A Lesson From the Top

A great long-term investment… How Microsoft has stayed on top… An adaptable, capital-efficient 'digital utility'… Are shares worth buying today?... The Fed's ready to juice… Stocks near all-time highs...

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An old favorite reported some good news yesterday...

Yesterday, shares of Microsoft (MSFT) moved higher for the sixth straight day after the company announced a new buyback program for up to $60 billion worth of its shares. Microsoft also said it would raise its quarterly dividend by 10%.

These line items should make a long-term investor drool... if you already own Microsoft shares, as I (Corey McLaughlin) suspect many of you might...

Devoted readers know that we have a few lists at the bottom of our daily Digest e-mail. One is the Top 10 Open Recommendations from Stansberry Research's publications...

One company – recommended by Retirement Millionaire editor Dr. David "Doc" Eifrig and Stansberry Research founder Porter Stansberry in 2010 and 2012, respectively – is responsible for the top two positions.

The company is Microsoft...

Shares are up nearly 1,400% since Doc's recommendation in 2010 and by almost the same since Porter's pick in our flagship Stansberry's Investment Advisory in 2012. Doc also booked a gain of 1,185% in a partial position of Microsoft last year.

From the garage to everywhere...

Bill Gates and Paul Allen's creation of "Micro-soft" in a garage in late 1975 ultimately brought software to the world – and things like MS-DOS, the Windows operating system, and Flight Simulator into my young life two decades ago.

This was incredible stuff at the time. And as illustrated again by the company's dividend and buyback plans, Microsoft continues to be one of the best businesses anywhere today.

It's not just because of software...

After all, along came the smartphone, prominently the iPhone, which moved popular cutting-edge technology from the desktop computer (Microsoft's wheelhouse) to mobile devices, a space that Apple (AAPL) has dominated for decades.

Yet Apple and Microsoft, as of today, are each worth about the same (around $3.2 trillion) – and are the world's two largest companies by market cap.

Yet, remember when "everybody" either 1) hated Microsoft because it was a monopoly and wanted to break it up, or 2) just hated its products after their initial shine wore off? Yet it's one of the world's best businesses and has been rewarding shareholders along the way.

This is a big deal if you care about real investing for the long term.

Think about everything that has happened in the past 25 years alone...

Think about all the risks – real and unrealized – that faced the economy and markets in that span.

Now, consider that while Microsoft shares have had periods where they've slid significantly – like in the dot-com bust, the great financial crisis, and the bear market of 2022 – the company has withstood the test of all its challenges and has continued to reward shareholders.

According to research by Arizona State professor Hendrik Bessembinder, Microsoft shares have returned more than 600,000% since they went public in 1986. 600,000%! I think you'd take those returns, even if it took almost 40 years.

Alas, those numbers are in the past. But if you care about real investing for the long term today, there are lessons to be gleaned from a company like Microsoft.

How has Microsoft stayed on top?...

Ironically, Apple's emergence as a world-dominant business and competitor probably helped. It encouraged Microsoft to develop additional revenue streams outside of Windows or Office... moving into things like its Xbox gaming consoles and cloud services.

As our Stansberry's Investment Advisory editor Whitney Tilson and True Wealth editor Brett Eversole wrote in a special report earlier this year, "Microsoft successfully reinvented itself," which is hard for a big company to do. As Whitney and Brett wrote...

Staying on top requires constant work and innovation.

It's especially true in the U.S., where our largest companies undergo a consistent "changing of the guard." The strength to stay in the lead is rare. But there's always an exception to the rule...

Microsoft has defied history in the recent decade. It was a top-five stock in 2000... in 2007... and at the market peak in 2022... and it's still a top-five stock today.

With keen strategy moves and putting its cash into more growth strategies, the company has remained at the cutting edge of other technological advancements over several decades. Apple may have taken over the smartphone business, but Microsoft dominates elsewhere.

Most notably, Microsoft added a focus on cloud computing to its business strategy 15 years ago. It continued to sell software through the business, too. All these years later, Microsoft's cloud business now accounts for more than 40% of the company's total revenue...

And Doc and Porter saw this shift coming, in one way or another... It's because Microsoft was a great business, positioned for future growth, whether Mr. Market believed it or not and despite whatever macroeconomic risk(s) were present over the years.

Seeing 'digital utilities'...

As Doc wrote in his first recommendation of Microsoft in 2010, the year he launched Retirement Millionaire...

Microsoft is one of the best-known brands in any industry. It recently released its newest iteration called Windows 7 to technical and critical acclaim – selling nearly 200 million copies amid the worst recession in 80 years. More important, MSFT is in multiple personal and business lines that enmesh its products and services in most everything we do. The gaming segment of MSFT will bring in billions this year and is growing by double digits (38% just last quarter). Whether you love MSFT or hate it, you'll be using its Office, Windows, Bing, or Xbox 360 products (or some descendant of them) 10 years from now... I guarantee it.

