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Microsoft, Quality, Durable, High Yielding, liquidity and CHEAP!!!
Posted by: Crafool (IP Logged)
Date: February 16, 2013 12:24PM

It is completely bizarre that we see investors husbanding cash and holding Treasury bonds rather than investing in some of the best companies in the world. Imagine investing in assets that offer the investor a "negative real rate of return" rather than investing in a proven leader with rock solid finances growing sales and earnings, at a price that offers a compelling if not out right high yield and with liquidity?

Yes, the worldwide crisis in government leadership along with the ussual investor mistakes has created an opportunity in my opinion in the shares of Microsoft stock. Please allow me to use my cocktail napkin approach to share what I see in Microsoft, and please I welcome your comments.

What first draws my attention to Microsft is how most investors dislike it and its stock and love Apple and its stock. Note: I use Valueline stock reports for they give great data history on the companies they follow. I always remember what Seth Klarman points out regarding one of investors' greatest advantages is time horizon. Valueline preaches it and Wall Street scorns it. If you talk with investors they will tell you Microsoft and its stock basically "stink". The company's stock has done nothing in years. No, I would point out. It's stock "price" has done worse than nothing in the last 12-years. If you look back to Microsoft's "Golden Age" with investors it woulld be around the year 2000, when the stock was trading near $48 per share and today it is trading around $28 per share. Thus, the stock price has declined around 42% over the last 12-years!!! This is worse than nothing!!! Microsoft is to blame!!!

Really? Blame Microsoft for the performance of its stock price. Why? Is company performance and stock price directly correlated? I mean should the fact that the share price of Microsoft stock declining reflect that Microsft the company's performance has deteriorated over the last 12-years? Well lets look at three keys to stock price and coporate performance.

First, revenue or sales is the one number that can not be manipulated like earnings per share or EPS. In 2000, Microsofts revenue or sales per share was around $2.65. It's EPS was around $0.85 per share and it paid no dividend. Investors paid the handsome price of $48 per share for these sales, EPS and future growth potential. Thus, since the stock market is efficient the fact the share price today is close to $28, Microsoft must have disappointed investors because the stock price has decline over 42%!!!

Let's see about Microsoft's 2013 Valueline estimates to see how bad the company has done these last 12 or so years. Microsoft's estimated 2013 per share sales or revenues is around $9.85 (2000, around $2.65). So sales are UP and not down? Yes, Microsoft's sales are estimated to be up almost 300% in these last 12 or so years (Please check the numbers. I might be slightly off since I am doing this from memory, and why I call it table napkin analysis.). Clearly, Microsfot must be a dissapointment since the sales or revenue per share only went up 200 to 300%!!!

Let's see about EPS and again how it must have disappointed over the last 12 or so years. Microsoft's estimated EPS for 2013 is around $2.95 per share (2000, around $0.85). The EPS like the sales per share went UP and not down! The EPS increased by around 250% over the last 12 or so years. That is sooo disappointing. You know the EPS per share now exceeds the earnings per share in 2000. It isn't just that, but now the compsny pays a dividend of around $0.92 (2000, No dividend) which now exceeds thet total amount of the EPS (2000, $0.85) of the company back in 2000! The dividend yield is around 3.30% or 163% of the 10-year Treasury Bond. Of course the 10-year Treasury Bond yield is fixed and Valueline projects Microsoft's dividend for the next few years to increase by double digits!!

Now, when I buy a stock I look for 3 main risks to try and cover as best I can. The risks are balance sheet risk, EPS risk and price risk. (Please note: Cocktail napkin figures and you should verify for yourself).

