A Low-cost Strategy To Play Microsoft
Bill Gates is super rich but his once high-flying software business may be inside the doldrums since mid-2002 right after falling through the $35 degree. The problem with Microsoft (MSFT) may be its failure to grow both its revenues and earnings in the superlative rates the company once enjoyed.
Any organization the size of Microsoft, with a market-cap of $242 billion, will find growth an issue simply because of its size. But this isn't to say the stock is dead. Far from it, Microsoft remains a viable long-term software program organization and is cash rich with $34 billion or $3.28 per share in money. This gives the stock plenty of financial flexibility to develop or buy growth technologies. Microsoft just announced it would invest $1.1 billion in R&D at its MSN Internet unit within the FY07. And according to the Wall Street Journal, Microsoft is exploring the possibility of getting a stake in Internet media organization Yahoo (YHOO) to take on Internet advertising behemoth Google (GOOG)
But with an estimated five-year earnings growth rate of a pitiful 12%, the company has its function cut out for it. Trading at 16.30x its estimated FY07 EPS of $1.44, the stock isn't expensive but appears to be priced not as a growth stock.
Its PEG on the surface of 1.51 isn't inexpensive, but in case you discount inside the money of $3.28 per share, the estimated PEG falls to around 1,0, a decent valuation. Also, if Microsoft can improve on its estimated 12% growth rate, the PEG would decline further.
The fact is Microsoft at the current price deserves a seem. Should you want to play the stock but do not want to shell out the $2,347 for a 100-share block, you may want to take a examine the long-term options, also known as LEAPS. For instance, the in-the-money January 2008 $22.50 Microsoft Call LEAPS not set to expire till January 18, 2008 presently costs $380 a contract (100 shares)
This means you risk a total of $380 for the chance to participate in the possible upside of 100 shares of Microsoft over the next 20 months. The breakeven price is $26.30. If Microsoft breaks $26.30, you would begin to make money in your LEAPS. Conversely, if Microsoft fails to complete anything, your maximum risk is $380 for the initial option play.
Warning: The aforementioned instance is for illustrative purposes only and not being construed as an actual option strategy. Due towards the higher risk inherent in choices, I recommend you speak with an investment professional just before deciding to employ any strategy involving choices.
Article Source: FxTradingStock.com
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by: Ricky Balboa
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Date: Mon, 16 Aug 2010
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