Forget about the Royal Wedding, there’s something far more important for you to see right now.
This week I’ve been reporting some of the ideas that came out of my strategy day with Simon Caufield, editor of True Value.
And now I want to get down to the nitty-gritty.
It’s all well and good trumpeting platitudes like always buy ugly and never lose money but it’s quite another thing when it comes to putting your money down. I’m talking about sticking your neck on the line and actually buying a stock.
I assure you, buying ugly isn’t easy – being a contrarian investor never is.
Simon and I are going to stick our collective necks on the line today. You see, I’ve read a stock tip Simon made recently and I’m right behind it. I think it’s a great idea… so I’m recommending you buy it too…
It’s wildly misunderstood by most investors. But it’s a great stock.
And here’s the thing….
I reckon that about half the Right Side readers will lose interest the minute they see the stock we’re going for – that’s how ugly it is!
But whatever you do, fight that reaction if you have it! Stay with me. I’ll make it worth your while…
Here goes…
Why you should BUY Microsoft today
Keep reading…
That’s one ugly looking stock. Many investors just don’t consider Microsoft (MSFT) a serious investment any more. And that’s great – it leaves the rest of us a cracking opportunity.
It’s blatantly obvious that Microsoft is not a great company!
But if you remember Thursdays article, you’ll l recall that neither I, nor Simon are fond of ‘great companies’. It’s great stocks we want.
I agree with Simon that MSFT is still a great stock. I’ll show you why.
Much maligned and misunderstood
When I look at what management have done to this once great company, even I can get despondent. But then Simon pipes up ‘Isn’t it great!’
We both chuckle about how badly this firm has been run.
MSFT is basically a misfit. And that’s all down to a fundamental misconception.
What everybody sees is what Simon calls the ‘consumer business’ – a business that’s being ripped apart by the likes of Google, Apple, Nintendo and Sony.
Google has put paid to any notion that Microsoft’s MSN search engine is going to be a serious contender.
All manner of web browsers have moved into a market previously dominated by MSFT’s explorer.
Apple’s iPhone came like a bolt out of the blue and relegated MSFT’s smartphone platform into a poor second place. Then there’s the brand new tablet market. What an innovation! Where’s that going to leave the humble PC?
And for a bit more doom, just look at the X-box. Sony and Nintendo are undisputed market leaders in gaming consoles.
Why on earth does MSFT waste its time on these ridiculous frolics? They squander shareholder cash and make themselves look like world-class muppets.
But if you can see through this side of the business and ignore the frivolity, you’ll be in the minority – and that’s a great place to be for stock picking. The way I see it, MSFT’s consumer facing business is a kind of smokescreen to keep investors away. It keeps them from looking at what MSFT really does. Simon’s recommendation on the stock helped me to understand that.
And he revealed some more really interesting points that convinced me that this is a great stock to buy right now…
MSFT’s real business is what makes this a great value stock
Here’s the point that is lost on most investors:
84% of revenue and 100% of profits come from the core Windows and Office software business.
All the rest of Microsoft’s efforts are just junk. They make losses and are only pursued because MSFT feels it should be making efforts to diversify. Undoubtedly this is because dumb analysts write reports that say the business is too focused on core operations.
But that’s a ridiculous argument. Surely it’s up to investors to diversify. If you want to buy Apple, Nintendo, or Sony, then go ahead and do so. Why on earth should MSFT chuck away its profits on things that it’s no good at?
Well, that’s what they do. Let’s leave it to one side for the moment and look at what the ‘real’ business is worth…
Source: Bloomberg
As at 28 April, MSFT shares currently trade around $26.50 and make around $3 in earnings a year, putting them on a p/e of less than 9 times.
And you know me – as I’ve written in The Right Side more than once, if it’s less than ten, it’s worth looking at again…
And things just get better when you do. MSFT has no debt and about $5 in cash for every share. They write off R&D as it’s spent, even though they could capitalise it way off into the future. That means future profits should look better than for most tech companies in its class.
And if you think that their core profitable business is in decline, then think again.
First-quarter profits were up 50% on revenue up 25%. Now that’s quite something – just imagine what would happen if they dumped the loss-making consumer side of the business!
They converted $16bn in revenue into $5.5bn of profit (and that’s just in one quarter!)
This is a great business! And despite tablets and smartphone proliferation, PC use is still growing. And that means Windows and Office sales are still growing.
As Simon Caufield says, ‘Nobody’s going to invest the billions it would take to take on MSFT’ – they’ve got a near-on monopoly here.
You could make a 50% gain if you buy today
Simon has crunched the numbers. He’s valued the business at $39 a share. He just can’t see how it’s worth less than that. Those figures stack up to me.
That’s a potential gain of 50% from here.
Simon explained to me exactly how he arrived at that figure. He’s got his own (and very personal) valuation technique. And I really like it. He’s a die-hard value investor in the mould of Benjamin Graham – the Godfather of value investing.
So go ahead: Buy Microsoft today. It may not look like a great company. But I’m right there with Simon, it’s certainly a great stock, worth a lot more than the market’s valuing it at right now.
Of course, there are risks. Simon made a very valid point in his analysis. I couldn’t put it better myself. Here’s what he said: “The analysts’ criticisms are partly valid. And their impact may well grow over time, if Microsoft can’t get its act together in consumer businesses.”
So this won’t be a stock to hold forever. But right now, it looks very undervalued. And that makes it a BUY.
Share price: $26.50
Market Cap: $222bn
52 Week High/Low: $31.43/$22.73
Microsoft five year performance: 2006 +14.19%| 2007 +19.22%| 2008 -45.39%| 2009 +56.79%| 2010 -8.43% | 2011 -5.97%
I hope I’ve been able to get across some useful ideas that came out of my strategy day with Simon.
As I said, Simon really has been generous in putting down his thoughts on valuation into a simple report that’s available for Right Side readers. And it’s absolutely free, too!
Enjoy the long weekend and do yourself a favour. Download Simon’s valuation report – I don’t know how long it’ll be available, so download it now and read it when you’ve got a few moments to spare. It won’t take long.
And keep reading The Right Side. I’ve got more ideas coming in the next few days…
Important Information
Your capital is at risk when you invest in shares – you can lose some or all of your money, so never risk more than you can afford to lose. Always seek personal advice if you are unsure about the suitability of any investment. Past performance and forecasts are not reliable indicators of future results. Commissions, fees and other charges can reduce returns from investments. Profits from share dealing are a form of income and subject to taxation. Tax treatment depends on individual circumstances and may be subject to change in the future. Please note that there will be no follow up to recommendations in The Right Side.
Managing Editor: Frank Hemsley. The Right Side is issued by MoneyWeek Ltd.
MoneyWeek Ltd is authorised and regulated by the Financial Services Authority. FSA No 509798.
https://www.fsa.gov.uk/register/home.do