I can understand how a lot of investors feel market sentiment is a fickle beast. The wisdom of crowds, whether in equities or politics, does not seem at all logical at times. However, as my late father used to say, "Life is like a pendulum. It swings too far to the left, it swings too far to the right, but eventually it gets back to the middle where it belongs."
This thought occurred to me as I watched two diametrically opposite reactions to the earnings reports from Apple (AAPL) and Microsoft (MSFT) this week. Both slightly missed on the revenue side, but beat a bit on the earnings side. Both are trading at about the same P/E valuation after subtracting cash. However, market reactions could not have been more different. Shares of Apple are down more than 10% since earnings hit, while Microsoft is up 1% after being initially down on the release of the earnings report.
I first called this inflection point around sentiment between these two stocks at the end of October. However, I did not follow my own advice for long and soon sold some puts on Apple after it fell further. Mitigation through options have left my cost basis just under $540 a share on Apple, but sitting on a nearly $100 unrealized loss still hurts -- if only temporarily (one hopes). I will add more as soon as I think the stock establishes some sort of support level.
It helps me to understand the current sentiment on these tech juggernauts by comparing them to married couples who have been together for a decade. Mrs. Apple has had a good run as her husband has consistently outperformed her expectations even during difficult times -- until recently. Unfortunately, in the last few months he has been coming home from work late without calling first, forgot their anniversary for the first time in their marriage -- needless to say, Mr. Apple is in the doghouse until his behavior confirms he is still the man he was before.
On the other hand, Mrs. Microsoft has had a steady, if unspectacular marriage. There have minor disappointments here and there and the yearly vacations to visit his mother in Omaha during the holidays are trying, but he is a good provider, makes the mortgage payments, and is a loyal husband. Over the years she has learned to keep her expectations low and forgive the little stuff.
I will leave the analogy at this point to concentrate on Microsoft's earnings, as they do have kernels of hope for long-term investors and it a good selection for the value investor. I have written about Apple recently and the stock has been discussed ad nauseum this week; suffice it to say I am holding the shares and hoping it gets out of the doghouse soon.
Here are some positives from Microsoft's earnings report:
- As mentioned, the company did beat earnings by a penny a share.
- It quadrupled the number of smartphones its operating systems were sold on.
- The company's CFO stated the company continues to "see solid demand for our business products and services, with particularly strong growth in multiyear licensing." Multiyear licensing grew 17% year over year.
- Its sales in its servers and tools rose almost 9% year over year to above $5 billion.
Here are four reasons why Microsoft is a good value at $28 a share:
- The stock yields 3.3% and it has doubled its dividend payouts over the last five years.
- The company has a AAA-credit rating and some $60 billion in cash and marketable securities on the books.
- After subtracting cash and equivalents, Microsoft is selling at less than seven times forward earnings.
- Given its dividend yield, the stock has a reasonable five-year projected PEG (1.17). It should also benefit significantly as more handset and computer makers roll out new products that utilize its new operating systems.