<THE CASH-KING PORTFOLIO>
Sell Microsoft Now?
No chance in Hades...
by Al Levit ([email protected])
Glendale, CA (Nov. 13, 1998) -- This is yet another column about Microsoft (Nasdaq: MSFT). I know that we write about Mr. Softy a lot over here in Cash-King land, but one of the rules we follow in Fooldom is to concentrate on the winners in a given portfolio. With the winners will lie an increasing portion of our savings. You can expect us to write considerably more about Microsoft, Gap, Pfizer, and Intel than to spend too much time on American Express and T. Rowe Price today. The greater portion of our savings lies with our winners; thus, we follow them more closely.
Microsoft has been our biggest winner all year. In fact, Microsoft's gain is responsible for about 1/3rd of the total gain for the entire Cash-King portfolio, today. It's a primary reason that we're leading the market by 2.5% since our birthing in February, 1998. Microsoft has been a machine. Moreover, since not everything written about Microsoft in the Cash-King column is positive (Hi, Rob!), I think it's important to make its case frequently. For the record, I do own Microsoft in my personal portfolio as well.
You've probably noticed that things haven't gone so well for Microsoft in 1998. The only major release that Mr. Softy had in 1998 was Windows 98, and that was more of a maintenance release than it was a new operating system. It was certainly not the kind of revolutionary change that Windows 95 was. If instead of calling it Windows 95, Microsoft called it Windows 4.0, then Windows 98 would've been nothing more than Windows 4.1. Now, there was also an Office 98 release for the Macintosh, but the more than 90% of us on PCs are still using Office 97.
In other developments this year, Microsoft tried to expand its presence outside of its two powerhouse monopolies. Just recently, it launched a fourth version of MSN as a portal to many of its successful Internet Web sites (e.g., CarPoint, Expedia, and Investor). Initial reviews suggest that this fourth version is the best yet (yes, Oak, we know, Microsoft always needs three or four versions to get it right!), but it still may not be good enough to compete with the more established portals like Yahoo! That remains to be seen.
In addition, Microsoft is also paying out a lot to aggressively develop Windows CE for use in hand-held personal digital assistants (PDAs). These will compete with 3Com's Palm Pilot and other appliance-type devices -- but Microsoft will again focus on just laying the application over the machine, not making the machine. Unfortunately, this development has not matured to the point where it can make a significant contribution to the bottom line in 1998. In the meantime, the Internet and Java and Linux are supposedly eating into Microsoft's market share.
But that's not all. There is one other little matter to fret about. The US Department of Justice (DOJ) is suing Microsoft for its business practices, claiming our company has monopolistic control over personal computing. This lawsuit has been in the news all year, as a daily item, often the lead daily item, and I don't expect it to let up any time soon. In fact, the litigation could go on for years. The cost for our software provider has been estimated at $1 million a month. Then, if Microsoft does finally lose this case and its appeals (which I think is unlikely but certainly possible) final penalties could include:
- A substantial fine.
- A consent decree (e.g., Microsoft may have to promise not to integrate Internet Explorer with Windows any more, or may be required to charge extra for it).
- A move to break Microsoft into various companies.
So, how are things going for Microsoft through these trying times? The stock is up more than 70% since January 1st, smushing the market's performance. And Mr. Softy just had an earnings report which Tom reviewed briefly and roundly praised as the greatest series of financial statements ever released. In addition to Tom's comments, I'd like to add a few of my own:
- It seems as though each quarter the record for the lowest (and thus, strongest) Flow Ratio of any company, anywhere, is re-set by guess who. With the First Quarter 1999 report, Microsoft now has its Flow Ratio down to 0.27. Wow.
- Not only did Microsoft shoot the lights out of estimates ($0.56 a share vs. $0.49 estimated), it did so while increasing cash and investments by $4 billion and maintaining its Foolish levels of debt at zero.
- Since the beginning of the year, we have referred to Microsoft and Coca-Cola (NYSE:KO) as the two companies that best typify the Cash-King model. With no disrespect to Coke intended, I believe that the recent evidence of falling margins for Coke is enough that we should be giving that title to Mr. Softy all alone. Tom and I agree -- Microsoft is the most powerful and amazing company that America's public markets have ever seen. That's nothing more than the numbers speaking.
