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Microsoft Corporation (MSFT) Stock Is Value You Can Bank On

InvestorPlace - Stock Market News, Stock Advice & Trading Tips

Microsoft Corporation’s (NASDAQ:MSFT) fiscal fourth-quarter earnings, reported Thursday after the bell, confirmed what had already been in progress. The company is on rails under the new management, and MSFT stock will be just fine in the long-run.

Microsoft Corporation (MSFT) Stock Is Value You Can Bank On
Microsoft Corporation (MSFT) Stock Is Value You Can Bank On

Source: Johannes Marliem Via Flickr

Coming into Thursday, however, the enthusiasm was high, and shares rallied on the earnings headline in after-hours trading. Friday morning, however, it’s giving it all back.

Was the upside already priced in? Was it too late to go wrong?

No. And we can go long MSFT stock with no money out of pocket, and with plenty of room for error.

But first, we have to look for Microsoft’s value. The company delivered excellent results against already elevated expectations. Yet Microsoft shares trade at a trailing price-to-earnings ratio of 35, which is high, but still reasonable versus the industry. Microsoft is now No. 2 — behind Amazon.com, Inc. (NASDAQ:AMZN) — in web services, but its P/E is about 9 times less than that of Amazon. It’s also a fraction of the valuation for Salesforce.com, Inc. (NYSE:CRM), which popularized the cloud a few years ago.

And to really drive the point home, Microsoft’s P/E isn’t much higher than that of General Electric Company (NYSE:GE), which is by many measures a floundering company that has low growth prospects.

So while MSFT stock is trading near all-time highs, there’s no doubt that it has value against its peers and in absolute terms. Microsoft is an exciting mega-cap tech company that, once upon a time, traders considered dead money, but under new management has made it into the new normal.

As long as the current macro remains the same, I want to remain bullish on Microsoft stock. To do that, I’m going to rinse-and-repeat a prior setup, but with a twist.

I usually like to sell downside risk against fears. For that, my No. 1 ingredient is value, but after such a big run, Microsoft has made it difficult enough to find a near-enough value level with enough premium to sell. But it’s not impossible.

I’ll step out in time and sell my puts into 2018. I am confident that management will maintain most of the momentum for another year or more. But in addition, I will short MSFT for the nearer-term. Consider this temporary insurance just in case the stock has gone too far too fast.

Since I am not required to hold my trades through their expiration, I can sell back the short position at any time I am convinced Microsoft’s upward trajectory is intact.

MSFT stock chart
MSFT stock chart


Click to Enlarge 

Why don’t I buy MSFT stock outright? I prefer profiting from my thesis without spending a dime. I prefer selling puts for income, which is a proven strategy. Case in point is this recent trade that delivered easy profits even since late June.

When I have a buffer between me and potential losses, my conviction is stronger, so I am less likely to hit my stop-losses.

How to Trade MSFT Stock Here

The bullish long term bet: Sell the Feb 2018 $62.5 naked put and collect $1.80 to open. Here we have a 85% theoretical chance of success, and with a 15% price buffer, I’m confident that we’ll be able to manage risk against short-term price gyrations.

If you want to mitigate the risk of naked puts, you can sell a credit put spread on MSFT stock instead. The worst-case scenario is much smaller, but it can still deliver great yield. I mentioned earlier that we’ll be temporarily hedging bullish risk. To do that, we will “rent” a debit put spread to hold until we’re comfortable that the bulls are completely in charge (even at all-time highs).

The temporary short term hedge: Buy the Aug $72.50/$70 put spread for 65 cents. If the stock falls through our spread, we will profit, thereby offsetting any paper losses that the first trade suffers.

Investing is risky business, so never bet more than you are willing to lose.

Learn options as easy as 1-2-3 here. Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @racernic and stocktwits at @racernic.

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