A Cheap Strategy To Play Microsoft

A Cheap Strategy To Play Microsoft

A Cheap Strategy to​ Play Microsoft
Bill Gates is​ super rich but his once high-flying software company has been in​ the​ doldrums since mid-2002 after falling from the​ $35 level .​
The problem with Microsoft (MSFT) has been its failure to​ grow both its revenues and​ earnings at​ the​ superlative rates the​ company once enjoyed .​
Any company the​ size of​ Microsoft, with a​ market-cap of​ $242 billion, will find growth an​ issue because of​ its size .​
But this is​ not to​ say the​ stock is​ dead .​
Far from it, Microsoft remains a​ viable long-term software company and​ is​ cash rich with $34 billion or​ $3.28 per share in​ cash .​
This gives the​ stock plenty of​ financial flexibility to​ develop or​ buy growth technologies .​
Microsoft just announced it​ would spend $1.1 billion in​ R&D at​ its MSN Internet unit in​ the​ FY07 .​
And according to​ the​ Wall Street Journal, Microsoft is​ exploring the​ possibility of​ taking a​ stake in​ Internet media company Yahoo (YHOO) to​ take on Internet advertising behemoth Google (GOOG).
But with an​ estimated five-year earnings growth rate of​ a​ pitiful 12%, the​ company has its work cut out for​ it .​
Trading at​ 16.30x its estimated FY07 EPS of​ $1.44, the​ stock is​ not expensive but appears to​ be priced not as​ a​ growth stock .​
Its PEG on the​ surface of​ 1.51 is​ not cheap, but if​ you discount in​ the​ cash of​ $3.28 per share, the​ estimated PEG falls to​ around 1,0, a​ decent valuation .​
Also, if​ Microsoft can improve on its estimated 12% growth rate, the​ PEG would decline further.
The fact is​ Microsoft at​ the​ current price deserves a​ look .​
If you want to​ play the​ stock but don’t want to​ shell out the​ $2,347 for​ a​ 100-share block, you may want to​ take a​ look at​ the​ long-term options, also known as​ LEAPS .​
For instance, the​ in-the-money January 2018 $22.50 Microsoft Call LEAPS not set to​ expire until January 18, 2018 currently costs $380 a​ contract (100 shares) .​

This means you risk a​ total of​ $380 for​ the​ chance to​ participate in​ the​ potential upside of​ 100 shares of​ Microsoft over the​ next 20 months .​
The breakeven price is​ $26.30 .​
If Microsoft breaks $26.30, you would begin to​ make money on your LEAPS .​
Conversely, if​ Microsoft fails to​ do anything, your maximum risk is​ $380 on the​ initial option play .​
Warning: the​ aforementioned example is​ for​ illustrative purposes only and​ not to​ be construed as​ an​ actual option strategy .​
Due to​ the​ higher risk inherent in​ options, I​ recommend you speak with an​ investment professional before deciding to​ employ any strategy involving options.

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