1.) Balance sheet risk. Current Assets of around $80 Billion, Current Liabilities of around $30 Billion and Long-term debt of around $10 billion. Thus, Microsoft has current asset after all debt of around $40 biilion and given there is around 8 billion shares of common stock outstanding that means there is basically $5 out of the $28 share price in current assets!!! I would say that qualifies Microsoft as having a rock solid balance sheet and since the company needs $0.40 of the estimated 2013 EPS for Capital Spending that the mountain of current assets is likely to grow, and the level of growth only mitigated from Microsoft buying back stock and increasing the dividend to investors. So I place a check with as much confidence as I can reasonably have that this is good in my opinion/

2.) EPS Risk. I think one of the greatest tricks for simple analysis was provided to me by Mary Buffett. If the name sounds familiar it should be for she is Warren Buffett's ex-daughter in law and author of the book, Buffettology. Two quick and simple observations can tell you if you are looking at special company or just another commodity business. They are the trend in sales and EPS figures over the years and the Return on Equity. If the company has many years of increasing sales and EPS figures like Microsoft, which has done exactly that for the last 11 out of 12 years then you know they have something special. It means they have some special sauce that makes their product or service voluable enough to be able to increase pricing and the customers allow it. Passing along pricing increases is what truly differentiates the extraordinary business from the commodity business. No surprise that Microsoft is the 600 pound gorilla in the coporate, government and education IT segment. This segment is the least trendy and the largest. You know there is an expression among corporate Head of IT that goes like this, "You don't get fired for hiring IBM'. This speaks to the anti-trendy nature of business, government and education and solidifies Microsoft as a "platform" company that is ingrained into the infastructure and not likely to be removed for many years. Micrsoft new Surface Tablet, and new Windows 8 will obviously find its way into the corporate sector, but will serve most likely as the plateau for Apple's sales in the consumer side. Unfortunately, Apple is a trendy technology company and just as first mover advantage rewards as it has done for them, the lack of barriers to entry and not being a necessity will most likely show a pretty good erosion to the durability of their business. Now they might be able to come up with something new like Apple TV, but a businesss model based on constant Big Bang innovation is just too risky for me. Microsoft's return on equity is over 20% and though that might not seem supper great, It is anchored by the excess capital. If they had net debt5 like most company's the ROE would be far higher. I point out that Buffett thinks anything over 15% without debt is a great business. So check this off for Microsoft.

3.) Price Risk. Microsoft's stock price is just over its 52-week lows of around $26. The Enterprise value of the company is around $23 (Current Equity value minus net current assets) and with an estimated $2.95 EPS for 2013 that puts the Forward P/E of 7.8 on the E.V. and 9.5 on the current stock price. The earnings yield on the E.V. is 12.83% after tax and at an estiamted 20% tax rate at 15.39% versus a 10-year T-Bond's fixed yield of 2.02%. Oh, Valueline also think Microsoft's EPS will grow by over 10% for the next few years. So as far is price risk, I think when looking at MSFT's historical P/E ratios that it is cheap at current levels and when I think of it relative to bonds I think 15% looks better than 2%.

So if Microsoft doesn't stink, why did the share price do so poorly? Well, investors needed to understand that price paid dictates risk and future return regardless of asset and growth expectations. In 2000, investors put a 50 plus P/E on Microsoft. Simplisticly, that P/E gave Microsoft and earnings yield of around 2.0% and at that time the 10-year Treasury was around 7.5%. Guess which one outperformed the other for the last 12 plus years? Now, the shoe is on the other foot so to speak with the 10-year T-bond offering a 2% yield and because of investor discuss Microsoft is priced to yield not around 7.5% but around15%!!! So don't blame Microsoft for its stock price performance, but past investors blame yourself. Today, Microsoft's stock looks like it is trying to reward investorzs that want a company that is an undeniable leader, an essential company, solidly financed, growing, offers liquidity and is returning value to shareholders thru dividends and share buy backs.

Last word of advise, never hold any asset too dear or too jaded!!! They all get their time in the sun and it ussually has to come after they have sufferrred greatly.

Happy investing to all. Please do not rely on my work or anyone else's but your own work. I hope this serves only to get you to do work/research on Microsoft and form your own opinion!!! Comments appreciated!



