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Tech stocks - Tuesday, October 28, 2008

Vista May Suck, But Microsoft's Stock Is Attractive

After the market dropped a little over 200 points today, the staff at tech:stocker decided to consult the "Oracle of Simsbury, CT" otherwise known as my father. In the interest of full disclosure, the oracle of Simsbury did recommend that we divest from the market 8 months ago as he did. We didn't listen. That's why he's the oracle. While the Oracle of Simsbury doesn't think the current economic environment is ideal for investing in the market, he is starting to get tempted. Like the staff at tech:stocker, he does believe the market will bottom out at 8000 noting there is a lot of money currently on the sidelines that is not satisfied making money in treasuries. We agree.

Among the stocks he's currently following closely (ie. getting ready to put his money into) are AIG (AIG:NYSE) (the Oracle of Simsbury has a lot of faith in CEO Edward M. Liddy after what he did with Allstate), IBM (IBM:NYSE) (he has always liked IBM and with the company sporting a price to earnings ratio in the single digits, he can't remember a better time to buy), and Microsoft (MSFT:NASDAQ).

We found the last tip more than just a little strange. Considering the Oracle of Simsbury has never used a computer with a Microsoft operating system, let alone used Internet Explorer, we had to ask why he had confidence in a company whose products he has never used directly. The Oracle of Simsbury responded with a few sound reasons.

First, the Oracle of Simsbury likes Microsoft's leadership position. Even though Google is constantly chipping away at Office, Microsoft still has the number one operating system. While many of his friends complain about Vista (a few are actually trying to buy new computers with XP installed. God bless them.), he thinks Microsoft will learn from this colossal mistake and eventually offer a far superior replacement.

Second, Microsoft had a solid Q1 2009. Even though the company tempered its guidance for 09, the Oracle of Simsbury still thinks they will deliver profits that will satisfy investors. Even if the company is slashing the price of Windows Vista to Dell (DELL:NASDAQ), and Hewlett Packard (HPQ:NYSE), he still thinks they'll make enough money on the lousy operating system to make a decent profit.

Finally, he likes the fact that the company has enough cash on hand to make some moves to boost their profits and business position. While they can't pay cash for Yahoo! (YHOO:NASDAQ), the Oracle of Simsbury believes they have plenty of cash to not only survive this economic downturn, but actually use it to their advantage. Instead of reducing R&D spending (which he feels many distressed companies will do), Microsoft can afford to increase R&D spending and launch some strategic new initiatives just as the world is starting to recover from the recession.

When asked to put a 12-month target on the stock, the Oracle of Simsbury put a range of $28 – 30 per share (the Oracle always puts targets in a spread so conservative investors can make money without worrying too much about their investment). The staff at tech:stocker puts the 12-month target at $31 per share which should make everyone happy.