John Reese, founder of Validea, a provider of value-focused research and investment tools, recently wrote an article a Nasdaq.com discussing the opportunities presented by blue chip stocks. One in particular, Microsoft (NASDAQ: MSFT) is a regular on this site, and the full article contains several more that might be worth looking into.
Microsoft Corporation (MSFT): Sure, Microsoft isn’t growing as fast as it used to. But Bill Gates’ software giant ($206 billion market cap) is still putting up solid growth numbers, and, perhaps more importantly, its shares are looking quite cheap these days.
That cheapness is a big reason my John Neff-inspired model likes Microsoft. Neff, who put up one of the greatest track records of all time while managing the Windsor Fund, looked for stocks with P/Es that were 40% to 60% of the market average (a P/E that was too low could signal the stock was a dog). Microsoft shares sell for 9.7 times trailing 12-month earnings, which makes the grade. Neff also used the total return/PE ratio, which adds a stock’s growth rate and yield and divides it by its P/E ratio. Microsoft’s is 1.72, which more than doubles its industry average (0.67) and more than triples the market average (0.57).
The model I base on the writings of another mutual fund legend, Peter Lynch, also gives Microsoft high marks. It considers the stock a steady “stalwart” because of its high annual sales ($69 billion) and moderate 14.1% long-term earnings per share growth rate (I use an average of the three-, four-, and five-year EPS growth rates to determine a long-term rate). Lynch famously used the P/E/Growth ratio to find stocks with good growth and cheap shares, adjusting the “Growth” part of the equation for dividend yield in the case of big stalwarts. Yield-adjusted P/E/Gs below 1.0 are acceptable to this model; Microsoft’s comes in at 0.58, a great sign.
Read the full article here.
Author Disclosure: Long MSFT
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