MSFT – Calling an Audible (Breaking Out of EBV+5)!

Call it the Ballmer affect.

When it comes to valuation the market doesn’t play favorites or gives anyone a pass.  The last time I wrote on Microsoft was October 28, 2012, here.  Mr. Softie had a negative transit of EBV+5, the first such negative transit below this important EBV level in the 26 years that MSFT was a public company.  To me the writing was on the wall.  This observed negative transit, back in October, to me was the beginning of the end in terms of MSFT having a valuation above EBV+5.  The market was giving investors a signal and for those familiar with Model Price Theory (MPT), the signal was received.

Looks like company insiders received the signal as well.  Shockingly, Mr. Ballmer announced his retirement on August 23, 2013.  The question of whether his fall was voluntary or he was summarily pushed isn’t much of a mystery, at least to me, as his farewell tears and maudlin behavior was observed everywhere in the business press.

The question becomes who will succeed Mr. Ballmer as CEO?

The market seems hopeful the new guy (or gal) will be what this company needs in the short and long term.  The stock has transited above EBV+5 in the first week of November and has remained above this EBV level for the last three weeks. Maybe insiders already know Mr. Ballmer’s replacement and the news is leaking into the market – this occurs all the time BTW (By the way!)

Let’s have a look at MSFT’s model price chart

Microsoft Corp. with weekly price bars, EBV Lines (colored lines) and model price (dashed line)

Microsoft Corp. with weekly price bars, EBV Lines (colored lines) and model price (dashed line)

Observers can see the positive transit of EBV+5 in the first week of November, as I have annotated and the price consolidation above this EBV level.  Observers can also see the price gap between our calculation of model price or fair market value and MSFT’s current stock price – a 34% upside.  Selecting the right candidate for Mr. Ballmer’s former position will certainly go a long way to closing this gap.  If the board selects the wrong CEO, or the market “disapproves” of Mr. Ballmer’s replacement, Model Price Theory (MPT) will respond immediately with a negative transit of EBV+5.

This same situation occurred with Apple.  A negative transit of EBV+5, blog here, followed up with a positive transit on October 27th, 2013, here.  For traders these transits represent the simplest of trades.  A positive transit giving investors an entry point for a long trade, with a stop loss or sell signal at the same EBV+5 level.

As always we will see what happens, but from MPT point of view the market is anticipating good news either on Mr. Ballmer’s replacement, whoever he or she is, or improving corporate fundamentals…or maybe both!

P.S.  Wondering whether the US equity indices will levitate higher.  Having both Microsoft and Apple transit above EBV+5 and trend higher is a welcomed event for those bullish on the US equity markets.  Together these two companies represent 4.95% market weight in the S&P 500 Index.

8 responses to “MSFT – Calling an Audible (Breaking Out of EBV+5)!

  1. Charles Couch December 3, 2013 at 1:16 pm

    I note that on your Web Site this month neither INTC or CSCO appear in the top ten of your US Value 50 Fund. Are they still in the Fund or did they both trigger a sell when they broke through EVB +3 on the downside even though the Model price in both cases is in the 50% upside range exceeding that of all top 10 stocks in the fund?

  2. Charles Couch December 3, 2013 at 2:17 pm

    Can you share with us the reasoning why they were replaced in the top ten – understand there must have been better value in other stocks but how was that determined?

    Thanks for your responses.

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