Guru Discussed: Seth Klarman: Current Portfolio, Stock Picks
Stocks Discussed: MSFT,
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Re Microsoft Quality Durable High Yielding liquidity and CHEAP
Posted by: vgm (IP Logged)
Date: February 16, 2013 01:23PM

"I always remember what Seth Klarman points out regarding one of investors' greatest advantages is time horizon."

Any thoughts on why Klarman just sold out his position in MSFT? What do you see as the main threats/risks to an investment in MSFT?



Guru Discussed: Seth Klarman: Current Portfolio, Stock Picks
Stocks Discussed: MSFT,
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Re Microsoft Quality Durable High Yielding liquidity and CHEAP
Posted by: crafool (IP Logged)
Date: February 16, 2013 03:17PM

Vgm,

In my opinion, Seth Klarman sold his Microsoft Common Stock position valued at around $41.6 million, because he became even more "bullish" on Microsoft. The following is the link to the 2/13/2013 Baupost 13F filing with the SEC:

http://www.sec.gov/Archives/edgar/data/1061768/000114036113006404/form13.text

It appears that Seth used the original $41.6 million to buy Microsoft "Call" Options valued at $53.41 million. The new "Call" Options position represents an increase of over 28% in his Microsoft investment. The fact he leveraged the investment by using options versus the common leads me to believe that he sees BIG price appreciation potential. He is willing to focus on it rather and give up the nice dividend yield. Klarman's noted for high returns on his fund even while holding large cash positions. I guess he follows the Buffett/Munger approach of when you doyour research and see a good opportunity for a satisfactory investment result then "You buy a meaningful amount!".

As far as Microsoft's weaknesses, obviously they were late with getting out a tablet and allowed Apple a nice first mover position. A mistake but hardly going to kill them. I would say there is a lot of concern over "cloud computing", however as long as the President of the United States, Secretary of Defense, CIA and FBI warn about cyber attacks as being the next great threat to America and other free nation security I think coporations and individuals are going to still be doing computer the way they do it now rather than outsourcing to the internet. I mean Facebook just got hacked today!

I always remember what Buffett says "Give a good manager a great business and both will succeed, however put a great manager in a poor business and the business will win!". Microsoft's ingrained and entrenched position makes it a great company. Apple's first to market success in mobile makes it a good business but only time wil tell if Apple moves to "great" or "commodity". So far in their history they have been both, but Microsoft has always been great.

Happy investing to all.






Guru Discussed: Seth Klarman: Current Portfolio, Stock Picks
Stocks Discussed: MSFT,
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Re Microsoft Quality Durable High Yielding liquidity and CHEAP
Posted by: vgm (IP Logged)
Date: February 17, 2013 05:56AM

Crafool,

Thanks for the full response.

You suggest Klarman "became even more "bullish" on Microsoft."

I don't buy that. The truth of the matter is that Klarman made MSFT a major equity holding in 2011, buying 12M shares at a cost of some $300M - and he's been unloading it ever since. I'd interpret that as him losing confidence in his thesis, just as he did with HPQ where he sold out at a substantial loss after a very short holding period. $50M is a drop in the ocean for Klarman.

I do agree MSFT qualifies as a "great company" and I think Mr Market is puting it (incorrectly) in the same bin as Dell and HPQ, thereby keeping price compressed. It's been encouraging to see Greenlight and First Pacific scooping it up of late and capitalising on Mr Market's myopia.

Thanks again for the stimulation. Good Luck!



Guru Discussed: Seth Klarman: Current Portfolio, Stock Picks
Stocks Discussed: MSFT,
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Re Microsoft Quality Durable High Yielding liquidity and CHEAP
Posted by: crafool (IP Logged)
Date: February 17, 2013 08:34AM


Vgm,

Why would you not buy that Seth Klarman, the author of Margin of Safety: Risk-Averse Value Investing Strategies for the Thoughtful Investor and very successful hedge fund manager trained by Michael Price and Max Heine is more BULLISH on Microsoft?

