Trade of the Day: Breakout Makes MSFT Stock Much More Interesting

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Microsoft Corporation (NASDAQ:MSFT) — The world’s largest computer software company continues to improve on its products. Its commercial cloud business and new Office 365 package (which includes standard Office, Exchange, SharePoint and Skype for business) are expected to be successful revenue generators.

Even with gross profit margins dropping slightly to 69% in fiscal 2014, ended in June, Microsoft still has one of the highest profit margins in the industry. Revenues also rose 12% for that period as a result of the acquisition of Nokia’s Devices and Services business.

Microsoft has benefitted from the termination of support for Window XP. The company plans a shorter shelf life of support for other products, which should help to lower costs in the future.

Credit Suisse Group AG (ADR) (NYSE:CS) has an “outperform” rating on MSFT stock with a target of $55. Its analysts note that commercial cloud gross margins turned positive in fiscal 2014, and they expect overall operating expenses to be flat in fiscal 2016 from 2015. They believe double-digit EPS growth could result from cost management, the sale of non-core assets, share repurchases, price stabilization for Windows, and an accelerating shift to Office 365.

MSFT stock was a boring plodder until two weeks ago when shares vaulted through major resistance. They broke the bearish resistance line and intermediate downtrend line with an impressive breakaway gap. The gap from $43.40 to $45.65, which resulted from an explosive round of buying, may not be fully closed.

However, rather than chase MSFT stock, I suggest placing a buy order just below the 200-day moving average at $45. A minor MACD sell signal supports the anticipation of a shallow pullback.

My trading target is the same as Credit Suisse’s fundamental objective of $55, which would result in a return or more than 20%. MSFT stock is also an excellent addition to a long-term investment portfolio.

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