Microsoft (MSFT) stock, in a rather ziggy-and-zaggy year, has been zigging the wrong way for more than a month now — and I don’t expect that trend to stop anytime soon.
While I generally prefer to take the long-term view rather than fret over the day-to-day fluctuations of my portfolio, I still watch the stock market with a keen eye every day, and from time to time I notice something compelling enough to make a fuss about.
Today I’ll make a fuss about MSFT stock. About how it’s primed to be a good-for-nothin’ laggard this summer. And about how — if I’m actually onto something here — investors can still make a buck or two on the lousy thing.
Post-Earnings Fatigue
First, some brief recent history on MSFT stock: Shares of the software giant went on a rip-roarin’ rally in late April, fueled by an awfully impressive fiscal third quarter. Earnings of 61 cents per share came in above consensus EPS expectations for 51 cents, and revenue beat Street views as well, clocking in at $21.7 billion to Wall Street’s $21.1 billion consensus estimate.
Just like that, the MSFT stock price took off, blazing 19% higher in April alone.
Alas, the rally was but a flash in the pan, and Microsoft shares are off 7% since April 30. If you heeded the old credo “Sell in May and go away,” well, give yourself a pat on the back.
But you can still make money off MSFT stock going forward — even if shares are destined to underperform into August, as I believe they are. Briefly, there are 3 reasons I think MSFT stock won’t be doing much for the next 4 weeks or so:
- MSFT just crossed below its 50-day moving average of $45.65, a bearish technical signal indicating the stock will continue to trend lower.
- Although another earnings surprise on July 21 could spark another short rally, the last time MSFT put together consecutive quarterly earnings beats was more than a year ago. I expect most attention to be focused on the July 29 release of Windows 10. After Windows 8 was fully released in October of 2012, shares initially popped slightly but ultimately slid, taking until March 2013 to recover.
- The chatter over Microsoft potentially buying Salesforce (CRM) should keep some bearish pressure on MSFT stock, and if the rumors ultimately prove to be true, the MSFT stock price will almost certainly take a hit.
So how can a MSFT investor make a buck off of the stock’s impending underperformance? Well, you could simply sell the stock in anticipation of a drop, then buy back in at a lower level in a few months’ time. But I think the better way to play it is to sell covered calls.
Specifically, selling the MSFT August 21 $50 calls looks like a solid play: At today’s prices, you’ll collect $35 for every call option you sell. If shares don’t get above $50 before Aug. 21, you’ll just pocket the $35 for every 100 shares you sold calls on. If it does manage to break $50, you’ll still have your premium and you’ll just sell your MSFT shares at $50 a share — pocketing a tidy 10% gain between now and then in the process.
Not a bad way to play a stagnating stock, if you ask me.
As of this writing, John Divine did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.
