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Throw This Stock Away

Selling a stock is never easy, even in these market-pounding days when it's a relief to be able to exhale. Over the past month, I've been suggesting stocks that you should dump from your portfolio.

I'm not just spewing venom. I am wrapping up every column with three replacement stocks that I believe will outperform the stock being heaved. After all, if I can't offer constructive criticism, I may as well offer reconstructive criticism.

Whom to toss out this week? Come on down, Microsoft (Nasdaq: MSFT  ) .

No more Mr. Softy
Bill Gates isn't the only one leaving Microsoft these days. If I'm right, investors should follow suit. The world's leading software company is feeling pretty vulnerable. If you don't believe me, check out these grim bullet points.

  • Earnings fell on flat revenue growth during the company's most recent quarter.
  • The Internet is a lucrative kegger for everyone but Microsoft, where MSN continues to post losses.
  • With two years and two stabs at portable-audio greatness, the Zune isn't making a dent in the iPod stronghold.
  • The Xbox 360 was the only growth component in Microsoft's latest quarter, but the console continues to lose market share to the Wii and lacks the PS3's killer Blu-ray app.

Perhaps the most problematic aspect of Microsoft's future is that Vista isn't the runaway success that the company was hoping for, even after its delayed launch. Even though the operating system is reasonably solid and even slightly innovative, the company is scrambling to rush out its next Windows incarnation, assuming that the market doesn't want Vista -- when the cold, hard truth is that the market just doesn't need any Microsoft operating system.

The hottest-selling laptops don't come with Windows pre-installed. Whether it's the high-end Apple (Nasdaq: AAPL  ) MacBooks or the entry-level ASUS Linux-powered portables, the future is more about the Internet than the operating system or the CD-installed productivity software. Yes, Microsoft is a gorilla with its Internet Explorer browser, but the playing field is level there. How else does one explain the rising popularity of Mozilla's Firefox and Apple's Safari?

Microsoft has feasted off its Windows washing and Office chatter for ages, but the future is changing, and Mr. Softy has gone from a leader to a desperate follower.

Yes, Microsoft will remain relevant, but it's unlikely to be the market darling that it was during the first leg of the computing revolution.

Good news
I promised to have three alternatives for Microsoft in your portfolio. Here they are.

  • (NYSE: CRM  ) : Cloud computing is the future. Software programs that are delivered through a provider's central server farm -- and not tethered to your PC as a clunky installation -- are cheaper, portable, and more logical than what we had in the old CD-anchored or PC-downloaded past. salesforce specializes in enterprise-software solutions, so it's not necessarily a direct threat to Microsoft's core. However, it is the poster child for cloud computing, a trend making Microsoft's Office cash cow vulnerable to something as simple as Google Docs or Sun Microsystems' (Nasdaq: JAVA  ) StarOffice. If you're looking for a rapidly growing software company, salesforce isn't cheap, but it delivers the octane.
  • Nintendo (OTC BB: NTDOY.PK): The Wii is a hit. It's outselling the PS3 and Xbox 360 combined. Microsoft's Xbox 360 was the first of the latest generation of consoles to hit the market, but it hasn't amassed the magnetic charm of the Wii. Unlike the Blu-ray-blessed PS3, it's not as if the Xbox 360 can compete against the PS3 as a must-have home-theater appliance (even though it has held up well over time against the PS3). Nintendo's trump card, though, is that most of its best-selling games are homegrown. The Xbox has Halo and an exclusive episodic installment deal with Take-Two Interactive's (Nasdaq: TTWO  ) Grand Theft Auto IV, but it's no match for Mario, Link, and the assortment of unique games that make the most of the Wii's motion-based controller.
  • Google (Nasdaq: GOOG  ) : Forget Microhoo. Since the Internet is the future, the search-query leader is the real usage gateway. Big G is the company that Microsoft fears the most. That's why it was willing to overpay for the Microhoo solution, which would have ultimately been a poor man's Google. And why settle for a poor imitation? Google isn't perfect. It isn't cheap. However, it's the one dangling the keys as the driver. Never settle for the one calling "shotgun" in desperation. 

Other headlines out of the recycle bin:

Do you like Rick's substitutions? Would you rather stick it out with Microsoft? Are there other stocks he should look at in future editions of this column? Let him have it in the comments box below.

Microsoft is a Motley Fool Inside Value pick. Take-Two Interactive and Google are Motley Fool Rule Breakers selections. Nintendo and Apple are Motley Fool Stock Advisor recommendations. Try any of our Foolish newsletter services free for 30 days.

Longtime Fool contributor Rick Munarriz is starting to realize why his latest purchases come from Apple. Sorry, Microsoft. He does not own shares in any of the stocks in this story. Rick is part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.

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