6 Stocks To Take On Microsoft

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“’My momma told me, ‘You better shop around.’” – Smokey Robinson

Shopping around is a foundation of smart stock market investing. Independent research allows investors to go beyond the stocks featured in the news and shop lesser-known alternatives. As simple as it sounds, you are better off investing in the stock market by shopping around than by using the media to make a stock market investment.

Consider the attention paid to Microsoft (MSFT) by the financial media. As a large cap and well-known former growth company, Microsoft receives incredible media attention, eclipsing other value investment ideas. MSFT is cherished by famous value investors who are attracted to its 10.22 price-to-earnings ratio. In 2011 MSFT was recommended by Joel Greenblatt’s Magic Formula based on quality and low valuations. In addition, Jeremy Grantham has pointed to MSFT as an example of a quality stock selling at an attractive price.

Regardless, there are comparable, lesser-known value investments than Microsoft. In addition to considering MSFT as an investment, consider the following stocks which also offer attractive investment prospects:

Ticker

Company

Sector

10-Year Average ROE

P/E (ttm)

Altman Z-score*

ESI

ITT Educational Services

Services

93.3%

5.61

8.33

USNA

USANA Health Sciences

Healthcare

62.8%

9.9

8.39

DELL

Dell Inc.

Technology

48.7%

7.95

3.46

WNR

Western Refining Inc.

Basic Materials

42.9%

8.19

4.12

DST

DST Systems Inc.

Technology

42.6%

9.22

3.06

NCIT

NCI, Inc.

Technology

34.5%

7.53

3.91

MSFT

Microsoft Corporation

Technology

30.6%

10.22

4.98

Dell Inc. (DELL) recently traded at $15.80 per share. Dell shareholders have seen a 8.0% change in share price over the past year. At present, shares of this large cap stock trade at a price-to-book ratio of 3.3, a price-to-earnings multiple of 8.2, and a price-to-sales multiple of 0.5 (trailing twelve months). Over the past decade shareholders savored a 48.7% average annual return on equity.

DST Systems Inc. (DST) recently traded at $47.89 per share. At this price level, the stock has a 1.5% dividend yield. DST shareholders have seen a 5.2% change in share price over the past year. At present, shares of this midcap stock trade at a price-to-book ratio of 3.0, a price-to-earnings multiple of 9.5, and a price-to-sales multiple of 0.9 (trailing twelve months). Over the past decade shareholders savored a 42.6% average annual return on equity.

ITT Educational Services Inc. (ESI) recently traded at $64.42 per share. ESI shareholders have enjoyed a 13.2% change in share price over the past year. At present, shares of this small cap stock trade at a price-to-book ratio of 13.4, a price-to-earnings multiple of 5.7, and a price-to-sales multiple of 1.1 (trailing twelve months). Over the past decade shareholders savored a 93.3% average annual return on equity.

NCI, Inc. (NCIT) recently traded at $11.21 per share. NCIT shareholders have endured a -3.8% change in share price over the past year. At present, shares of this micro cap stock trade at a price-to-book ratio of 0.9, a price-to-earnings multiple of 7.8, and a price-to-sales multiple of 0.3 (trailing twelve months). Over the past decade shareholders savored a 34.5% average annual return on equity.

USANA Health Sciences Inc. (USNA) recently traded at $31.66 per share. USNA shareholders have seen a 4.3% change in share price over the past year. At present, shares of this small cap stock trade at a price-to-book ratio of 3.0, a price-to-earnings multiple of 10.1, and a price-to-sales multiple of 0.8 (trailing twelve months). Over the past decade shareholders savored a 62.8% average annual return on equity.

Western Refining Inc. (WNR) recently traded at $14.78 per share. At this price level, the stock has a 1.1% dividend yield. WNR shareholders have enjoyed a 11.2% change in share price over the past year. At present, shares of this small cap stock trade at a price-to-book ratio of 1.5, a price-to-earnings multiple of 8.2, and a price-to-sales multiple of 0.2 (trailing twelve months). Over the past decade shareholders savored a 42.9% average annual return on equity.

Each of the stocks on this list has a lower price-to-earnings ratio than MSFT, indicating that each is cheaper than MSFT. Each of these stocks has exceeded the extraordinary returns on MSFT equity over the past 10 fiscal years. This is a measure of quality. Moreover, each of these stocks has an Altman Z-score that qualifies as “safe.” Thus, each of these stocks is cheaper than MSFT and is high quality.

Even though Microsoft stock has formidable metrics, these other stocks are just as attractive. Investors ought to consider all of these stocks rather than stick to Microsoft on the basis of hype.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Disclaimer: This research is NOT a guarantee. This article uses third-party data and may contain approximations and errors. Please check estimates and data for yourself before investing.

This article was written to provide investor information and education, and should not be construed as a guarantee or investment advice. I have no idea what your individual risk, time-horizon, and tax circumstances are: please seek the personal advice of a financial planner.

*The Altman Z-Score is a measure of bankruptcy risk that is not based on stock price volatility. This score places companies into three groups: “safe” (Z-score > 2.99), “grey” (Z-score between 2.99 and 1.81), and “distressed” (Z-score < 1.81), and is surprisingly useful for identifying bankruptcy risk in the coming year. This method of segmenting companies uses of fundamental (financial statement) data and market capitalization only, not on price volatility. Beyond credit risk prediction, companies with higher Z-scores have historically outperformed companies with lower Z-scores, in aggregate. One sector has not been accurately modeled: Altman’s Z-score has not accurately predicted the bankruptcy risk of financial companies.

“Distressed” was a label coined by researchers, and should not be taken to mean that any company is bankrupt or in default on the basis of this calculation alone. Credit scoring is not fate, only prediction based on relative past performance of companies grouped by key variables. Time will tell.

Volatility has be incorporated into a credit scoring to improve accuracy and extend it to financial companies, but this would reduce the value of a fundamentals-only model for indicating attractively-priced put options.