Microsoft's (NASDAQ:MSFT) dominant and monopoly-like position (94% market share) in PCs at the enterprise and home is the envy of any company (software or otherwise). Microsoft has seen its share price soar approximately 114% over the past five years as the company achieves market darling status and optimism continues. Contrast that, the S&P 500 index has returned less than half as much or about 55% over the same period.
MSFT - Microsoft Corporation
^GSPC - S&P 500 Index
As Warren Buffett aptly puts it,
The market pays a high price for a cheery consensus.
Currently there are 21 buys (including eight strong buys) versus only two sells and one underperform by analysts according to Thomson/First Call. The corollary is to buy when Microsoft is out of favor as we did back in 2012 when the company was trading at less than half of Apple's market capitalization (Is Apple Worth 2 Microsofts?).
Given the run-up in Microsoft stock, let's now turn our attention to valuation and other business factors with the help of our friends at Jitta.com. According to the chart and factsheet above (only first six rows shown), Microsoft is currently trading about 60% above fair value (see Jitta Line). In addition, the Jitta Score (higher the score, the better the business performance) is at 10-year lows while Microsoft's debt-to-equity ratio is at 10-year highs.
The risk of selling now is foregoing additional profits should share price continue to disconnect from value as momentum traders take prices higher. There is a saying on Wall Street, "don't fight the tape." It means do not bet or trade against the trend in the financial markets. It is analogous to the trader's maxim "the trend is your friend." However, note that this maxim does not apply to most value investors because our main concern is to enter and exit based on price-to-value.
Based on high valuations and weakening business fundamentals, we believe the downside risk now is greater than the upside reward.
Leave crashes to your PC and not to your Microsoft stock. By selling or reducing shares now could save you an unnecessary reboot of your portfolio.
Disclaimer: Please note the fact that a general recommendation made of a particular security, commodity, or investment area does not mean it is suitable for you or should be purchased or sold by you. For example, we may already have purchased an investment at a lower cost and/or the position for you may represent too much concentration in one security or industry. Before deciding to invest you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should seek advice from an independent financial advisor if you have any doubts.
Disclosure: I am/we are long MSFT.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: We have reduced our holding in MSFT.