That last prediction sure was (and is) true. For instance, I am writing these words today – 14 years later – in Microsoft Word, using Windows (on an Apple computer). Many millions of other people did the same exact thing today, and they will tomorrow.

Then there are the hard numbers, which translate into the things you care about most: returns and making money...

In 2010, Doc also reported that Microsoft had paid shareholders $13 billion in dividends and bought back $27 billion in shares over the prior three years. Microsoft traded at a cheap valuation then and in the years following the great financial crisis.

Microsoft traded for 10 times to 15 times earnings from 2008 to 2014. Those were enticing levels, considering Doc described Microsoft and three other companies – Google, Cisco, and Intel – as "Digital Utilities... sitting on piles of cash." Doc said...

Looking beyond cash, these companies are attractive on other metrics. They all have excellent margins and profitability. And their sales and income streams are either stable or growing over the past three years. That's something not too many businesses can say about the tough business times.

Despite these great metrics – all four have more income, better margins, and more cash than they had in 2008 – they are trading at discounts to their all-time highs. So these digital utilities should pay us dividends and provide tremendous capital gains.

These companies have all the makings of a perfect utility:

• Impeccable financials

• Brand loyalty and recognition

• Captive users

• Friendliness to shareholders

• Regular and frequent use of the services

He concluded, "As the cash builds up and the digital world expands, so will our profits."

A lesson in 'capital efficiency'...

About two years later, in another must-read issue – of Stansberry's Investment Advisory about the "Only Sure Way to Get Rich in Stocks" – Porter wrote about Microsoft as one of the world's best "capital efficient" businesses.

"Make sure you save a copy of this month's letter," he wrote.

After describing the disastrous debt situation in the U.S. and the foibles of paper money, Porter explained why it was critical to shield some of your savings in stocks – and how to find ones that would "do very well."

It was a lesson in capital efficiency, something longtime subscribers have heard from our team repeatedly and still do today...

Porter said in the February 2012 issue of the Investment Advisory that these are "businesses that have long-lived products and are capable of increasing payouts year after year."

The issue ended with a list of companies that had returned investors a large percentage of gross margins over the previous five years.

Porter said he generally was only interested in buying them for "less than 10 times enterprise value... based on earnings before taxes, interest, and depreciation. As a shorthand, we call these 'cash earnings.'"

And only Microsoft fit the bill in February 2012, he wrote...

Over the last three years, the company has returned almost $40 billion to investors – or roughly 15% of the value of the entire company. Paying only seven years of cash earnings for a company like this seems awfully cheap.

I know... I know... Apple seems like the clear, runaway winner in the space. And maybe we're making a fool's bet here. But I believe both companies can continue to prosper in the computer space. Microsoft will surely continue to focus on serving its core enterprise customers, while milking its cash-cow Windows and Microsoft Office products. And Apple will continue to make brilliant consumer products.

There are clear lessons here for investors looking to make decisions today...

First, cash flow is king when seeking and making a long-term investment in a publicly traded company...

So is a well-managed business. Microsoft's successful "reinvention" has not only worked for Microsoft but has been a blueprint that many of the U.S.'s other largest companies – like Amazon and Google – have followed.

Amazon and Google started off as an online marketplace and a search engine, respectively. Then they went heavily into the cloud as well... and are invested in artificial intelligence, just like Microsoft is now. (Apple may or may not be getting there.)

Companies that can successfully do this kind of thing at scale over long periods are elite businesses around which you can build a long-term investing portfolio and real wealth. As Whitney and Brett noted, they are uncommon, but they do share common traits.

Our team is always looking for them in the Investment Advisory today, Doc's Retirement Millionaire, or myriad other publications from our editors and analysts.

That said, here's an essential detail...

You want to buy shares of high-quality businesses at a reasonable price...

As Doc noted in 2010, Microsoft was trading at a discount to its all-time high. That's not the case today. Microsoft and others in the "Magnificent Seven" have become overvalued relative to the market.

As Whitney and Brett showed in their special report in July, Microsoft's price-to-earnings (P/E) ratio was around 10 times at the start of 2013, compared with the S&P 500 Index's P/E of 15.

The dynamic changed by 2016 and has swung more extreme in Microsoft's relative overvaluation today...

We see this and think it's appropriate that shares of Microsoft and other mega-cap tech leaders have been selling off lately... and perhaps more in the future. Microsoft's trailing-12-month P/E is still around 36.

According to our proprietary Stansberry Score indicators, while Microsoft's balance sheet remains in great shape, shares aren't cheap.

