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Is Microsoft (MSFT) A Smart Long-Term Buy?

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Alger, an investment management firm, published its “Alger Spectra Fund” third quarter 2021 investor letter – a copy of which can be downloaded here. During the third quarter of 2021, the largest portfolio sector weightings were Information Technology and Consumer Discretionary. The Health Care sector was the largest sector overweight and Consumer Staples was the largest sector underweight. You can take a look at the fund’s top 5 holdings to have an idea about their best picks for 2021.

Alger, in its Q3 2021 investor letter, mentioned Microsoft Corporation (NASDAQ: MSFT) and discussed its stance on the firm. Microsoft Corporation is a Redmond, Washington-based technology company with a $2.3 trillion market capitalization. MSFT delivered a 39.00% return since the beginning of the year, while its 12-month returns are up by 42.98%. The stock closed at $309.16 per share on October 22, 2021.

Here is what Alger has to say about Microsoft Corporation in its Q3 2021 investor letter:

"Microsoft Corporation was among the top contributors to performance during the third quarter. Microsoft is a Positive Dynamic Change beneficiary of corporate America’s transformative digitization. Microsoft's enterprise cloud product, Azure, is rapidly growing and accruing market share. Microsoft reported that Azure grew 51% in the second quarter. This high unit volume growth is a primary driver of the company's higher share price, but the company’s strong operating execution has enabled margin expansion that has also helped to increase forward earnings estimates. We believe Microsoft's subscription-based software offerings and cloud computing services have a durable growth profile because they enhance customers’ growth initiatives and help them to diminish costs. Additionally, investors appreciate Microsoft's strong free cash flow generation and its return of cash to shareholders in the form of dividends and share repurchases."

Image by Tawanda Razika from Pixabay

Based on our calculations, Microsoft Corporation (NASDAQ: MSFT) ranks 3rd in our list of the 30 Most Popular Stocks Among Hedge Funds. MSFT was in 238 hedge fund portfolios at the end of the first half of 2021, compared to 251 funds in the previous quarter. Microsoft Corporation (NASDAQ: MSFT) delivered a 6.73% return in the past 3 months.

Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. Our research has shown that hedge funds’ small-cap stock picks managed to beat the market by double digits annually between 1999 and 2016, but the margin of outperformance has been declining in recent years. Nevertheless, we were still able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by 115 percentage points since March 2017 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that underperformed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of underperformance of these stocks has been increasing in recent years. Investors who are long the market and short these stocks would have returned more than 27% annually between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter.

At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, lithium mining is one of the fastest-growing industries right now, so we are checking out stock pitches like this emerging lithium stock. We go through lists like the 10 best EV stocks to pick the next Tesla that will deliver a 10x return. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our homepage.

Disclosure: None. This article is originally published at Insider Monkey.