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Adding Protection To Microsoft On The Bounce

Mar. 03, 2020 11:32 AM ETMSFT4 Comments
David Pinsen profile picture
David Pinsen


  • Last week, a Seeking Alpha contributor warned that shares of Microsoft were overvalued.
  • In that assessment he was aligned with Seeking Alpha Essential's Quant Rating, which gives Microsoft an "F" for value.
  • Given its extended valuation, and the broader economic risks associated with the coronavirus, I show ways cautious Microsoft bulls can take advantage of the market bounce to hedge their shares.
  • Looking for a helping hand in the market? Members of Bulletproof Investing get exclusive ideas and guidance to navigate any climate. Get started today »

Microsoft Belgium encourages children to learn about technology (photo via Microsoft's Twitter account).

Taking Advantage Of The Bounce To Add Protection

Last week, Seeking Alpha contributor Oleh Kombaiev warned that Microsoft (MSFT) shares were overvalued ("Microsoft - Emotions = Overvaluation"). In that assessment, Kombaiev has some backing from Seeking Alpha Essential's Quant Rating, which gives Microsoft an "F" for valuation.

Screen capture via Seeking Alpha.

Although the overall Quant Rating for Microsoft is on the bullish side of neutral, as you can see above, that rating doesn't take into account the broader economic risks of the COVID-19 coronavirus. As I wrote last week ("Time To Immunize Your Portfolio"), the economic risks of the virus may not be fully appreciated yet. Seeking Alpha contributor Daniel Nevins, CFA attempted to quantify those risks ("Straightforward Calculations On COVID-19 Risks"), and concluded that given likely global diffusion rates, a moderate to severe global recession is possible. Given those risks, and Microsoft's current, extended valuation, I'll show a couple of ways cautious Microsoft bulls can take advantage of the market bounce to stay long while strictly limiting their risk (hedging during a market bounce can be less expensive).

Adding Downside Protection To Microsoft

For these examples, I'll assume you own 200 shares of Microsoft and can tolerate a decline of as much as 20% over the next six months, but not one longer than that. I'm using 20% here to strike a balance between not taking too much risk and not costing too much to hedge, but of course, if you hedge, you should pick a decline threshold that's in line with your risk tolerance.

Uncapped Upside, Positive Cost

As of Monday's close, these were the optimal, or least expensive, put options to protect 200 shares of Microsoft against a greater-than-20% decline by mid-September.

Optimal hedge on Microsoft via Portfolio Armor.Here, you

A Unique Approach To Security Selection

This article looked at hedging Microsoft, but in my Marketplace service, I use a unique approach to select securities that are inexpensive to hedge and have the potential to generate market-beating returns. You can read more about my approach here: "Better Returns By Reducing Outliers."

This article was written by

David Pinsen profile picture
I developed the hedged portfolio method of investing at Portfolio Armor, and I run a Marketplace service at Seeking Alpha based on it called Bulletproof Investing.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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