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Post Earnings Profits For Your Portfolio + Vic Wisemann’s Thoughts on: MSFT, AMZN, HPQ, DELL, AAPL

Vic Wisemann
InvestorsObserver
Featured Contributor

As you may or may not know, sailing is a passion of mine. I love the feel of the wind on my face, the taste of salt in the air, and the whole world in the palm of my hand. When I bought my first sailboat, I did some homework and researched what was available in the market. I then examined my accounts and was able to bring my choices down to a select few. That's a fancy way of saying that after seeing what I could afford, there were only a few choices available.

Knowing that the technology in these boats is extraordinary and not at all cheap, I set about the task of finding the boat I could afford today and be able to upgrade in the future. I knew a few things that were available but too expensive for me at the time, so I made sure I could work most of those in as funds allowed.

The hard part was allowing for the things that were planned for release but not yet available. I was lucky because the dealer I was working with had years of experience and was a wealth of information. With his help I was able to get the best I could afford at the time, with the ability to update to new equipment as it became available.

Not a bad set up. As equipment has become available and funds have allowed, I updated and refit the boat and I still have it today. I take it out at least once a year to remind myself how I need to treat people in business.

Read on to find out how you can profit even though earnings have already been released.

There was another boat that cost about the same as mine at the time, and according to the literature, upgrades and refits would be no problem. The gentleman working with me said that particular manufacturer was notorious for promising compatibility but not following through. It was a lesson I learned well: don't promise or imply what you can't or don't intend to deliver.

One of my favorite tech companies, Microsoft (MSFT), seems to have not learned this lesson. Microsoft took a hit to its earnings during its fourth financial quarter of 2009, reporting a 17 percent decline in year-over-year revenue. Overall, Microsoft earned $13.10 billion for the quarter, coming in more than $1 billion below Wall Street estimates.

Although Microsoft hit several technical milestones during the quarter, including the rollout of the Windows 7 and Windows Server 2008 release candidates, it will not see revenue on those products until later in the year. The deferring of revenue related to the Windows 7 Upgrade Option program dragged down earnings per share by 2 cents.

Basically, it sounds like they are holding back revenue from the current quarter so they can boost their revenue figures in future quarters. This is not an uncommon practice for MSFT, but it is one I really don’t like. It sounds an awful lot like sandbagging, but we can use it to our advantage anyway.

Microsoft will be depending on Windows 7, which has proven to be a pre-sales bestseller on online shopping sites such as Amazon.com (AMZN), to be a monster hit. Roughly a third of Microsoft’s historical income has come from its operating-system sales. In order to encourage a rapid worldwide rollout, Microsoft has instituted sweeping price cuts and discounts for the operating system. In the case of consumers buying retail copies of Windows 7, the strategy thus far has seemed a success. 

The looming question, though, is whether small and midsized businesses will be willing to leave the bunkers in which they’ve spent most of the current recession and begin spending to upgrade their systems. A recent survey of 1,000 companies suggested that six out of 10 companies will avoid purchasing Windows 7 at the time of its debut, although 34 percent also said they will have the operating system online by December 2010.

Keep in mind these businesses are typically running Hewlett-Packard Company (HPQ) and Dell Inc. (DELL) computers with nearly decade old Windows XP. Some may have been burned by Vista and feel they have no choice but to move to 7 or another system altogether.

Things in the larger world have supposedly started to stabilize. Apple (AAPL) just posted spectacular numbers for its last quarter, with 2.6 million Macs and 5.2 million iPhones sold, and profits rising 12 percent year-over-year to $1.23 billion, or $1.35 a share. A rising tide must raise all boats, or so they say.

With the next earnings report coming before the release of Windows 7 to the general public, we can expect much of the same. It is likely the economy will have started to move back in a positive direction and MSFT will meet and slightly beat estimates for the September ending quarter. They will also have a substantial chunk of "deferred earnings" held back for the December ending quarter, the first which will include Windows 7 sales.

There will be plenty of hype between now and then and the stock will likely trend up before a few choppy days following earnings. Since the deferred earnings are not a surprise to most investors, the stock will then turn strongly up in anticipation of a Windows blowout in January.



To take advantage of this today, you may want to look at the October 21/18 Bull Put spread for a 25 cent credit. That's a 9.1% return and the stock has to fall 10.8% to cause a problem.

These are exciting times in the market and you need to be confident in your trades. Be sure you understand the risks of a trade before you put your money at risk. Don't risk money on trades that don't fit your goals and tolerances; just watch those from afar. Do your homework, understand the trade, and have a little fun.

If you have any additional thoughts, ideas or happy earnings stories, please e-mail me at vwisemann@InvestorsObserver.com.