Now what about Microsoft in the year ahead? Unlike this year, the software giant has two major releases scheduled, both of which are in beta testing today. Microsoft's web site promises that Office 2000 will be in the store shelves early next year. And Windows 2000, formerly known as Windows NT 5.0, is scheduled to be released in mid-summer of 1999. Meeting promised deadlines has never been Microsoft's forte, but if only one of these products is released next year, then 1999 results may be far better than 1998 results. If both products are released next year, then 1999 could truly be a banner year for Microsoft.
Not only that, but at some point the public may come to realize that the lawsuit is not the end of the world for Microsoft. Even if worst comes to worst, even if the company one day is broken up, the shareholders won't be disadvantaged since we would all get shares in each of the new companies. I, for one, would happily continue to hold a slew of Microsoft components (or just two), and continue diligently following the quarterly performances of each.
All of this leads me to believe that Tom was probably right when he wrote a couple of weeks ago that the lawsuit was holding down the price of Microsoft's stock. I'm hoping that this will continue for a while further. After all, we'll be putting another $2,000 in the Cash-King portfolio in a few months, and I can't think of a better way to make our first "second purchase" than to go with a company that is:
- The model of The Cash-King.
- Our best performer to date.
- Relatively cheap, to boot.
And three of us might agree (Tom, Phil, you guys out there?).
One last note before we head out for the weekend... Gap (NYSE: GPS) reported third quarter earnings yesterday and the Fool has the conference call synopsis right here.
That's it for today. Fool on, Fools!
Al
The book doesn't come out until January, but you can reserve your copy today!
Stock Change Bid AXP +2 3/16 94.56 CHV --- 83.00 CSCO - 1/2 64.69 KO - 13/16 69.75 GPS +2 3/4 68.88 EK + 1/4 77.50 XON + 1/16 72.88 GM +3 1/8 70.13 INTC +1 1/16 103.75 MSFT +1 1/4 110.00 PFE +1 3/16 105.50 SGP - 7/8 101.88 TROW +1 1/16 30.94 |
Day Month Year History
C-K +1.13% 3.37% 14.90% 14.90%
S&P: +0.68% 2.46% 11.90% 11.90%
NASDAQ: -0.17% 4.32% 10.90% 10.90%
Cash-King Stocks
Rec'd # Security In At Now Change
2/3/98 24 Microsoft 78.27 110.00 40.54%
5/1/98 37 Gap Inc. 51.09 68.88 34.81%
2/3/98 22 Pfizer 82.30 105.50 28.19%
2/13/98 22 Intel 84.67 103.75 22.53%
6/23/98 34 Cisco Syst 58.41 64.69 10.75%
8/21/98 22 Schering-P 95.99 101.88 6.13%
2/27/98 27 Coca-Cola 69.11 69.75 0.93%
2/6/98 56 T. Rowe Pr 33.67 30.94 -8.12%
5/26/98 18 AmExpress 104.07 94.56 -9.13%
Foolish Four Stocks
Rec'd # Security In At Value Change
3/12/98 20 Eastman Ko 63.15 77.50 22.73%
3/12/98 20 Exxon 64.34 72.88 13.27%
3/12/98 15 Chevron 83.34 83.00 -0.41%
3/12/98 17 General Mo 72.41 70.13 -3.15%
Cash-King Stocks
Rec'd # Security In At Value Change
2/3/98 24 Microsoft 1878.45 2640.00 $761.55
5/1/98 37 Gap Inc. 1890.33 2548.38 $658.05
2/3/98 22 Pfizer 1810.58 2321.00 $510.42
2/13/98 22 Intel 1862.83 2282.50 $419.67
6/23/98 34 Cisco Syst 1985.95 2199.38 $213.43
8/21/98 22 Schering-P 2111.7 2241.25 $129.55
2/27/98 27 Coca-Cola 1865.89 1883.25 $17.36
2/6/98 56 T. Rowe Pr 1885.70 1732.50 -$153.20
5/26/98 18 AmExpress 1873.20 1702.13 -$171.08
Foolish Four Stocks
Rec'd # Security In At Value Change
3/12/98 20 Eastman Ko 1262.95 1550.00 $287.05
3/12/98 20 Exxon 1286.70 1457.50 $170.80
3/12/98 15 Chevron 1250.14 1245.00 -$5.14
3/12/98 17 General Mo 1230.89 1192.13 -$38.77
CASH $120.62
TOTAL $25115.62
*Please note: On 8/4/98 $2,000 cash was added to the
portfolio. $2,000 will be added every six months.
*The year for the S&P and Nasdaq is as of 02/03/98
