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In the January issue of Downside Protection Report, we highlight two timely stock picks that meet our strict downside protection criteria while offering strong upside potential. Key excerpts – including editorial commentary and a summary thesis on Microsoft (NASDAQ:MSFT) – follow.

Be careful what you wish for. Until fairly recently, the ancient Chinese proverb, “May you live in interesting times,” sounded pretty good. Who wouldn’t prefer interesting times to the alternative, right? Well, not quite, if the alternative isn’t dull times but times that are a bit too interesting.

Another wish we’ve heard from investors over the years can be paraphrased as follows: I wish I’ll have a chance to buy my favorite stocks at a bargain price! Until recently, this seemed like an ambitious wish, especially for value-oriented investors who didn’t like the idea of paying twenty times earnings or more for wide-moat companies like Disney (NYSE:DIS), McGraw-Hill (MHP), Viacom (NASDAQ:VIA), or Microsoft.

Investors are now getting their wish, perhaps a bit too much so. Many are now frozen in their tracks, waiting for some sort of “uncertainty to lift.” Never mind that when those same investors made their original wish, they acknowledged that whenever their wish was granted, they would almost certainly have to accept some near-term uncertainty in exchange for getting a bargain. One such bargain hiding in plain sight is Microsoft, which we are buying this month.

Microsoft can credibly lay claim to being the world’s best large business. It has a near-monopoly in operating systems, high margins, high returns on capital, a respected global brand, and continued prospects for long-term growth. Since going public in 1986, Microsoft has never been as cheap on a P/E basis, trading at less than ten times forward earnings. This is even more noteworthy when we consider that the headline P/E doesn’t give the company credit for several growth businesses, including MSN.com and Xbox.

Disclaimer: Copyright 2008 by BeyondProxy LLC. BeyondProxy and its affiliates may have positions in and may make purchases or sales of the securities discussed in this report. It is the policy of all Related Persons to allow a full trading day to elapse after the publication of this report before purchases or sales of any securities discussed herein are made. Related Persons held a position in MSFT as of the date of publication. Use of this report and its content is governed by the Terms of Use described in detail at http://www.manualofideas.com/terms.html.

Source: Microsoft: A Bargain Hiding in Plain Sight