What are the facts? Seth Klarman sells $41.6 million of Microsoft and turns around and purchases $53 million of dervatives on Microsoft in the form of 2,000,000 Call options.

For discussion lets disect this move without bias or opnion. Is holding options on a Company's stock riskier or less risky than holding the common stock outright? I believe that options give the investor the ability to "leverage" their investment dollars, however they pay a "premium" for this right which is an added cost and they assume a new degree of "time risk" since options can expire worthless at a set time. I beleive an investor of Klarman's level would most likely only change his risk profile if his thoughts regarding a particular opportunity had changed toward his certainty toward the possiblity of the success of the investment. Why else would one assume MORE risk? Especially, a legendary investor that goes around writing books about "Thoughtfulness" and "Risk-Averse" investing? I am going to go out on a limb and say that Klarman is BULLISH.

I will go out even further on a limb and suggest or speculate that he may be EXTREMELY BULLISH. Why would I do this? Well, I beleive I am correct here, but anyone please correct me if I am wrong, but Hedge Funds do not have to report their "Short" positions. Klarman is noted to NOT be a "Short Seller" of stock, but a common value investor strategy is to "Short Put Option" contracts. One way to duplicate the risk profile of holding common stock is for an investor to "Go Long the Call Options" of a company paying a premium for those options, but also "Selling/Shorting Put Options" c-ollecting premiums that can be used to lower the cash outlay for the call options or wait for it.....buy even more Call Options with the premiums collected and further leverage the investment!!! Now, that would be EXTREMELY BULLISH!!! Now, I don't beleive a hedge fund has to report a "Short Option" position on its 13F-HR. So that is why I am definitely 'Speculating"!!!

I would add that other successful value investors are joining Seth Klarman in buying Microsoft. They are:

1.) David Einhorn, Greenlight Capital,
2.) David Tepper, Appaloosa Capital,
3.) Charles De Vaulx, IVA Funds (Former Manager of First Eagle Global and Co-Manager of Legendary Manager, Jean Marie Eveillard),
4.) Jean Marie Eveillard, FIrst Eagle Funds,
Richard Pzena, (Joel Greenblatt, author "The Little Book that Beats markets"calls 'The smartest investor I know"),
5.) Mason Hawkins (Longleaf Funds)
6.) Joel Greenblatt (Gotham Capital)
7.) Steven Romick (FPA Cresent)
8.) Arnold Van Den Berg (Century Management)
9.) Mario Gabelli
10.) Me

I know there is a lot of personal opinions regarding Microsoft. I don't really know anyone that has not owned it in the past. I know that most if not all lost money on it and hold a bad/poor opinion of it. The too "Don't Buy it", but that is how a stock gets into my "Strike Zone". Unfortunately, I have never had the opportunity to get a "fat pitch" while enjoying broad public consensus. As Buffett says "You pay a mighty high price for a rsosey atmosphere!!!".

Happy investing to all!!



Guru Discussed: Seth Klarman: Current Portfolio, Stock Picks
Stocks Discussed: MSFT,
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Re Microsoft Quality Durable High Yielding liquidity and CHEAP
Posted by: AlbertaSunwapta (IP Logged)
Date: February 17, 2013 12:33PM

Joining or have been there long before Klarman?

As for the time horizon advantage, I completely agree, but with tech companies, that longer term time horizon has to be tempered by the huge ever looming risk of obsolesce.



Guru Discussed: Seth Klarman: Current Portfolio, Stock Picks
Stocks Discussed: MSFT,
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Re Microsoft Quality Durable High Yielding liquidity and CHEAP
Posted by: vgm (IP Logged)
Date: February 17, 2013 01:20PM

Crafool,

You seem to one of those people who believes if you say something loud enough and repeat it, it must be true! Your posts are very 'loud' and erratic. Not a positive sign. Meaningful content is by far superior.

