How to Handle Apple and Microsoft

02/21/2013 8:30 am EST


Richard Band

Editor, Profitable Investing

Richard Band is investing in these two tech giants in a way that would have seemed unthinkable a few years ago, and he explains what he means here.

Richard, we have seen some interesting things in the market. I mean, pretty much if you had a dartboard recently, you could have done fairly well. Wouldn't you agree?

Yes, yes.

Now that we are reaching close to 14,000, do you think the strategy is going to have to change?

A little bit. I think you have to focus more on income-producing stocks and high dividends, which means high dividends. Even, surprisingly enough, some of the technology stocks are starting to pay decent dividends now.

Really, like Microsoft.

Like Microsoft (MSFT). Actually, I have been recommending that to my subscribers, and what we have been doing with Microsoft is not just holding it forever and ever, because frankly it has not been a great long-term performer in the last five or six years.

What we try to do is we buy it when it seems to be low relative to where it has been in the last year or two, ride it for a while, then take a profit and then try to get back in again.

So not buy and hold?

Not buy and hold, but not daytrading either. Maybe hold it for a year or 18 months. We sold it back in May 2012 at a nice gain and then Microsoft came back down about 15% and we are back in, getting a dividend of over 3%.

They have a lot of cash on the balance sheet, but it is still a company producing competitive products in the desktop field. I do not think Microsoft is going away, but it is no longer a big go-go growth company. It is a growth and income stock for people like me who are getting a little closer to that retirement date.

Well, any thoughts about their new prerogative that they were just announcing about the new Office products...that now it is going to be on a yearly subscription instead of just buy one?

Yes, well, that is always what a smart marketer will try to do, get people on to a subscription basis. I mean, we do that in the newsletter business too. It is a good thing to try to do, and I think Microsoft will be able to keep up those revenues, but probably growing at maybe a 5% or 6% long-term earnings rate, not 15% or 20%.

But reasonable. 

But reasonable...and you know, I can live with that. If they will raise my dividend every year, I think that is very attractive.

Now let us talk about one that has been a barnburner stock, but has recently retraced, and that is Apple.

Yes, kind of controversial right now. I think a lot of folks who were buying it at $600, $650, and $700 a share are not too happy about Apple (AAPL).

Some customers are not happy about what they did when they pulled Google Maps out of the iPhone. That angered a lot of customers. You do not want to do that. But still, Apple is a company with cutting-edge products, and what attracts me as a value investor is I see the balance sheet is carrying $173 billion of cash.

And debt?

No debt. And would you not love to have $173 billion in cash? I mean, you could lop off a few zeros and I would be happy.

What will they do with that cash? I think they will use it to raise the dividend. Already, Apple is yielding 2.4%. I think if you could buy the stock just a little cheaper, maybe down around $440 or $430, and start scaling into it, I think you would be very happy with your total return here—dividends plus your capital gains—over the next year or two.

Related Reading:

A Paradigm Shift for Apple

Does Consumer Popularity Equal a Better Stock Pick?

Approach or Avoid These 2 Top Techs?

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