MSFT Sold at $23. Where’s the Bottom?

Earlier today I sold my 100 shares of Microsoft (MSFT) at $23. Truth be told, I should have unloaded the shares a couple of weeks ago. Overall though, I’m still happy with how I’ve been trading this and looking forward to buying back in when goes on the upswing. Below is a brief history of my investments in MSFT.

Originally I bought 25 shares to start a position because I thought (and still do) that the company has a bright future once Vista is released and their online Live component gains some traction. You can read my thoughts on this in my original article here: Buying Opportunity for MSFT Stock.

I kept my initial purchase to 25 because I was a little unsure of the short term outlook for MSFT leading into the quarter. I bought my first shares right after the last Vista delay, and it seemed that more bad news could be coming. Lo-and-behold… Microsoft announces a lack-luster quarter, states that margins on their operating systems and Office software can be expected to shrink in the future, and (perhaps worst of all) declares their intention to spend a little more than $2 Billion to beef up their online services and Xbox segments among others. Well, investors were not to pleased with this.

The first two points are obvious deal breakers, while there is some room to argue on the last one. With regards to Microsoft’s increased R&D spending, there are two camps. Camp 1 wants the company to focus on their strengths (read: monopolies) in operating systems and office software. To these people the $2 Billion in new R&D funds is a waste of money. Camp 2 sees the online services, entertainment, and hand-held segments as prime areas for future growth. These people are excited to see Microsoft finally spending that war chest.

I’m obviously in Camp 2. But then why am I selling? Easy: because everyone else is. After shares dropped to $24.50, I brought my position up to 100 shares. MSFT stock become undervalued at this point (see some discussions here: Is Now the Time to Buy?) and I thought there was a good chance the stock would bounce back quickly. After a week or so, it should have been apparent to me that a quick bounce was not going to happen. But I held on to the stock anyway as it tested previous support levels at $24 and then $23. As I write this, technical indicators are showing that MSFT should go down for a little while longer. Institutional investors are moving out of Microsoft and tech in general as they rotate their investments into other sectors (construction, minerals, oil).

I’ll hold onto a falling stock if I have reason to believe that there could be a very sudden reversal to the upside. I want to make sure I don’t miss the gains. While at the same time I’m ready to buy more shares when I feel the true bottom is found. I no longer feel a sudden reversal is in the cards for MSFT. And so I’m selling my stake.
My plan now is to hold off until the stock truly bottoms out (going to be watching the Stochastics, MACD, and Moving Averages) before moving back into the stock. I’m still long on Microsoft as a company and an investment, but the short term is looking bleak for these guys (and the tech sector in general).

I’ll be sure to inform you guys once I think the stock is turning around. I’m also going to be writing later in the month about other stocks I’m watching (EBAY, PFE, BBBY, DNA, AMD) and going into more detail around the how I’m using the 3 technical indicators stated above to determine when to move into the stocks (hint: following suggestions in Phil Town’s Rule #1).

All the stocks on my watch list above are on the downswing. So please don’t take this as a buy recommendation for any stock. We’re trying to buy undervalued stocks, and most of the stocks in my watch list are undervalued. But we don’t want to find ourselves “catching a falling knife”. The game here is to figure out when these guys are going to move back into favor with investors and get in on the upswing. Cheers to that.