Is It Time to Take Profits in Microsoft Corporation Stock?

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MSFT stock - Is It Time to Take Profits in Microsoft Corporation Stock?

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It’s hard to believe just how well shares of Microsoft Corporation (NASDAQ:MSFT) have been doing. Not many were calling for shares to rally more than 40% from January 2017 to January 2018. But that’s just what MSFT stock has done.

Now that it sports a market cap north of $715 billion, should we be more cautious on the software giant?

Given its recent run — rallying about 10% so far in 2018 — I’m inclined to be more cautious on the name.

I know I’ve been cautious on a lot of names as of late. But trust me, I haven’t been a bear on MSFT stock. I haven’t even been a hesitant bull. I’ve been calling for MSFT to rally, rally, rally. But even some of the most optimistic price targets on the Street weren’t looking for this steep of a move.

Let’s look at the charts before we go much further.

Trading MSFT Stock

chart of MSFT stock price
Click to Enlarge
Source: Chart courtesy of StockCharts.com

For almost exactly one year, MSFT stock was steadily trending higher. You can see on the chart where shares were bracketed in between support and resistance. Notably, the 50-day moving average (in blue) stuck pretty close to the stock, acting as support.

Now though, MSFT stock is trading almost 10% above its 50-day moving average. Further, it’s completely blown right through the top of its prior range.

For those that have been long, they’re likely not complaining. This move makes it pretty hard to be a buyer near these levels, however. In fact, it even seems prudent to consider taking some profits for those that aren’t in Microsoft for the long haul.

At the top of the chart is the Relative Strength Index (RSI), which measures how overbought or oversold a stock is. A reading of 70 or more generally indicates an overbought stock. Currently sporting an RSI of 80, MSFT stock appears ahead of its skis.

Further, notice over the last 18 months each time Microsoft stock has a high RSI. More times than not, shares tend to correct. If they don’t correct, they consolidate near current levels. In my assessment, MSFT either needs to correct or consolidate. While momentum investors might run it to $100, the risk-reward currently no longer favors the bulls in the short term.

Fundamentals of Microsoft Stock

Microsoft isn’t the only runner. The FANG stocks — Facebook Inc (NASDAQ:FB), Amazon.com, Inc. (NASDAQ:AMZN), Netflix, Inc. (NASDAQ:NFLX) and Alphabet Inc (NASDAQ:GOOGL, NASDAQ:GOOG) — have all been on fierce rallies. Heck, NFLX stock is up 46% on the year already!

Maybe the whole group, and most of the market for that matter, is due for some consolidation or a pullback.

The run to start 2018 has been pretty hot. And while valuations are stretching, the money flow into the market has been mind-boggling. It’s tough to contain stock prices when buyers are flooding in at a rate like this.

In any regard, the valuation is starting to get up there for Microsoft stock. Shares trades at 27.5 times 2018 earnings estimates. While MSFT has been growing sales and earnings at a respectable pace, the forward P/E generally stays below 23. Part of this increase is related to its switching to GAAP reporting from non-GAAP.

Don’t get me wrong, while MSFT stock isn’t wildly overvalued. But its valuation is becoming something to note.

Microsoft has a strong core business and is making huge strides in the cloud, as we’ve highlighted constantly over the last year. The company will make a push into artificial intelligence and the cash it repatriates will boost its flexibility. Whether that comes in the form of buybacks, higher dividends or M&A to boost growth (or all three) remains to be seen.

MSFT stock yields about 1.75% and has a rock-solid balance sheet. Meanwhile, CEO Satya Nadella continues to build out an ever-powerful brand.

The Bottom Line On MSFT Stock

Microsoft remains a tremendous company. But currently its valuation is certainly stretching and its yield is the lowest it’s been since 2010. The chart is pointing to a less favorable situation for the bulls and warrants caution going ahead.

However, Microsoft isn’t a short and it’s debatably not even a sell. Particularly for long-term investors.

But I wouldn’t buy MSFT at current levels and expect much upside. A pullback to $87.50 — likely where the 50-day moving average will come into play as well — seems like a reasonable spot for longs to start a position.

Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell did not hold a position in any of the aforementioned securities.

Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell.


Article printed from InvestorPlace Media, https://investorplace.com/2018/01/avoid-msft-stock-earnings/.

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