Here’s Why the Dow Was Down 300 Yesterday

Microsoft (MSFT) for instance.

When I look back at my MSFT data from 2012 Q4, I see a $27 stock selling for 9 times earnings, with profits expected to climb 5% for the year. The stock had an Estimated Long Term Growth Rate of 9% and a yield of 3.4%, for an estimated 12.4% annual return. MSFT was cheap at the time, and I wanted to buy it because its 2014 Fair Value was $32 –> 20% upside.

Normally, slow-growing (no-growing) conservative stocks with dividends have P/Es of around 12. Microsoft fits in this category.

Fast forward to today and we have MSFT at $44 selling for 16 times earnings. That seems too high, and that’s why I think the market sold off. Some of these Blue Chips have run up so much they are either fully valued or overvalued.

One Year Chart

Here’s the one-year chart of MSFT. Quarterly profit growth (bottom left) has been poor the last 3 qtrs. The company made $2.73 in 2012 and is expected to make only a penny more in 2015 (MSFT has a fiscal year-end June 30th, so the 2015 year started July 1st and runs to next June).

Microsoft does have some good things going for it. It’s cloud computing business is growing like a weed (+147% last qrt), but unfortunately this will not be 5% of sales until 2015. The company also acquired Nokia, and that helped boost sales 18%, but it’s been a drag on profits (loss of 8 cents a share last qtr). Management is doing a great job of cutting expenses, and will lay off 18,000 workers with most of the layoffs coming from Nokia.

Fair Value

I feel MSFT is worth 12 times earnings. I’m just not into the stock like a lot of other people are.

Sharek’s Take

Microsoft looks to be a posterchild of the current Bull Market. Like many conservative dividend payers it was undervalued at the end of 2012, and now it’s gone up and carried the stock market with it. Right now MSFT is overvalued and needs to do some magic in regards to cutting costs and new technology to get back on top. It wouldn’t be a buyer of MSFT here.