Microsoft Corp (MSFT)

He likes companies that produce a lot of free cash flow, because it generates a lot of shareholder wealth. This is the world’s largest software company, and they generate increasing streams of revenue and free cash flow. Trades at about a 6% free cash flow yield. Has recently started to accelerate their business as they’ve accelerated their web business. Dividend yield of 2%. (Analysts’ price target is $92.)

Has had a great run. One of the best companies in the world. It struggled after the 2000 setback. Every new business that started up in the last 25 years, runs on Microsoft. As these businesses grow, this company’s products are just going to naturally populate as they grow. They got into Cloud computing, and were able to roll their entire user base from the legacy software to software services, replacing the one-time payment to a monthly rental payment, which provides better cash flow and outlook for the company.

She missed the boat on this one. They were kind of lumped into the old technology type of group, but did a remarkable job of taking the installed base and getting into the Cloud side. Now Cloud accounts for about 26% of overall revenue, and now they are bundling those packages together. Have done a phenomenal job of that and have gone from a legacy technology provider, getting into the FAANG space. It's had a phenomenal run with EV to EBITDA going from 24X in 2.5 years. There are a lot of good things happening within the company. It's hard for her to get around the valuation at this time.

Reports on Thursday. Buy or wait? This is the one stock that has helped the market, in addition to FAANG, it’s just that no one knows how to spell FMAANG by adding M into the acronym. It has been a home run since February 2014 when management changed. It’s been trading at around 20X earnings every quarter for a long time. He would stay away for the time being and have a better entry point. The growth story for them has been their Cloud services division, where they are going up against Amazon Web services. When facing a competitor like that, who has no problem not earning money, that becomes a big dogfight. Wouldn’t be comfortable buying at these prices.

(A Top Pick Nov 3/16. Up 34%.) He likes its exposure to the Cloud, an incredible business. They aren’t making money on the Cloud at the moment. However, unlike Amazon (AMZN-Q), they are funding their Cloud ambitions with a business that is gushing cash. 80% margins in their software business. Feels the Cloud is going to be a $1 trillion plus business.

Seasonal it is strong from now until the middle of January. Technically, it is in an upward trend. Stick with it or buy some more.

One thing that really capitalized Amazon (AMZN-Q) in the last 2 years, is Amazon Web Services. This company is a close #2 in that business, and there are certain aspects of their historic legacy business that puts them in a powerful position to potentially pull even or even surpass them over time. Generates a ton of free cash flow. Dividend yield of 2.3%. (Analysts’ price target is $82.)

Had a great run. When he bought it, it was on a free cash flow yield basis of about 12%. Now it sits with a 5%-6% free cash flow yield. Their Cloud-based business has exploded upwards. Office Suite 65 has done incredibly well. The only issue is valuation. It used to trade at 10X earnings, but now trades at 25X. If you take out the cash, it is more like 15X. Thinks there is more upside, but he is cautious. He is going to look at this in the next couple of weeks as to what he is going to do with reallocating.

He likes this. A very well-run business. In the past number of years, it has been undergoing a pretty meaningful transition, and now much more of the business has much higher quality revenue streams. In his opinion, deserving of a much higher multiple than the prior Microsoft. They’ve found discipline in terms of costs and capital allocation. He likes their underlying strength, diversification and how they are running it. It is no longer cheap, and would own more if it were cheaper.

It has very strong seasonality from mid-October until January. It is a bit early right now. Buy the whole position in around the middle of October.

(Top Pick Jun 23/16, Up 44.26%) He still likes it. 22 times forward earrings and a 10% growth rate. They are a major player in the cloud business with 28% of revenues from that. MS Office is doing quite well. It is getting a tad expensive, however.

Management has done a very, very good job of bringing the shine back. Their initiatives are obviously clear, and do close to 20% of their revenues in the Cloud. Their gaming offering is exciting. They are doing a good job, but when looking at the results, they are still spinning their wheels a little. This company goes up and down the valuation elevator. However, results are quite muted and they don’t change a lot, they grow incrementally. The expected changes haven’t happened yet, so you shouldn’t think that because the stock price has moved dramatically, that they have proven anything.

A good company. They’ve taken this from being a business where you would periodically buy an upgrade to your software. More and more people are buying licenses where they pay a certain amount per year, and are guaranteed access to the current version. That turns it into a kind of utility, resulting in you having to pay if you want to use your computer. Very heavily involved in Cloud, not as strong a position as Amazon (AMZN-Q), but probably the #2 position.

What has been working for this company is their Cloud services platform. Amazon (AMZN-Q) started in that space, targeting towards the start-ups and entrepreneurs, but Microsoft, with their huge relationships, have really done a good job, and that has been doing really, really well for them. If you aren’t in this, you may have missed the boat at this point.

He likes the Web services. This has had a good run over the last year, but thinks it is justified by the evolution of the company picking up LinkedIn. A real competitor to Amazon and Web services. Dividend yield of 2.1%. (Analysts’ price target is $82.00.)