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Michael Fowlkes' Analyst Insights

Options and ETF Analyst Writer
Michael Fowlkes
Author Bio


Microsoft (MSFT) stock seen as strong buy ahead of second-quarter numbers

Michael Fowlkes

1/26/2019 12:54 PM

What's Happening

Tech titan Microsoft (MSFT) reports fiscal second-quarter numbers January 30. The company will report after the market close with the consensus calling for earnings of $1.09 per share. The stock is up 7.6% since the end of June.

Technical Analysis

MSFT was recently trading at $107.63 down $8.55 from its 12-month high and $23.80 above its 12-month low. InvestorsObserver’s Stock Score Report gives MSFT a 76 long-term technical score and a 89 short-term technical score. The stock has recent support above $102.5 and recent resistance below $112.5. Of the 21 analysts who cover the stock 19 rate it Strong Buy, 0 rate it Buy, 1 rate it Hold, 1 rate it Sell, and 0 rate it Strong Sell, MSFT gets a score of 80 from InvestorsObserver’s Stock Score Report.

Analyst's Thoughts

After selling off in December with the overall market, MSFT stock has trended higher in 2018 as stability returned to the market. The stock looked a bit overvalued after hitting a record high in September but currently the stock trades at 21 times forward earnings which is much more attractive with the company forecast to grow earnings by slightly over 14% per annum over the next five years. Microsoft has posted positive earnings surprises each of the last 10 quarters, and the street expects another beat for Q2 with a whisper number of $1.16 per share.

The tech sector was hit hard during the market sell off because of fears of global economic weakening and valuations being a bit high after years of strength. There is growing optimism in trade negotiations between the U.S. and China which is lifting the overall market and taking tech stocks higher. Expect a solid set of quarterly numbers and the stock to trend higher on the report. Analysts have an average price target of $123.29 on the stock.

Stock Only Trade

If you're looking to establish a long stock position in MSFT consider buying the stock under $108. Sell if it falls below $98 or take profits if it gets to $125.

Bullish Trade

If you want a bullish hedged trade on the stock, consider a 4/18/19 90/95 bull-put credit spread for a $0.50 credit. That's a potential 11.1% return (49% annualized*) and the stock would have to fall 12% to cause a problem.

Bearish Trade

If you want to take a bearish stance on the stock at this time, consider an 4/18/19 120/125 bear-call credit spread for a $0.50 credit. That's a potential 11.1% return (49% annualized*) and the stock would have to rise 11.8% to cause a problem.

Covered Call Trade

If you like the stock but wish to lower your cost basis on a new position, you may want to consider a 4/18/19 $110 covered call. Buy MSFT shares (typically 100 shares, scale as appropriate), while selling the 4/18/19 $110 call for a debit of $103.08, per share. The trade has a target assigned return of 6.0%, and a target annualized return of 26% (for comparison purposes only).



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