Name That Trade – $MSFT’s Broken Windows

by CC September 3, 2015 11:04 am • Commentary

On CNBC’s Fast Money last night (watch here) the panel talked Dow stocks and debated which were cheap and expensive to their historically averages.  One name that screens expensive is MSFT. A month ago, Dan highlighted MSFT’s premium valuation in a trade post (read here). The stock was $46.63 at the time:

I think its safe to say that the stock trading at 17.4x fiscal 2016 earnings (ex $65 billion in net cash below a market multiple), it highest multiple since 2009, already reflects a most if not all of this optimism:

MSFT 7 year chart of P/E from Bloomberg


In that post, we identified a trading range of $4o to $50 over the past year. That range found buyers on the downside and sellers on the upside with the mid point acting as a magnet in neutral market periods.  The 2 year chart below shows this range. But note the the lower highs and lower lows since breaking the uptrend:

MSFT 2yr chart from Bloomberg
MSFT 2yr chart from Bloomberg

That looks like a double top and with a downtrend now in place, $45 is a decent short biased entry spot. That’s techincals, the fundamental story is simple. The PC market seems screwed and stocks like MSFT probably catch up to other PC supply chain stocks on the downside.

Options prices in MSFT are elevated alongside the broad market. 30 day at the money implied volatility is 27.6%, well above the one year average near 20%:

[caption id="attachment_56609" align="aligncenter" width="600"]MSFT 1yr chart of 30 day at the money IV from Bloomberg MSFT 1yr chart of 30 day at the money IV from Bloomberg[/caption]

We’re going to try to be patient on this one and wait for an entry closer to 45 on the short side.. At that point the are to target for a move back towards the lower end of the range. Right now the October 45/41/37 put fly is about 1.05 and about 18 deltas. Up near 45 it will likely be about 80 or 85 cents and we like that risk reward set-up. Stay tuned.