My top pick for 2011 is a tech stock. That may not surprise you considering the big run by technology companies in the second half of 2010. But what may surprise you is what tech stock I’m throwing my weight behind: A tiny company called Microsoft (NASDAQ: MSFT).
Admittedly, Microsoft hasn’t given investors a lot to be happy about lately. MSFT stock has been kicked to the curb, down about -8% this year while the broader market has gained about +12%. If you’re a momentum investors this may turn you off, but I believe that the time is right for the rotation of capital back into this old standard.
Why? Here are some of the biggest reasons:
Stock Buyback Plan: Microsoft is currently working on a $40 billion stock repurchase, with $10 billion of that happening this year. That’s a lot of shareholder value.
Microsoft Flush With Cash: Though MSFT is often only mentioned derisively in the same sentence with Apple Inc. (NASDAQ: AAPL) and Google Inc. (NASDAQ: GOOG), one thing it shares with the two tech powerhouses is a war chest brimming with cash. Microsoft has $30 billion in the bank – and that’s even after paying a decent dividend of 2.3%, something neither Google or Apple offer right now.
Bargain Valuation: Microsoft trades for less than 8 times next year’s earnings (when you back out cash). Compare that to the S&P 500 which trades for about 13 times next year’s earnings. That would be impressive enough, but the icing on the cake is that MSFT earnings will grow twice as fast as the S&P earnings over the next five years.
Predictable Revenue: Much of MSFT’s revenues have shifted to subscription revenues making their earnings very predictable. The company is no longer as reliant on flashy software launches and one-shot sales.
Kinect for Xbox: The Kinect video game controller is is bigger than people think. And that’s saying something, considering the new gadget topped 2.5 million units sold at the end of November after less than a month on the market! Sales of the motion controller will top $500 million next year and $5 billion over the next five years. What’s more, applications will be created for it with very high margins.
Emerging Market IT Sales: The developing world is opening up its wallet when it comes to corporate IT. Though it may not be flashy, Windows remains the gold standard for computer OS software in the workplace so MSFT stock will be the prime beneficiary of this emerging market boom. Followed closely by fellow corporate IT powerhouses Cisco Systems (NASDAQ: CSCO) and Intel (NASDAQ: INTC), of course.
Check out the other FREE stock picks that make up InvestorPlace.com’s Top 10 Stocks for 2011.
James Altucher writes for The Wall Street Journal and is the author of numerous investment books, including “Trade Like A Hedge Fund” and “Trade Like Warren Buffett.”