Microsoft is a BUY! and Another Buy Signal? - Consumer Confidence Lowest Since 1982

As Friday's "Prudent Speculator" newsletter suggests, I have bought more Microsoft on Friday (already held some sold puts on Jan 09 at $35), as one of the best values today and also sold some Daylight Energy to capture profits.

The case for Microsoft is very compelling. This is a company with an ROE that is through the roof at over 45% (one of the highest of any stock). The gross margin is also through the roof at 80% (as it has maintained for 20 years). It is a cash machine with revenue growth of 17% YOY. Earnings growth is 25%. Yet, the P/E at today's closing price of 29.83 is only 17.3

This is the best price on Microsoft since the mid 80s, before the launch of Windows, in my estimate. And there is a catalyst in the Yahoo deal. You have to love the way that CEO, Steve Ballmer, is playing his hand with Yahoo directors (and founder Jerry Yang). He is refusing to overpay and throw investor money (Bill Gates' and mine) at Yang. He will get Yahoo for a fair price and that will help MS in its competition with Google. In fact, I won't be surprised if after Yahoo, Ballmer goes after AOL, which Time Warner has on the block (I also own TWX betting AOL gets sold). I think MS will go over $40 by year end as the tech cycle leads us out of recession.

I also have trimmed a little on energy, just to lock in profits. I still think energy is the place to be for the next 10 years, (and have added solar to broaden exposure), but there should be a little pullback as the dollar turns around the next couple months. I will buy back the Daylight I sold when it is around $8. I am not selling any PennWest or PGH at these prices, as they should get back to $40 and $25 respectively, before I consider trimming some.

From April 26 Prudent Speculator: ...The fact that an early decline, one that accelerated after the price of oil spiked following news that U.S. war ships had fired on Iranian vessels in the Persian Gulf, gave way to a broad-based advance that closed near the highs of the day and that the S&P 500 finished above the apparently technically significant 1395 level have to be viewed positively.

The market also had to overcome word that the University of Michigan's consumer confidence survey fell to its lowest level in 26 years. Interestingly, the expectations index component of the Michigan report hit its worst reading since November 1990, while the current conditions gauge plunged to levels last seen in November 1982. Of course, as we have discussed in recent Hotlines and Buckingham Reports, the release of extremely weak economic statistics often marks a major market bottom. Such was certainly the case in 1982 and 1990, as Al Frank's TPS Portfolio gained 123% in 1983 and 55% in 1991.