Here you will find new trade ideas that CRI is initiating in CRI's account. If it is posted here, then we are doing it.
New trade for October 28th, 2010.
CRI's recently released TTA - First Two Weeks of Q4,'10 Report suggested that technology & commodities ought to do well for the quarter. Considering the fact that X-Mass is just around the corner, gaget hungry consumers ought to help tech. outperform. Additionally, CRI's most recent CTS is still quite bullish of US stocks and specifically the Nasdaq.
So the question then becomes, if one were to invest in technology where should one do it. Since most tech. companies trade at very steep valuations, finding value amid this group can be tough. Few of these stocks will trade at a discount to book value since growth in tech is still very much alive. In fact, if you buy into the 'cloud computing' revolution, there is still way more growth to come.
That brings us to CRI's latest acquisition: MSFT
This once growth powerhouse seems to be trading at utility levels with little regard to the fact that this is still the largest market cap tech stock around. Specifically, MSFT currently trades at 12 times current earnings and a paltry 9 times forward earnings with a dividend near 2.5%. If we assume that Microsoft isn't going to grow at all over the coming year then these metrics will change little. However, if we assume a small positive change to any of these numbers then the stock could take off.
So what may bring change?
Microsoft of course is well known for its Windows operating systems and MS Office platform of software products. These are the classic drivers of the company (the 'bread and butter" if you will) that will ensure Microsoft's utility status and I don't see any significant change here for a little while yet.
But did you know that Microsoft is eating Nintendo's lunch with thier new paddless motion video games unit for the X-Box 360? and even more impressive, did you know that Microsoft owns a considerable portion of Facebook....bet you didn't....
This brings us to the notion of cloud computing and what I would consider the next wave of internet expansion: applications/services provided online. The combination of a Wireless X-box console, social networking capabilities, a plethora of applications/content and a monstrous cash position put MSFT in what I would consider a very good position to dominate this space. Yes there will be competition from the Goggles and Apples of the world but this market is so big and Facebook is so popular, MSFT doesn't have to worry about be crowded out just yet.
If you looks at the chart above, one can't help but notice that MSFT is trying very hard to break out of a wedge pattern. The tight double bottom has given us both an indication of demand for the stock and a nice little entry point. While price and momentum look good, I will concede that volume hasn't been confirmed yet - but that may come in on their quarterly earnings which is due out after the bell October 28th.
Simply put, with the recent double bottom and momentum breakout - I would fully expect the winter/spring highs of last year to be tested in earnest. If the market does move into that range then the options that we are considering will be 'in the money' which is a very strong position for options with a lot of time remaining. Ironically enough, even with the street's current earnings projections, the mean avg. price target by analysts for the coming year is $31.85 (or 21% higher). This means that the street fully expect those highs to be tested an further to be taken out....But what happens if Microsoft happens to beat those numbers?
This then brings us to the trade. Currently MSFT is about $26 dollars per share. The January, 2012 $30 call options are currently $1.40. This option lets you control 100 shares of MSFT for next 15 months at $30 or higher. The premium is $140 (or about 5%). As indicated above, the mean avg estimate (based on current projections) is for the stock to hit $31.85 over the coming year. If this happens then the Jan., 2012 $30 call will have an intrinsic value of $1.85 or $.45 higher than current prices (or 32%). But what happens if the stock breaks those highs?
In CRI's opinion......the next target is an incredible $39.46.
This would be the case because a weekly close above $31.27 would confirm a bullish flag pole chart formation. This can be clearly seen on the Monthly price chart included above. As well, it appears that the upper cycle bull trend line also sits in this area. While I don't expect that line to be hit for another couple of years, it is still out there and if the market gets really going then this is where I would expect significant resistance to come in.
Now, at $39.46 these $30 call options will have an intrinsic value of $9.46 or about 547% higher than where they are today. I'm not saying its going to happen, but considering the huge upside potential, the relative 'hated-ness' of MSFT and the compelling growth story coming out of a Wireless X-Box/Facebook I think this trade is worth the risk.
So in summary then. MSFT has what I would consider to be limited downside risk while at the same time quite a bit of upside potential. While I do not expect the stock to double over the coming year, I do see an opportunity to double one's investment capital through the options market. I have bought (and will look to buy more on pull-backs) the January, 2012 $30 Call options on MSFT up to $1.45 today. I will look to sell half the position at or above $3.00 (hopefully on the coming earnings news!) but am more than happy to ride this position for the next year and three months until expiry.
Remember, make sure the system you are using is at least 66% accurate and for heavens' sake, don't put more than 5% of your risk capital into any one play.
That's all for this post,
Brian Beamish FCSI
The Canadian Rational Investor
the_rational_investor@yahoo.com
the-rational-investor.com
