I'm Not Buying Microsoft or Applehttp://www.fool.com/investing/value/2010/12/13/im-not-buying-microsoft-or-apple.aspx Jim Mueller
December 13, 2010
This article is part of our Rising Star Portfolios series.
Odds are good that if you're a fan of Microsoft or Apple, I've probably managed to annoy you. But if you give me a chance, I'll tell you why I'm not buying Microsoft (Nasdaq: MSFT ) or Apple (Nasdaq: AAPL ) for my Messed-Up Expectations (MUE) portfolio at this time.
Mr. Softy is too soft
But today, things are priced a bit too rosily for Microsoft. At Friday's close of $27.34 per share, the market is expecting 6.5% annual growth in free cash flow for five years, 3.2% growth for the next five years, and 2.5% terminal growth (at a 15% discount rate). (For the rest of this article, I'll abbreviate that as "6.5%/3.2%/2.5%.") Over the past five years, FCF has grown by 8.4% annually, on average. There's not a lot of pessimism priced in compared to what Microsoft has done.
I know I've said before that Microsoft can be an intriguing investment, possibly doing a repeat of what Coca-Cola did starting in the mid-1980s. But on further reflection, the MUE portfolio is looking for situations where the market is really expecting next to nothing from a company, not just uninspired performance.
Cupertino is too hard
The trouble is, as far as deciding what's going into my portfolio is concerned, that's pretty well priced in right now. Using the same model, at Friday's price of $320.56, the market is expecting an 18.3%/9.2%/2.5% growth pattern (at a 15% discount rate). Yes, over the past five years the company has grown FCF at nearly 49% annually, but over the past five years, FCF growth actually increased only twice compared to the previous year's growth rate. In other words, that 49% rate might not be sustainable.
To reiterate, I'd much rather invest in a company where the market is expecting nothing, like when Apple was at $90 per share in early 2009.
These might be just right