Time to buy Microsoft, this investor says

There’s no good way to time the bottom of the market, but why bother when there are solid names like Microsoft (Microsoft Stock Quote, Charts, News, Analysts, Financials NASDAQ:MSFT) currently trading at a sale price? That’s the thinking behind portfolio manager Greg Newman’s move to nominate Microsoft as one of his top picks for the year ahead.

“I think you get one of the world’s premier premier companies, on the cheap right now, and I don’t know that this is the very bottom, the magic moment right here, but I think over the next one, two years, this is a wealth builder,” said Newman, senior wealth advisor at ScotiaMcLeod, who spoke on a BNN Bloomberg segment on Monday.

Newman said part of the reason for the pullback on Microsoft is the market’s worry about the company’s growth prospects. Microsoft’s share price dropped seven per cent, for example, on the release of the company’s third quarter earnings last month. Top and bottom lines for the software and hardware giant were strong enough to beat analysts’ expectations, but management’s guidance for the fourth quarter was tepid, forecasting Q4 revenue of between $52.35 and $53.35 billion. The Street had been expecting on average a forecast of $56.05 billion. 

Revenue for Microsoft’s cloud computing business came in a little under analysts’ estimates, as well, while management said unfavourable foreign exchange rate movement over the third quarter had a negative $302 million impact on revenue and negative $0.03 per share on earnings, as did the acquisition earlier in the year of artificial intelligence firm Nuance.

Concerns over a swooning economy are likely also playing a role in the dimmer view of Microsoft, whose consumer products would be expected to take a hit in leaner times. But for Newman, there are just too many good-looking metrics on Microsoft to pass it up.

“Weakening PC sales, lowered guidance, lower investment technology spend — they’ve obviously brought this name and the group down and [Microsoft] was very, very crowded and over-owned,” he said.

“I think over time the macro and the [foreign exchange] headwinds abate. They have high growth of 20% in Intelligent Cloud, mid-teens growth in Productivity in Business, two to five per cent growth in Windows. Over time, for their scale and their [share] buybacks, you add that up, we believe they’re going to grow their earnings per share and free cash flow by 20 per cent over our medium term estimate,” Newman said.

“We believe that the street estimates are too low,” he said.