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Here comes Microsoft (MSFT). Once the belle of the ball among tech companies in the 1990s, then shunned after it made one blunder after another in the 2000s, the software giant in Washington state has rebounded to within an inch of its all-time high in recent weeks without much fanfare.
This is exciting, as there is very little on the surface to justify the optimism. But it’s this very optimism that is making the stock go up. The company was growing all during its 2000s downturn, but it was not getting any credit for that because investors had lost confidence in its management’s ability to look around the corner and see the future.
Investors collectively decided to pay less for every penny of earnings than they had in the 1990s, so the price/earnings multiple went down even as real earnings went up. This depressed the shares, forcing holders to wonder whether the tech giant could survive in a new era in which its key product, operating systems, had seen its importance erode in favor of the Internet browser.
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| Microsoft shares are only a couple dollars from their all-time high of $44.01, up an impressive 68 percent since late 2012. |
More importantly, though, investors had grown frustrated and disillusioned with management, and the stock only began to perk up in a major way in the middle of last year when it was announced that longtime chief exec Steve Ballmer would finally step aside in favor of new blood. The initial buzz that the company would attract the popular chief executive of Ford (F), Alan Mulally, gave the shares a pop. But even when he demurred and the job was given to an insider, Satya Nadella, shares remained elevated.
My sources say that the new chief executive has been a big hit internally as well as externally, and has given the software giant a fighting chance to make good on its promise to become a devices and services company. Moreover the shares are not expensive now on a fundamental basis, so there is plenty of opportunity for new owners to come in.
Shares in the tech giant are now only a couple dollars from their all-time high of $44.01, up an impressive 68 percent since late 2012. It’s an incredible comeback for a company many had left for dead as it adapts to a new mobile future with its acquisition of Nokia, the launch of the well-received Surface 3 tablet/laptop, and its aggressive push into the cloud.
New highs do wonders for stocks, as suddenly everyone is a winner and thus there are no natural sellers at any level. It is going to take a bit more time for Microsoft shares to chew way through the last remaining resistance, but when the do hit the rare air of a new all-time high, don’t be surprised if that is itself a catalyst for much higher prices as investors gain more confidence and push the price/earnings multiple back up.
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The first half of the year officially concluded yesterday, so this is the time to start thinking about what is working and where the surprises are.
U.S. investors have something like 35 percent of their portfolios in cash. I guess they are worried about something, but I’m not really sure what it is. You know, there is always something to fret about. But the main thing that stocks care about is the level and direction of interest rates, corporate earnings and inflation.
As long as the economy is inching along at more than a 1.5 percent annual pace, rates are low, inflation is low and the Fed is accommodative, stocks are going to rise. It doesn’t matter who is in the White House, what Sunni extremists are doing, whether Obamacare is successful or not, or a whole host of other things you might have strung on your worry beads.
Quick scorecard for the first half:
Best major U.S. index variant:Â Midcap 400 Value (IJJ), +8.6%.
Runners up:Â S&P 500 Equal Weight (RSP), +7.4%; Nasdaq 100 (QQQ), +6.7%.
Best S&P sector: Utilities (XLU), +15.6%; Energy (XLE), +12.6%; Health Care (XLV), +9.9%.
Worst S&P sectors:Â Consumer Discretionary (XLY), -0.1%; Telecom (IYZ), +1.4%.
Best countries:Â India (INP), +19.3%; Italy (EWI), +11.2%; Spain (EWP), +10.6%.
Worst countries:Â Russia (RSX), -7.5%; China (FXI), -3.3%.
Best fixed income:Â 20 Year Treasurys (TLT), +11.3%; TIPS (TIP), +4.9%.
Best commodities:Â Natural gas (UNG), +17.1%; crude oil (USO), +10.1%; gold (GLD), +9.3%.
A few notes on the scorecard:
— Consumer discretionary has lagged because crude oil and gasoline prices are up. If energy prices pull back, then expect XLY to get rolling.
— Financials led the bull market start in 2009. But just for a year. After that first leg, they have lagged; they’re up 3.8% this year, which is a quarter of the return of the leaders.
— Health care has been a leader in almost every phase of the bull market. They pulled back for a short while this spring, but are back to their winning ways.
— Small caps, which have the most exposure to the U.S. economy, are up but lagging, which may be an indication that investors are leery of the pace of the recovery.
— Technology stocks were big leaders in 2013 and early this year, then pulled back in the spring, but they are going great guns again, led by the smaller companies in the group.
— This is all outstanding considering how horrible the U.S. economy was in the first quarter. Bespoke notes that since 1947 there has never been another quarter where GNP declined by 2.9 percent or more and the economy was not in recession. The worst quarter in recent history outside of a recession was the first quarter of 1956, when the economy contracted by 1.5 percent, or about half the decline we just saw.
–Â Final thought:Â If stocks can survive and in many cases thrive after a quarter like that, imagine what they can do if the temperature of the economy actually picks up a bit.
Best wishes,
Jon Markman
P.S. Microsoft isn’t the only tech to keep your eye on. Download my free report for 5 red-hot technology stocks to check out now.
