A Reader Writes: "What do you think of SBC and Microsoft (MSFT) for the next 1-5 years??"

Hello Friends! Thanks so much for stopping by and visiting my blog, Stock Picks Bob's Advice. As always, please remember that I am an amateur investor, so please consult with your professional investment advisors prior to making any investment decisions based on information on this website.

Trying to catch up with my email, I had a nice letter from Jonathan C. who I shall share with you. He wrote:

Hi Bob,

I just started on xanga today, mainly for the purpose
of interacting with other traders and business people,
and I came across your blog. I just have one
question, and was wondering if I could get your
opinion on it:
-What do you think of SBC and Microsoft (MSFT) for the
next 1-5 years?? SBC is investing a lot of money in
developing the IPTV system and getting it to market
within 1-2 years. It pretty much would be the future
now, with having all your home entertainment media:
internet, TV, cable, telephone, satellite, computer,
music, etc. streamlined onto one device, the TV. If
you look in the current Fortune, there is a great
article on what they are trying to do. I believe that
this is what people have been wanting for a while from
technology, having all home entertainment connected,
streamlined, and controlled from one place.
-And with Microsoft, they are also looking into this
market on the software side, as they have been working
on IPTV for the past six years. Also, their legal
troubles are behind them, they are acquiring a few
companies and software technologies, they are pushing
more into business project networking, and the new
Windows (Longhorn) is coming out in 2006.
I apologize about the email being a little long. I
was just wondering what your thought might be on these
two companies, and their outlook/performance for the
next 1-5 years?? Thanks a lot.
-Jonathan

Well, first of all, you are utilizing a strategy that we could call "top-down investing". In fact I am a "bottom-up investor". Now what does all of that mean?

I wrote up a piece on a MSN board not too long ago about the "Zen of Investing". Others have written similar pieces as well. What that means is that I try to be a very passive investor. That doesn't mean that I don't think; to the contrary, I am thinking all of the time :). What that means is that instead of trying to divine the future sort of with some sort of divining rod, and using an "intelligent guess" about what sort of stocks ought to be doing well in the future, I let the stocks "come to me"...sort of "Ouija" style I guess :).

I do not spend time thinking about current trends and which company will probably be doing well in the future. I am spending much more time finding out which stock is doing well today; looking at the daily momentum lists and then determining whether they show evidence of financial results that might justify a price appreciation in the future.

Briefly, let's for the sake of discussion take a look at the Morningstar on each of those stocks...and I will give you my off the cuff take on them. But they would not qualify for purchase in my perspective unless they showed up in the daily momentum lists first. Just my idiosyncracy I guess :).

First SBC: the Morningstar.com report is located here. Revenue, which climbed from $49.5 billion in 1999 to $51.4 billion in 2000, has been declining each and every year on Morningstar. I wouldn't be looking further than that.

Earnings/share have declined from $2.56 to $1.85 in the trailing twelve months. Another negative point from my perspective. Free cash flow has been solidly positive and the balance sheet looks adequate although the $48 billion in long-term debt is a concern.

What about MSFT? This picture looks better on the Morningstar report here.

MSFT shows growing revenue from $23.0 billion in 2000 to $37.8 billion in the TTM. The latest earnings are down a tad at $.74 per Morningstar vs $.75 in 2004. Free cash flow is superb and the balance sheet is gorgeous with billions (!) of cash in the bank.

So what do I think about these two? Well of the two, MSFT fits my "perspective" better than SBC. Now that doesn't mean that either stock will perform positively. And you will note that I have not given any thought to everything you said about the future. There are enough variables in the past and the present that I don't think that divining the future is worthwhile...I leave that to brighter minds. I also believe that by being a bottom-up investor, one leaves oneself open to new ideas that you probably would never have thought of by yourself!

Just a thought. I hope that my writing is helpful to you and that you continue to comment on the posts and add some of your own insight to the discussion! Have a great weekend.

If you or anyone else has any questions or comments, they can reach me at bobsadviceforstocks@lycos.com .

Bob