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Concerned About Volatility And S & P Valuation ? - Microsoft May Be The Answer


  • Market valuation and recent volatility has many searching for quality & stability.
  • Microsoft is a quality name with solid fundamentals and a 3% dividend.
  • Solid free cash flow yield and plenty of cash on the balance sheet.
  • Technical 'breakout' from a 13 year base period suggests more gains to come.

This year has brought investors a fair amount of market volatility as we ushered in the new year with a 6% correction during the latter part of January. The S & P fell from a high of 1850 to its low so far this year of 1737. From there a nice rebound to present levels only to now see issues like the Ukraine and Chinese lending & growth concerns weigh on investors minds.

This recent volatility has ramped up investor concerns about the overall market valuation as they question whether its prudent to put money to work here at the present S & P levels.

In order to quell some of those concerns I suggest its time to take a look at a stock that will fit nicely as a core holding in any long term portfolio.

Microsoft (MSFT) shares are inexpensive, as it is currently selling with a PE ratio of 13x FY14-FY15 earnings. That is currently less than the S & P's forward looking PE of 15.6. Highlights from the company's 2Q 2104 earnings report are as follows:

  • Total revenue came in at a record 24.5 million an increase of 11%
  • EPS came in at $.78 beating the analyst consensus of $.69
  • Operating expenses grew at 3% , which was less than company guidance

Going forward, analyst estimates for F14/F15E revenues are at $83.7 million, and $89.5 million respectively.

While F14/F15E EPS are expected to come in at $2.63 and $2.90.

Continuing with a solid fundamental backdrop, the balance sheet is strong with approximately $60 billion in cash on the books and that figure represents about 20% of Microsoft's present market valuation. The company also sports an enviable 10+% free cash flow yield.

The shares yield 3%, and is a member of David Fish's Dividend Contender List as the company has paid dividends for 11 consecutive years and sports a 10 year dividend growth rate of 15% and a 3 year DGR of 20%.

Many of these positive fundamentals presented here have been stated in other blogs or articles, so for some nothing here is really "new".

However, in addition to those fundamentals, there is another reason I chose to present Microsoft as a viable candidate for purchase at this time, its the technical picture.

Here is a monthly chart of the stock. Recently, the stock has broken out of a 13 year range when it closed @ $38.13 last November which eclipsed the high that was set @ $37.50 back in November '07. The shares continue to trade above that "breakout" level as a sign of continued strength and confirmation of that "breakout".

This price action suggests that the stock my be poised to move higher since it has now broken out of a 13 year base period with little or no overhead resistance until the $50 level.

It's good news for those who have patiently held on to the shares through the "lost decade", as it may now be time to reap rewards for that patience.

I believe that many investors that have sat on the sidelines or those that may be struggling to find value to put money to work will find Microsoft a good choice for investment here.

Microsoft may not be an exciting name and to some it may be downright boring, but both the fundamental and technical picture make MSFT a compelling stock that can be be added to a portfolio as the "upward" trend now seems firmly in place.

Best of Luck to all !!

Disclosure: I am long MSFT.

Additional disclosure: It is my intention to present an introduction to this security and state my intent and position. It should be used as a starting point to conduct your own due diligence before making any investment decision. I am long numerous equity positions; all can be seen here on my SA Instablog.