I want to share a pretty conservative Microsoft trade idea with you guys
I want to share a pretty conservative Microsoft trade idea with you guys. Let me know your thoughts…
Here are some really awesome things that we noticed with this company when looking at their rock-solid financials:
10-Year Growth Rates:
• Revenue – 10.4%
• Net Income – 9.1%
• EPS – 11.4%
• Dividend Increase – 22.6%
• Book Value – 12.1%
• Cash Flow – 12.4%
• Free Cash Flow – 8.3%
• Share Buybacks for the last 10 Years.
• Net Profit Margin – 35%…and increasing.
• ROA – 18.85%
• ROE – 44.99%
• ROC – 29.80%
• Current Ratio – 2.29
• Quick Ratio – 2.10
• Debt/Equity – .4
• More Cash Assets than Long-Term Debt
• F-Score – 8 (highest score is a 9)
• Z- Score – 8.13 (just about as high as it gets)
• M-Score – (2.55)
• CAGR – 39%
• Timeliness – 1
• Safety – 1
• Financial Strength – A++
• Earnings Predictability – 95
• Price Stability – 100
• Growth Persistence – 95
WOW, WOW, WOW
I have not seen financials this good in quite a while.
We can see that the business is run almost perfectly. But just because the financials are amazing, does not mean we should go buy the shares just yet. We MUST calculate the intrinsic value and then we ONLY BUY AT A DISCOUNT to fair value.
After running several calculations, we determined the stock should be priced at approximately $291. As of this morning, Monday, May 17, 2021, the stock was trading at $245.50.
That is a discount to fair value of a little more than 15%. However, if you guys know me by now, I want a much larger discount than 15% especially in a market like we are in right now.
Warren Buffett says we should buy at a 50% Margin of Safety.
I am not buying this stock at the current price, because the upside is not great enough for me…
So how can we make money from Microsoft NOW?
Here is a trade that I believe has ZERO downside…and it is an amazingly simple, basic trade:
I want to buy the stock, but not at $245. Here is what I am going to do. I am going to SELLL a Put Option.
I will select the January 2022 Expiration date.
I selected the $220 Strike Price and I collected $10.50/Per Share or $1,050/Per Contract for that trade.
Here are the possible outcomes:
If MSFT goes up from now until expiration date in January, I win and I collect $1,050.
If MSFT trades flat from now until expiration date in January, I win and I collect $1,050.
If MSFT goes down from now until expiration date in January, but not below $220, I win and I collect $1,050.
I get paid to do absolutely NOTHING!!!
If MSFT closes below $220 at expiration date in January, I am forced to buy a freakin’ awesome stock that I want to buy…and I get to buy it at a price that I WANT…a DISCOUNT.
This is my desired outcome. I must buy the stock at $220, but I collected $10.50 for the obligation, so my cost per share (cost basis) is not $220, it is only $209.50!
I would be buying a $291 stock (from a value perspective) for just $209.50. I like that Margin of Safety much better than buying it today at $245.
What is the downside? Microsoft could go to ZERO. If that were to happen, I would still be obligated to buy it at $220. However, this is where your training as a Value Investor comes in.
We reduce much of that risk by properly analyzing the business, understanding the risks, and knowing the true value.
Can Microsoft go to zero? Anything is possible, but it is probably very unlikely. I am willing to bet that it won’t and I am very comfortable with that assumption.
In summary, by selling a Put Option, on this solid business, I will get $1,050 per contract if Microsoft goes up, stays flat, or goes down…but not below $220 by January 2020 expiration.