Time to Ditch Microsoft for Apple

03/29/2011 2:35 pm EST

Focus: STOCKS

Jack Adamo

Editor, Jack Adamo's Insiders Plus

Though Microsofts business is solid, its out of favor with investors. In contrast, Apple is fashionable as well as cheap, writes Jack Adamo of Insiders Plus .

Well, I finally figured out what’s wrong with Microsoft (MSFT). And it’s not Apple (AAPL).

All the criticism I can find on Microsoft seems to be based on the premise that:

  • Apple is eating its lunch in smartphones
  • Eventually iPads will supplant laptops and netbooks, killing another source of Microsoft revenue

The first point is well taken. Apple is making tons of money on the iPhone, and Microsoft is basically making nothing.

Of course, for most of the software that runs on the vast majority of the computers in the world, Apple is making nothing while Microsoft is making it all. And it seems unlikely to me that businesspeople or students are going to try to do work on an iPad, or some clone, when they have to use a flat keyboard on a screen instead of a real one.

But let’s not let facts get in the way of that groovy feeling we get when we see that very cool Apple logo.

The upshot of it all is: I’m throwing in the towel for now. While a few savvy fund managers are accumulating positions in Microsoft, the on-balance-volume is still awful, as bigger funds steadily unload their shares, sending the stock lower.

[After declining steadily from its late-January high near $29, the stock recently bounced off lows just below $25, only to run into resistance at its downwardly sloping 20-day exponential average—Editor.]

When you sell a stock like this, you always wonder if you’re selling at the exact wrong time, but even if we are, we should get another opportunity to buy it, though we may have to wait until the next serious correction. I’d rather play the percentages here.

And yes, I’ve drunk the Kool-Aid. Not only are we dumping Microsoft, we’re buying more Apple.

The shares are still cheap. At 19 times trailing earnings, they’re actually selling at less than the market multiple, though earnings per share are expected to grow 27% this year and 14% next year.

Apple absolutely will face tougher competition in phones and tablet computers. However, Steve Jobs has been brilliant in marketing and tapping the “cool” factor so important to the buyers of these gadgets. If Jobs stays healthy, so will Apple’s market share.

Buy Apple up to $365. [Shares traded near $349 in recent action, in the upper third of this year’s trading range—Editor.]

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