That said, the company continues to reward current shareholders with moves like stock buybacks and increasing its dividend by 10%. Good companies do this when they don't think the cash can be put to better use elsewhere.

If you want to maximize a return on new capital, Microsoft's still-high valuation means you're better off looking elsewhere.

But you can, and should, look for the identical hallmarks that made the company an attractive investment more than a decade ago... and a 1,000%-plus winner all these years later.

Our flagship Investment Advisory and Doc's Retirement Millionaire – which offer new stock picks almost every month, plus a host of other tools and benefits – are two great places to start if you're getting going on the journey toward long-term investing success.

You can find more information about a subscription to the Investment Advisory here, and Retirement Millionaire here.

As for the short term...

The conclusion of the Federal Reserve's latest two-day meeting, the central bank's afternoon policy announcement, and Fed Chair Jerome Powell's press conference will be front and center tomorrow...

We'll have a report in tomorrow evening's Digest. The market essentially expects the Fed to lower its target federal-funds rate range to inject "juice" into the economy. But the market is uncertain about how much.

Today's fed-funds-futures market shows traders are betting that a 50-basis-point cut is 65% likely rather than the 25-point option.

I wouldn't be surprised with either outcome. The Fed wants to support the economy while not suggesting a crisis is afoot and not reigniting inflation. That's a tall order over the long run, but not for now. As Whitney wrote in his daily newsletter today...

As I've long said in explaining why I've remained constructive on stocks despite widespread fears of a recession, either the economy will remain strong and therefore the Fed won't cut rates by much (if at all), which is good for stocks... or the economy will slow and therefore the Fed will cut rates, which is also good for stocks.

The latter appears to be happening...

Yesterday, the Dow Jones Industrial Average and equal-weight S&P 500 closed at an all-time high. Today, the benchmark S&P 500 touched a new intraday high, though it finished flat. On it goes.

New 52-week highs (as of 9/16/24): American Express (AXP), Compass (COMP), Direxion Daily Real Estate Bull 3X Shares (DRN), iShares MSCI Spain Fund (EWP), Fair Isaac (FICO), Fidelity National Financial (FNF), Houlihan Lokey (HLI), iShares iBonds December 2025 Term Treasury Fund (IBTF), iShares Convertible Bond Fund (ICVT), Jack Henry & Associates (JKHY), Nuveen Preferred & Income Opportunities Fund (JPC), JPMorgan Chase – Series LL (JPMPRL), London Stock Exchange Group (LNSTY), NYLI CBRE Global Infrastructure Megatrends Term Fund (MEGI), Motorola Solutions (MSI), Simplify MBS Fund (MTBA), Annaly Capital Management (NLY), NVR (NVR), Omega Healthcare Investors (OHI), Oracle (ORCL), Sprott Physical Gold Trust (PHYS), Planet Fitness (PLNT), RenaissanceRe (RNR), Construction Partners (ROAD), Sandstorm Gold (SAND), Sprouts Farmers Market (SFM), Sherwin-Williams (SHW), iShares 1-3 Year Treasury Bond Fund (SHY), S&P Global (SPGI), Stryker (SYK), iShares 20+ Year Treasury Bond Fund (TLT), Travelers (TRV), Trane Technologies (TT), Visa (V), Vanguard Short-Term Inflation-Protected Securities (VTIP), Consumer Staples Select Sector SPDR Fund (XLP), Utilities Select Sector SPDR Fund (XLU), and Health Care Select Sector SPDR Fund (XLV).

In today's mailbag, a subscriber writes a letter to the Federal Reserve... and we have another note of appreciation for Dr. David "Doc" Eifrig's latest Retirement Millionaire issue... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.

"Chair Powell & Board Members, Please exercise CAUTION on Sept 17th and 18th in 'changing' current 'official' Rates.

"The truth is that a rate cut of (almost) any size will not affect employment/unemployment, beyond a short lived knee jerk. Employment is being driven by immigration impacts. Worse? These impacts lag for about 6 months from present, primarily due to work permit rules.

"Again, I respectfully submit that inflation has paused on the surface but is not cured, AND excessive immigration is affecting 'employment data'. That is a fiscal policy problem, NOT a monetary policy vector. BE VERY CAUTIOUS, AND DO NOT OVER REACT TO POLITICAL and WALL STREET CRIES FOR LOWER RATES.

"Your job is not to buy elections or run up stock market rates. Respectfully..." – Subscriber Bill B.

"I second Bill K. on the latest issue of Retirement Millionaire. I printed the issue and have read it twice. This issue is packed with so much information about the economy, investing and recommended protection trade stops. I agree with Corey that this issue is required reading." – Stansberry Alliance member Frank S.

All the best,

Corey McLaughlin
Baltimore, Maryland
September 17, 2024