This Tech Blue Chip Is On Sale

The last time Shah Gilani recommended Microsoft Corp. (Nasdaq: MSFT) to Private Briefing readers as a "New Buy," I asked him if he had a Windows-powered crystal ball - or a listening device planted in the software firm's Redmond, Wash., headquarters.

I was only kidding, of course. But Shah's timing was stunning...

MSFT Stock's Run Following Shah's Call

It was July 2013, and Shah advised Private Briefing subscribers to snap up shares of both "Mr. Softy" and Apple Inc. (Nasdaq: AAPL) - telling them they were both undervalued, cash-rich companies that were poised for corporate shakeups.

These "are two examples of decent dividend-paying stocks that have tons of cash that will yield them more income if rates rise," Shah told us. "The two of them are long overdue to shake things up, and I believe they will."

He was right on both counts.

Just days after we shared these twin recommendations with you, Microsoft announced a sweeping corporate overhaul. Not long after that, the company announced that incumbent CEO Steven Ballmer would be retiring - and made a $7 billion deal to buy the Nokia Corp. (NYSE ADR: NOK) handset business.

Microsoft ended up naming Satya Nadella as its new CEO. And even though Nadella was an insider - he'd joined Microsoft in 1992 and ran the company's cloud and enterprise businesses - he's so far been the "change agent" the huffing heavyweight seemed to need.

Shah's prescient call paid off big. After recommending the stock at $34.70, it zoomed as high as $50.04 - a peak gain of 44%. And Apple - recommended at a split-adjusted price of $60.10 - has risen as high as $133.60, for a peak gain of 125%.

Why It's Time to Buy

I'm recounting this story because Microsoft has recently sold off, and our 44% gain is now down to about 19% (underscoring the strategy of "trailing stops" our experts use with most recommendations).

And Shah's telling his Capital Wave Forecast subscribers that it's once again time to buy.

"Bill, we've made a lot of money over the past few years on Mr. Softy, and it's time to get onboard that gravy train again," the retired hedge-fund manager told me this week.

"There are lots of reasons why we're going to load up on Microsoft. One, it's cheap. Two, it yields 3% and counting. Three, there's all the cash the company continues to stockpile. Four, there's new management running the house. And five is the fact that Microsoft is going back to $50, then on to $60 by the end of 2015."

The stock is down 5.25% year to date, and 17.6% from its 52-week high of $50.05 - not too far from the 20% drop that constitutes a "bear market" sentiment for the shares.

Granted, it's a contrarian play. But it was the last time Shah made it a new "buy," too.

"There are good reasons why Microsoft has been sliding backward," Shah said. "But if you study them carefully, you'll see that those reasons are fully baked into the new lower price. So we're definitely not overpaying here."

The company's management team "has been fairly aggressively talking down 2015 earnings expectations," Shah said, which has induced super-cautious Wall Street sell-siders to anticipate additional disappointments and ratchet their own estimates down even more.

But Shah likes that backdrop because it's wrung a lot of the downside potential out of the share price already.

"Look, this company isn't sick, isn't dying - and certainly isn't dead," Shah said. "In fact, it's actually remaking itself right before our eyes. It's doing so very smartly. And it's doing so in a way that has almost hidden a big-profit opportunity in plain sight."

With $68 billion in cash and counting, Microsoft actually has what investors should be seeking in a sky-high - risky - stock market: Plenty of room to maneuver.

The "Real" Story

According to Shah, the company's cloud business is growing about 40% per year. Windows 10 should be a smash and grab-the-cash winner. The new simplified backend kit that lets developers create apps that work across all devices is killer, which is about time. The result, over time, will be a lot more user-friendly front-end apps.

Microsoft recently struck a new deal with Lenovo Group Limited (OTCMKTS ADR: LNVGY), the world's largest computer vendor. And another deal - with China Mobile Ltd. (NYSE ADR: CHL) to make and push a price-competitive set of phones - will definitely improve Microsoft's market position in the hefty Chinese market.

"Right now, the company's phone offerings make up about 0.8% of the Chinese market of nearly 600 million smartphone purchases," Shah said. "That means Mr. Softy has mega-room to improve its penetration into that market - and you can count on that being a core strategy going forward."

Another thing that's freaking out analysts is the belief that Microsoft has lost its mind and is backing away from its premium, high-margin products and disastrously resorting to a "freemium" strategy that will degrade margins and destroy net needlessly.

Anyone who believes that is reading the wrong set of Microsoft tea leaves, Shah told me.

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"Microsoft is going to have a Windows 10 giveaway 'program' for some upgrading customers," he said. "The company is letting users of some competitors' smartphones download a 'mobile' version of Office for free. And it is also creating some partnering deals where it will be giving lots of free stuff away as a 'freemium.' But that's a lot different than dumping a tried-and-true business model."

It's all part of what Chief Marketing Officer Chris Capossela refers to as the company's "Acquire, Engage, Enlist, and Monetize" strategy.

"You acquire new customers by some freemium programs and hold onto old customers by engaging them with new and better products," Shah explained. "You enlist them to basically self-market the company's products by giving them a lot of reasons and access to try other integrated products in the ecosystem, and you monetize all that. That's been Apple's strategy for a while now, and Capossela isn't shy about saying it's brilliant and long overdue in Microsoft. Personally, I love the strategy."

There are going to be some headwinds for the company, like currency translations, Shah cautioned. About 50% of Microsoft's revenue is generated overseas. So as the U.S. dollar strengthens, we'll see how well the company hedges or what other creative financial moves it can make.

"Are there slippery rocks ahead? Yes, there are," Shah concluded. "But the further down the new path the company gets the drier the ground is, until 2016, when it's going to be rock hard and as fast as the Daytona International Speedway. That's why we're buying Microsoft."

Shah recommends that new purchases be executed in "tranches." And we have a strategy in mind for you here.

We're recommending that you buy 40% of your intended position now, at prices up to $41 (at Monday mid-day MSFT stock price was a hair above our target price) a share. Buy another 20% if the price slips to $37. Hold back that final 20% back to capitalize on a major market correction, which will affect all stocks, not just Microsoft.

More from Bill: On December 2, 2013, the CEO of a tiny defense contractor bought over 30,000 shares of his own company. The stock went up 30% in just over a month. Recently, this CEO snapped up even more shares. This time Bill expects the stock to pop by 108%. For full access to Bill's report on this incredible opportunity, click here

About the Author

Before he moved into the investment-research business in 2005, William (Bill) Patalon III spent 22 years as an award-winning financial reporter, columnist, and editor. Today he is the Executive Editor and Senior Research Analyst for Money Morning at Money Map Press.

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