By Dan Ferris in the S&A Digest mailbag:
"It seems that ever since Apple Computer passed Microsoft Corporation in total capitalization recently, Microsoft's share price has been in freefall. Maybe that event was significant for the company and will continue its decline. Yes, the company does churn out a lot of cash, but investors have actually lost money if they had held the stock over the last 10 years. I know you classify Microsoft as a 'World Dominator' company, but maybe things are changing? Personally, I feel I've held on way too long as an investor." – Paid-up subscriber M. Stone
Ferris comment: Two things. First, I love it when investors say they've held on too long. There are few better sentiment indicators than the capitulation of the individual retail investor. He buys and sells based on how he feels because he doesn't know how or what to think. Second, 10 years ago, the market was peaking in the greatest equity bubble ever. It's meaningless to refer to any stock's performance since then as anything but evidence Mr. Market was smoking crack. Everybody lost money buying stocks at that moment. That's not a criticism of Microsoft. It's a criticism of anyone who owned the stock when Mr. Market was offering 68 times earnings for it. You will never catch me holding on to the stock at that price.
You could as easily have pointed out investors have made thousands of times their money on Microsoft since the late 1980s. Both observations are equally meaningless. You can't buy the past. If only you could...
Microsoft's earnings per share have more than doubled since then. Its revenues have nearly tripled. Its financial condition makes it one of perhaps two or three businesses on Earth at this moment that deserves a triple-A rating. It generates more cash than any other publicly traded company in existence. If history repeats, as it so often does, it means Microsoft will clock another good earnings performance over the next 10 years. It's dirt-cheap right now at around nine times free cash flow.
Crux Note: Dan is one of the world's best at finding great stock values no matter what the market is doing. To learn more about Extreme Value, and his exclusive list of World Dominators, click here.
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