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.
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. With his latest project, Private Briefing, Bill takes you "behind the scenes" of his established investment news website for a closer look at the action. Members get all the expert analysis and exclusive scoops he can't publish... and some of the most valuable picks that turn up in Bill's closed-door sessions with editors and experts.