Since May 1, we've seen a slow-motion sell-off. Little by little, more and more points have been shaved off of major indices and have been shaking out the weak hands within them. Last fall, we could have seen 900 Dow Jones Industrial Average points gone in two days. We've seen about that many go over the past two weeks, with 12 down days out of a possible 13. Whether this is the beginning of something ugly, or just a correction in a long-running bull market, one thing is becoming apparent: Some stocks are getting cheap, and Microsoft (MSFT) is one of them.
While plunging into positions is clearly a bad idea, adding to core positions or creating small starter ones wouldn't be a half-bad idea. With the deeply oversold condition of the market, a bounce is in store. I have a feeling that many investors will get suckered here. Many have been waiting for a pullback, and now that they finally have one, most are hesitant to pull the trigger. This is completely understandable. However, I would hate to see a small relief rally that gets investors to buy in, only to see them get crushed in the ensuing downfall. Microsoft, the technology giant, is getting pretty cheap as we speak.
At $29 a share, Microsoft is $4, or 12%, off its yearly highs. With Dell (DELL) reporting a dreadful quarter the other day, many big-name tech companies have been driven even lower amid all the selling. Though everything seems ugly now, things look promising for Microsoft. The company is broadening its horizons and expanding products, as well as their capabilities. It even raised its quarterly dividend 25% to $0.20, from $0.16 several quarters ago.
Click to enlarge image.
Source: Stockcharts.com.
I will admit, the six-month chart above looks a little ugly. The RSI would indicate this name is oversold, and should selling continue, significant support should be found near $27.50, the 200-day simple moving average. Microsoft had a low of around $25 in December, but began to get top heavy over $32. The technicals aren't really what I'm focused on here. The fundamentals in Microsoft are what I'm excited about. With a yield north of 2.5% and P/E below 11, Microsoft certainly has value. But with everything lining up so well right now, it also has a promising growth stage ahead.
Microsoft suffered through 10 years of stagnant growth, with the share price hardly moving. It also suffered through the financial crisis in 2008 and the tech bubble that burst in 2002. Though the dividend helped keep buy-and-hold investors, many are looking for growth to propel shares higher. Well, Microsoft is not what it used to be, a one-brand company. It has diversified itself among many business ventures.
The company has partnered with Nokia (NOK) to produce a Windows phone for mobile. Although many think that Apple (AAPL) has an impenetrable grasp on the mobile phone market, this new Windows phone is making a lot of noise. Being partnered with Nokia was a wise move for Microsoft, where it has cracked the Chinese cellular market. Though Apple is likely not far behind from gaining access to China, Microsoft is still put in an advantageous situation considering how many cell-phone users China has.
In addition to breaking into mobile, Microsoft has itself spread out among other entities. Their Xbox division is doing very well and continuing to add market share. It is beginning to fully realize the potential that the Xbox Kinect can have for users and gamers alike. Also, Microsoft has quietly launched a new social media platform. Though it likely won't be strong enough to knock out Facebook (FB), the most dominant social media platform to date, it could potentially harvest market share from Google's (GOOG) Google+ -- and even possibly LinkedIn (LNKD) -- if it finds a way to bring the "business connections" integration to its site. Don't forget that Microsoft still has Skype, which was a big acquisition and will likely play a major role somewhere in the company's future plans.
Though Microsoft is spreading out a bit to make sure it stays relevant in the tech field, it is still sticking with its anchor. Microsoft plans to launch Windows 8 later this year. This is not supposed to be an upgrade or a slightly improved platform. Windows 8, if successful, is expected to make Microsoft a force to be reckoned with. It has been overhauled it by making it compatible with tablets. While tablets are somewhat popular now, it is expected that over 200 million will be sold in 2014. While half of these are expected to be iPads, the dominate player selling the remaining 100 million-plus has yet to be determined. If Microsoft's Windows 8 is as sensational as critics have been hyping it up to be, the company could very well find itself set up rather nicely in the tablet industry, which is on pace to eventually overtake the PC business (according to Nielsen, Pew Research Center, Money Magazine).
So it seems that Microsoft is putting itself out there a bit, and perhaps it is. Is it likely going to take out Facebook and be the No. 1 social media site? Or outsell the iPhone in America? Perhaps not. But if it doesn't take on risk and venture into the ever-changing world of tech, it would be history. Microsoft's pockets are deep enough to spend on innovation and can take on acquisitions. With its presence in personal gaming, the up-and-coming Nokia phone and Windows 8 operating system, Microsoft is shaping up to be a very dominate player in large-cap tech.
While it's true that Microsoft could be a complete flop and be stuck for another decade, I don't think that is the case. By tapping into markets rich with potential, it is shaping up to be a value play and growth play, with a dividend to pay along the way. Allocating shares under $29 is a steal, and I would look to add here as well as on further dips we may see in the future.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in MSFT over the next 72 hours.
