Microsoft (MSFT) has become one of the single biggest drivers for Nasdaq gains over the last two years. The stock has nearly doubled since the start of 2013, up about 86%, or put another way the stock has gained about $175 billion of its current $408 billion market cap, making it the second largest stock in the S&P 500 and the Nasdaq 100 behind Apple (AAPL) in both.
I get AAPL’s run. There is only one company like it. But MSFT, a perennial also-ran on the innovation front, I just don’t get. OK, it has an amazing balance sheet, $65 billion in cash, net of their $23 billion in debt, pay a dividend that yields 2.5%, an existing $40 billion share repurchase and massive free cash generation. But with the stock at $50, trading at 14 year highs, I suspect that a lot of the excitement about their new CEO and the transition towards cloud products is reflected in the stock at current levels. The Wall Street analyst community seems a tad torn with 22 Buy ratings, 20 Holds and 2 sells with an average 12 month price target just below where the stock is trading at $49.31. One thing that stands out to me is what to do with all that cash? Will the new CEO make some sort of transformative acquisition that would likely weigh on the shares compared to the potential for them to pay a massive special dividend, as they did a decade ago to the tune of $32 billion?
I obviously have no idea what they will do, but the stock’s 18% gains from the October lows, representing more than half of the years 32% gains seems just a tad overzealous to me for a company who’s PE is approaching 7 year highs:
MSFT trading at 17.5x fiscal 2015 earnings (current) that are only expected to grow 5% (2% as they report GAAP) is no longer the high yielding value darling it was a year ago with nearly a 5% yield trading below a market multiple.
From a technical standpoint, the chart looks just a tad overbought having, in just a month, gone from the low end of the uptrend channel to the high end:
Options prices have picked up a bit in the last couple days, but still well below recent highs:
So we are exploring entry points and debating trade strucutres.
As of now we want to own February premium that catches their fiscal Q2 earnings report in the last week of January. The trade we are considering is the Feb 49/44 put spread for 1.50, but we are also considering calendars, looking to sell a downisde put over the holidays, to help finance a longer dated put or spread.
We will be back this week with a trade, but wanted to do a but more work on the right structure.