Jack Hough
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Microsoft shareholders should be steamed

Posted Feb 1st 2008 2:55PM by Jack Hough (RSS feed)
Filed under: Google (GOOG), Microsoft (MSFT), Yahoo! (YHOO)

Microsoft (NASDAQ: MSFT) is forgetting what has worked for it in recent years: lavishing cash on its shareholders.

The stock lost more than half its value between December 1999 and summer 2006, but has since easily outperformed the broad market. That's partly because of brisk sales. PC unit shipments have increased 10% a year for three years. Microsoft has a fresh operating system on the shelves in Vista, barely a year old. And while Apple's (NASDAQ: AAPL) clever "I'm a Mac" commercials have won many of us over, Microsoft still has a 90% share of the market. Also, the company has done a much better job of late protecting against overseas piracy. So sales for its fiscal year ending June 30 are expected to swell 18%.

But much of the stock's success is owed to a plan announced in summer 2004. It called for stuffing $75 billion in cash into the pockets of shareholders through dividends (including a plump $3 a share paid one time) and share repurchases. Repurchases, of course, increase earnings per share and tend to make remaining shares more valuable.

Apart from the rekindled growth, the two main things to like about Microsoft today are that it still produces heaps of cash and that its stock is still reasonably priced. The company's cash on hand has recently grown to $19 billion or $2 a share. Shares finished trading Thursday at around 18 times trailing earnings, a slight premium to the broad market's 16 times earnings, but one that's warranted considering the growth spurt.

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Are stocks cheap right now?

Posted Jan 18th 2008 2:58PM by Jack Hough (RSS feed)
Filed under: Indices, Getting Started, Bargain Stocks, S and P 500

Large-company stock prices have tumbled 13% in three months. Small-company stocks have done worse. The ratio of share prices to company earnings ("P/E") is the lowest it has been in more than a decade. But is it low enough to make the broad market cheap?

That depends on how you measure. Over the past 135 years, stocks have carried an average P/E of 15.1, based on trailing 12-month earnings. (I'm using data provided on the websites of Yale economist Robert Schiller and Standard & Poor's.) As of the close of trading Thursday, the S&P 500 index, which more or less tracks the stock performance of America's 500 largest companies, had a P/E ratio of 16.6. Viewed like that, stocks look a smidgen pricier than average.

Remove special charges for things like bad loan write-downs from the past year's earnings, and the result is a more alluring P/E of 14.9. Whether that's a fairer number or not is a matter of opinion. But if we were able to apply the same tactic to 135 years of corporate accounting, we'd surely end up with a lower historical P/E, too. That suggests again that stocks are pricier than average, but not worrisomely so.

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Apple (AAPL) shares still a bit pricey

Posted Jan 16th 2008 4:56PM by Jack Hough (RSS feed)
Filed under: Apple Inc (AAPL), Hewlett-Packard (HPQ), Research in Motion (RIMM), iPhone, Stocks to Sell

Apple (NASDAQ: AAPL) finished trading last year at $198 a share. On the first trading day of this year, I recommended in a SmartMoney.com column that shareholders sell. In the two weeks since, the stock has fallen more than 30 points, three times the percentage drop of the broad market.

I realize the following statement makes me a bad person, because Apple is America's most beloved company right now: The stock still seems expensive.

I own an iPhone and I'm thinking about replacing my desktop and laptop with Macs. So I get the appeal. Moreover, I freely admit that no large company in is executing like Apple at the moment. The other day I killed a few minutes watching several of the "I'm a Mac" commercials on Apple's website. What kind of company gets people to go out of their way to view its ads? I needed my first iPhone replaced because the screen cracked. I couldn't say for sure whether it was my fault. Apple replaced it for free, which was nice. But they did so within a day, and provided all the packaging I needed to mail the old phone back, right down to little tape strips to close the box and a paperclip for popping open the phone's card slot. That was almost eerie.

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Five reasons to buy Pfizer (PFE)

Posted Jan 11th 2008 4:31PM by Jack Hough (RSS feed)
Filed under: Pfizer (PFE), Bargain Stocks, Stocks to Buy

Pfizer logo Pfizer (NYSE: PFE) shares are slightly cheaper now than a decade ago, even though the company's per-share profits are more than 70% higher. The stock is unloved for a reason: Pfizer, like many drug makers at the moment, is finding it difficult to develop new medicines.

The company's biggest seller, Lipitor for lowering cholesterol, faces the loss of patent protection in 2011. Two of Pfizer's past hits, Zoloft for depression and Norvasc for high blood pressure, are already losing sales to generic competitors. Last year, a promising inhaled insulin flopped in the marketplace. The year before, a drug that raises levels of so-called good cholesterol proved too risky, and research was halted.

And Pfizer isn't alone. Last year, the Food and Drug Administration approved just 16 first-of-its-kind drugs, a 20-year low.

All that said, I think the stock warrants a purchase at today's price for five reasons.

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