Microsoft (MSFT) has dipped for more than a week now. Does this offer a buying opportunity for investors now or is it a warning to stay away because Windows 8 will flop? Notebooks are not selling well, and if component shipments do not experience a significant increase by late October, the component makers believe that there will not be any growth in the demand for notebooks in the fourth quarter. Companies are counting on Microsoft to lift sales with Windows 8. The company is gearing up for the holiday season, and some analysts believe it is a good buy.
Microsoft-based Stores
With the last quarter of the year popping up, tech companies are making a push to sell the latest gadgets, and Microsoft is taking the lead of Apple (AAPL) with its own pop-up stores. Temporary stores are popping up all over the United States and Canada to capitalize on the holiday season. Having stores with retail staff running computers with the new OS will be a giant leap in helping educate consumers about the new system. It will be interesting to watch how consumers respond to the stores and being able to interact with the new system that is more "interactive oriented" than past OS from Microsoft.
The Seven Day Stock Sale
Did the recent downward move of the stock take place in advance of Windows 8 because critics do not believe it will win the public over? Some critics believe it has too few apps to matter from the start. Or is it now primed for a snapback rally? Within the last five weeks, there has been some movement within the ranks of the analysts in favor of Microsoft. Analysts at Nomura reiterated a "buy" rating at the end of August. Longbow Research initiated coverage with a buy rating about that time. And one important point to make here is that Microsoft was in the elite group of companies that beat both earnings and revenue estimates this quarter. It beat EPS by $0.11 and revenue was up 4%.
So it might be to the advantage of the investor to take a look at Microsoft and explore the possibility of an investment if the stock is not already owned. If Windows 8 is embraced, the stock is going to grow this fall and the dip offers a good point to look at the stock.
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Technically Speaking
After what looked like an ascending triangular pattern, we see the stock failed to break out. But I do not think we can give much credence to this pattern since it is not coming from a steady bullish or bearish pattern. The stock looks like it has been moving sideways in a trading zone and is on the higher end. As the stock lifted, it was bullish but was not showing any signs of increasing strength according to the RSI indicator. In order for a breakout to occur at a certain point, one would expect increasing strength, but this was not the case. So at a certain point the stock took a plunge. For the last week, the stock has taken a huge dip. This could be a point to move off of. But neither the MACD nor the RSI are showing any signs other than following the stock. It could be starting a bullish peak and valley pattern.
The Options Play
With the stock presently trading at 29.86, I am one who would give Microsoft a benefit of the doubt. I believe it will bounce back with Windows 8 this fall. But I do not think the stock will rise quickly like it has fallen. For this reason, I am looking at a bearish credit spread.
- Sell the October 2012 call with a strike of 31 (priced at $0.18)
- Buy the October 2012 call with a strike of 32 (priced at $0.07)
- Net Credit to Start: $0.11
- Maximum Profit: net credit
- Maximum Risk: $0.89
- Maximum Length of Trade: three weeks
Reasoning behind the Trade
- I believe Windows 8 will move the stock up this fall
- Early profit taking before windows release does not constitute a bearish pattern
Caution: credit spread trades must be accompanied by a good risk management strategy before entering in to a trade. Make sure you know how to exit the trade before you create one so as to minimize risk.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
