Microsoft (MSFT) and Google (GOOG) are the two highest-conviction holdings among Morningstar’s Ultimate Stock Pickers. Both tech companies are owned by 16 of the 25 funds in Morningstar’s elite lineup of standout managers.
While Apple (AAPL) didn’t crack the Top 10 holdings of the ultimate stockpickers, it did show up as one of the Top 10 buys in the second quarter. Five managers added to their stakes. Neither Google nor Microsoft made it onto the top 10 list in terms of second quarter buys. (For the record, National Oilwell Varco (NOV) and Wells Fargo (WFC) were the two biggest high-conviction buys among the stock pickers in the latest roundup.)
In fact a sizable minority of the ultimate stockpickers were trimming their Microsoft positions in the second quarter. With 7 of the 25 funds reporting lower Microsoft positions in the second quarter Microsoft pulled off the interesting feat of being the highest conviction holding, but that conviction was waning a bit.
It’s important to remember that as of late June, Microsoft was still riding high after reporting way better than expected first quarter results in mid April:
NASDAQ:MSFT data by YCharts
So some of that selling was probably a bit of profit taking, as the stock price seemed to get ahead of the story; Microsoft’s PE ratio jumped from sub 15 in early April to above 18 in mid June.
It will be interesting to see what next quarter’s ultimate stockpickers report shows for Microsoft. With a disappointing second quarter earnings report, the pressured announcement of CEO Steve Ballmer’s resignation, word that an activist hedge fund has wrangled a seat on the board, and the controversial $7.2 billion acquisition of Nokia’s phone business, let’s just say Microsoft post June 30th is looking a bit different than it was pre-June 30th.
A 14% price decline since the second quarter earnings report has given back a chunk of the earlier returns from this year. But what’s maybe lost in all the recent turmoil is that year-to-date Microsoft’s stock price gain is still slightly ahead of the market average, in what has been a strong year.
Moreover, if you add in Microsoft’s plump dividend payout, Microsoft’s total return has delivered a strong -- if messy -- total return.
With the recent leg down since mid July, Microsoft’s PE valuations have sunk back to well below the market average of around 15.
If the ultimate stock pickers are sour on the all the impending change, that once-again cheap valuation won’t stoke more buying. But as ultimate stockpicker Steve Romick, manager of FPA Crescent pointed out in his second quarter shareholder letter, Microsoft along with Oracle (ORCL) and Cisco Systems (CSCO) still delivers above-average earnings per share growth and return on equity.
Meanwhile, Microsoft continues to trade at a much lower valuation. Romick pointed to enterprise value/EBIT:
And it’s not as if the ultimate stockpickers are shy about buying messy tech stories. In addition to Apple showing up as one of the top 10 buys during the latest roundup, Intel (INTC) also made the buy list.
Carla Fried, a senior contributing editor at ycharts.com, has covered investing for more than 25 years. Her work appears in The New York Times, Bloomberg.com and Money Magazine. She can be reached at firstname.lastname@example.org. Read the RIABiz profile of YCharts. You can also request a demonstration of YCharts Platinum.
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