Microsoft's stock puts the "trap" in "value-trap." The company still has a virtual monopoly with Office and a complete monopoly on the slow-growth PC OS (operating system) space. The two businesses are incredibly high-margin, bringing home some 60% gross margins. OS and Office are why Microsoft is sitting on nearly $50 billion in cash despite the company's horrifying history of terrible and expensive acquisitions and product initiatives. Zune anyone?
What makes Mr. Softie a value trap is the way the stock looks cheap on paper. Microsoft (MSFT) trades at 10x trailing earnings and is laden with that aforementioned cash which it should seemingly be able to put to work in some shareholder friendly way. MSFT stock is also hated by guys like me, always a contrarian signal to buy a stock for some people.
Folks buy stocks like Microsoft almost to spite traders. When I gently, or bombastically, try to guide people away from the stock, I invariably get a response to the effect of "I'm a long term investor, not a 'trader' like you." It's not uncommon for folks to cite Warren Buffett as a role model for their investment style. Of course this ignores the fact that Buffett and Bill Gates are long time friends, yet Buffett has never owned a share of Bill's company, but my saying so would be mean-spirited.
Because I can do little more than scoff at MSFT stock, Breakout welcomed Eugene Profit, the founder of Profit Investment Management and a Microsoft shareholder. While conceding that a company trading at both 10x trailing and forward earnings may be something less than a growth business, Mr. Profit was kind enough to run through some possible catalysts which could potentially, and at long last, break Microsoft out of its decade-plus trading range. Here's what to watch for:Read More »from Microsoft Earnings: What to Watch