I'm perfectly aware of Klarman's background and accomplishments, and elite standing in the investing community and have the greatest respect for him, but it's a fool's game to blindly assume (as you do, with no actual rationale) that he cannot be wrong. He lost meaningfully on HPQ just in the past year, selling out at a substantial loss.

You asked: "What are the facts?" about his MSFT holding.

Yet you failed to address my earlier point: "The truth of the matter is that Klarman made MSFT a major equity holding in 2011, buying 12M shares at a cost of some $300M - and he's been unloading it ever since. I'd interpret that as him losing confidence in his thesis."

You then say "For discussion lets disect [sic] this move without bias or opnion [sic]." And then you proceed to give speculative thoughts, going on to conclude at the end of the same paragraph "So that is why I am definitely 'Speculating"!!!" That's quite a contrast :-)

It's very amusing that you put yourself on your list of "successful value investors".

'Nuff said.



Guru Discussed: Seth Klarman: Current Portfolio, Stock Picks
Stocks Discussed: MSFT,
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Re Microsoft Quality Durable High Yielding liquidity and CHEAP
Posted by: crafool (IP Logged)
Date: February 17, 2013 03:27PM

Vgm,

In my piece, I mentioned Klarman not as a reason to Buy Microsoft, but rather stating one of his theories of investor advantage being "time". The following is what you posted:



[color=#000000; background-color: rgba(255, 255, 255, 0)]Vgm - 1 day ago[/color]

"I always remember what Seth Klarman points out regarding one of investors' greatest advantages is time horizon."

Any thoughts on why Klarman just sold out his position in MSFT? What do you see as the main threats/risks to an investment in MSFT?

I stated that Klarman the facts about Klarman because you posted an erroneous post. I merely wanted to clarify your blatant error in order for other readers not to be misled by you and your post.

I am sorry if my posting the facts and observations regarding Klarman is bothering you. Klarman nor any other Guru made me Buy Microsoft, but rather my own research told me to do it as I recommend that all investors do their own homework.

Yes, you are correct that I was trying to be funny by putting my name on the list of Guru investors in Microsoft. I am proud of my success as an investor. Am I or any investor perfect? No, but I do have a "buy and hold" portfolio on Gurufocus for anyone to view. Please check it out. Just click on my member name and the portfolio. I tried yours but it appears you don't have one. If you do, please send me access we can discuss or portfolios.

happy investing to all!!!




Guru Discussed: Seth Klarman: Current Portfolio, Stock Picks
Stocks Discussed: MSFT,
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Re Microsoft Quality Durable High Yielding liquidity and CHEAP
Posted by: jonmonsea (IP Logged)
Date: February 17, 2013 03:50PM

How long has Klarman held the LEAPS (?) position? If he exercised in full, what would the nominal amount spent be?

I am long MSFT thru LEAPS and equity. Net of cash, it sells at a PEG of under 1. It seems like a good bet, if not an obvious home run. Thing is, if things go well, it could become a retroactively obvious home run. If things go shitty, the multiple might compress to something even more extraordinary, giving it a PEG of .5; isn't that where Peter Lynch said to mortgage the house and load up on the stock?



Guru Discussed: Seth Klarman: Current Portfolio, Stock Picks
Stocks Discussed: MSFT,
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Re Microsoft Quality Durable High Yielding liquidity and CHEAP
Posted by: dougt@shaw.ca (IP Logged)
Date: February 17, 2013 07:01PM

Regardless of Klarman, it is a stock whose earnings and balance sheet seem to deserve a better price in the market. Great to be able to buy when the market is not efficient at pricing. Thanks everyone.



Guru Discussed: Seth Klarman: Current Portfolio, Stock Picks
Stocks Discussed: MSFT,
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