R. Scott Raynovich's  Instablog

This is some strictly technical stuff, here are some stocks popping up on my screens. I still need to do more research so the usual caveats apply: Do your own homework!

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Sometimes it seems like CNBC commentators are asleep. I want to shake them and wake them up: Can't you see what's happening! They are still perplexed as to why gold is up 30% in a year. Gee, why would that be? Who would buy gold? Isn't that quirky and cute?

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Biotech stocks are in a recovery mode and poised for a Q4 rally extending to early January, according to Raynoreport.com's chief biotech contributors Raygent Associates (raygent.com).

Raygent notes that the year-end rally has been a trend in the past few years (’05,’06, and ’07 trends), though it was certainly disrupted by the recent financial crisis of ‘08/09. The IBB tracking ETF looks to be basing at levels of 75-79 so a rally would take this popular ETF beyond 80, seeking the September highs of 85.

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The economic relationship between the United States and China -- known in some circles as "Chimerica" -- is central to the economic recovery and a resolution of the economic crisis.

President Obama and various U.S. officials are in China this week. Will anything come out of it? We doubt it. But indeed, what is needed is profound change in the dysfunctional releationship between America and China.

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Doesn't look good this AM with the dollar plummeting as Obama meets with Chinese leaders. Expect more milquetoast statements from Geithner to accelerate the selling.

Imagine a plain-vanilla stock that that trades at a forward P/E of 13 and pays a 2% dividend. Sounds kind of average, right?

Next, I tell you that the company is a software company. It has a 34% operating margin, a 37% return on equity, holds $33B in cash, and a history of being one of the leading companies in the world for the last 20 years. Your ears would perk up.

The company is Microsoft. If you told somebody in 1998 that the company would some day trade with these kind of metrics, they would swoop in and buy it. Historically, it is very rare for such a blue-chip name with such strong financials to trade at a P/E of 13.

I took a stab at Microsoft in its plunge into the mid-teens, but now I'm buying more. Recently, of course, Microsoft's stock has been perking up on excitement building for Windows 7. It's not too late to get in, if you think that Windows 7 will be a grand success. Microsoft hasn't been growing for a year. Add revenue growth to this formula, and the stock takes off.

Early success with Windows 7 could generate additional upgrades, including big corporate upgrades. Given that many large companies skipped Vista altogether, you could see  a huge wave of Windows 7 upgrades. And in 2010, Microsoft will also be upgrading its Office Suite.

Windows sales were down 39% year-over-year from Q1 Fiscal 2009 to Q1 Fiscal 2010 (Microsoft's fiscal year runs from October-July). Part of this was the bad economy. The other part was a bad operating system.

In other words, everything has been a huge disappointment. All Windows 7 has to to do is be reasonably successful to reverse this disappointment.

If Windows sales can go back to fiscal 2009 levels -- or maybe even a bit higher -- that is a $2B bump in annual revenue.

Now let's look at Microsoft's numbers over the past three years:

PERIOD ENDING	30-Jun-09	30-Jun-08	30-Jun-07
Total Revenue	58,437,000	60,420,000	51,122,000

Net Income	14,569,000	17,681,000	14,065,000
Preferred Stock And Other Adjustments	-	-	-
Net Income Applicable To Common Shares	$14,569,000	$17,681,000	$14,065,000

Source: Capital IQ

Profits fell about $2B from 2008 to 2009. If Microsoft can get revenues back to the $60B mark, you could argue that with cost-cutting measures, they could beat 2008 profit levels, when they earned close to $2 per share.  Analyst estimates have been rising lately and now the consensus if for $2.05 EPS in 2010.

If you give Microsoft a more generous forward premium P/E of 20 -- a premium it has traditionally had and deserves because of its strong profitability and cash position -- that gives you a stock price of $41. All the while the company is sitting on piles of cash and paying you 2% dividends. Not a bad deal. There is plenty of upside for Microsoft here.

Disclosure: Long MSFT