You are wondering whether our Economic Book Value or EBV lines work? It’s my job to highlight different ways they do work. Hopefully over time you will come convinced, as I am, that these multi-colored parallel lines on our model price charts have relevancy in terms of your investment decisions.
Microsoft reported its fourth quarter late last week disappointing equity participants, sending the stock lower.
Here is our model price chart after the close on Friday, July 19, 2013.
Microsoft with weekly price bars, EBV Lines (colored lines) and model price (dashed line)
For those interested, a daily updated chart of MSFT subsequent to this post will be maintained on Facebook, here.
Microsoft had a negative transit of EBV+5 back on October 26,2012
Back on October 28, 2012 I wrote a blog highlighting Microsoft’s negative transit of EBV+5. This was a significant event because MSFT traded above this EBV line for over 26 straight years!
Quoting from my blog post:
My point here is that Microsoft, which has been a public company since 1986 and has traded above EBV+5 for 26 years looks to be breaking or transited down through EBV+5. Too me this event is amazing and historic. I’m not saying Microsoft is going to go away anytime soon. I’m saying in our Model Price work, EBV+5 has important relevance and what it says about the company. The monopoly or dominance for Microsoft is truly over in “the market’s eyes”. And if I’m right, that this is truly a negative transit, than EBV+5 support becomes resistance.
So what has happen to MSFT since my blog post on October 28, 2012?
As you can observe from the most recent model price chart indeed, EBV+5 has become resistance for Microsoft. I think it bears repeating MSFT isn’t going away anytime soon and Mr. Softie will make tons of money and pay out billions in dividends. The distinction I’m making here is valuation. The market is reducing Microsoft’s valuation, probably on a permanent basis, reflecting its reduction in market dominance or eroding monopoly status.
An historic event occurred back on October 28, 2012 in the history of valuation of Microsoft (see blog). This blogger highlighted the negative transit of EBV+5 – the first negative transit of this company in 26 years or since MSFT has been a public company. As I highlighted then and will probably will be the case going forward EBV+5 will be price resistance for the company for the foreseeable future.
Knowing this information traders/position traders can seek opportunities when MSFT trades at a discount to EBV+5 and take profits when EBV+5 is achieved.