raise that dividend. However, those statements are still speculation.
But what I really follow is the philosophy of "buy when it's right, sell when it's right". And it has a lot to do with the "value vs. price" relationship. I can buy or sell when the market is severely out-of-sync with the value of the company, too lowly or highly valuing it. For example, the gentleman whose MSFT cost basis was under $4 would have better off selling during the tech bubble than have his capital trapped waiting for it to rise back to those levels. What if I had that situation, and sold "when it's right" and put that money into an interest bearing CD? How far (and long) would it have to take MSFT to rise to reach break-even with that alternative?
It's easier for me to summarize a Motley Fool email I've read in the past.
- Hold when the price changes (and not value)
- Hold when temporary bad news comes
- Sell when the stock's way overvalued
- Sell when the business changes (for the worse)
- Sell when there's a better stock to buy
Hope that helps you understand where I stand on "buy and hold"
8-26-2006 @ 2:34PM
Mr. noitall said...
Thanks for your repsonse & explaining your investing philosophy, Vince. I think your approach towards investing is better than most of the people out there. I hope we see some more articles from you soon, here on blogging stocks.
9-03-2006 @ 8:45PM
JOHN HEMPFLING said...
it is a strong buy . and i did and is moving up GOOD BUY