As much as I love the markets, I am a big sports fan as well. While baseball is my favorite sport, my favorite fantasy sport to play is fantasy basketball, where I have done exceptionally well year over year. Why? Because I know what it takes to form a good team. It's not just having the best known players, but building a team that accumulates whatever stats you need in that particular league. According to ESPN stats, Lebron James is having one of the best all-time years in the NBA this year, in terms of player efficiency rating.
So what does this have to do with the markets? Well, think of Lebron James as Apple (AAPL). The comparisons are tremendous. Both are considered the best in the U.S. right now (player, stock). Both have extremely high expectations, with everyone expecting everything from Apple, and everyone expecting Lebron to win a championship. Both receive tons of media attention as well. Listen to CNBC for a few hours or ESPN for a bit, and you'll hear plenty of mentions of each. And just for a small joke, Apple's fiscal fourth quarter in 2011 was very disappointing, just as Lebron disappeared in the fourth quarter of the NBA finals last year. When it comes to the markets, it is all about Apple, Apple, Apple. When it comes to the NBA, it is all about Lebron, Lebron, Lebron.
Apple is a great investment. I am not debating that here. However, think of this comparison. Microsoft (MSFT) is Kevin Durant. For those of you who don't follow Kevin Durant, he is a forward for the small market Oklahoma City Thunder (formerly the Seattle Supersonics). Kevin Durant in my opinion is the best player in the NBA right now. In fact, if you compare Durant's stats to Lebron's, Durant is better in free throw percentage, makes more 3 pointers, scores more points, gets more blocks, and has slightly less turnovers, as well as getting the same amount of rebounds per game. In fact, this year, Lebron is only better in field goal percentage, three point percentage (although he shoots less than half the number of 3's per game), assists and steals.
Durant is perhaps having a better season, although not according to the efficiency ratings. Durant's Thunder and Lebron's Heat have identical win-loss records at the all-star break, despite the Thunder playing in the much better Western Conference and perhaps having a slightly weaker team than the Heat.
So why is Kevin Durant equal to Microsoft? Well, he's not talked about as much as Lebron, while Microsoft isn't talked about as much as Apple is. Those are both facts. Also, if I asked you how both were doing right now, you would say Apple and Lebron are doing much better. But are they really? I would say no. Coming into Monday, Apple is up 29% year to date. That's a great move, but everyone is expecting Apple to do really well.
Here's something that might surprise you. Microsoft is up 22% year to date. Yes, Microsoft, a company growing at a much slower rate than Apple, known more as a value stock thanks to its dividend and buybacks, is up about three-fourths of what Apple is. In terms of performance to expectations, I would argue that Microsoft is actually doing better than Apple in 2012, which is the same case I'd make for Durant over Lebron.
By now, Apple probably has over $100 billion in cash and investments, but it is not using any of that money right now. People, like myself, have been calling for dividends and buybacks, but we haven't gotten either yet. Microsoft (by now) has over $60 billion in cash and investments, but it also is paying 80 cents in dividends a year currently and is buying back plenty of stock. Also, Microsoft's margins are in fact higher than Apple currently on all three primary margins. Microsoft just brings in more profits per dollar of revenues right now. That is a fact.
Right now, both companies are great investments. Apple is an excellent growth name, and Microsoft is a great value name at the moment. But while Apple is like Lebron, very flashy and all over the place, while Kevin Durant is performing just as well, if not better, and is much lesser known. The same is true with Microsoft compared to Apple this year.
Apple has plenty of growth ahead, thanks to the iPhone, iPad and Mac, and it blew out first quarter earnings expectations. Microsoft did great when it comes to earnings as well. It has plenty of growth ahead in Bing search (which in the past year has grown tremendously), Xbox gaming is doing very well, and they just completed their acquisition of Skype.
Apple right now has a better price to expected growth ratio over the next five years (0.63 to 1.39), but Microsoft has better ratios when it comes to trailing figures. Microsoft's P/E of 11.33 is lower than Apple's 14.8, although people might say Apple is cheaper there because of the extra growth. Believe what you want. Microsoft's price to sales ratio of 3.67 is lower than Apple's 3.81.
I'm not saying that Microsoft is a better investment right now, but it is very underappreciated at the moment, just like Kevin Durant. Microsoft is one of the best value plays in tech land now, while Apple is the best growth name. Also, there have been rumors lately of Microsoft getting higher weightings in certain indices when they rebalance later this year, and there is a chance Apple's weighting could be taken down somewhat. Could this potentially lead to certain exchange traded funds, like the iShares Dow Jones US Technology Sector ETF (IYW), buying more Microsoft and selling some Apple? Today, the ETF holds 19.45% of its basket in Apple stock and 9.41% on Microsoft stock.
Apple might be growing more right now, but based on expectations, I would say Microsoft is performing better. Just like Kevin Durant.