Friday, July 22, 2005

MSFT is a value blue chip WOW, what a concept.

Ms Mancin of Gabelli Value Blue Chip, told CNBC that she owns MSFT in her portfolio as she could made a valuation case for MSFT. As far as I'm concerned, anything that is trading above 20x trailing (not estimated P/E as the E could be influenced by high expectation as to compress the P/E) and 6x book is not a VALUE stock. Arguably, MSFT could be in a secular decline as the world is moving away from PC centric and open sourced application such as LINUX is getting on its tail.

Even with growth to P/E metric, assuming 10-12% EPS growth (probably lower after factoring in stock options compensation which would compress EPS calculation), it doesn't justify such a high P/E ratio. Many portfolio managers will look at its valution RELATIVE to its last 5 year (very misleading due to such short period after the bubble years), and say it looks cheap. That is the trouble with this kind of thinking, and I'm surprised Wall Street still hasn't adapted to the potential of MULTIPLE COMPRESSION of the years ahead even as earnings could continue to grow.


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