Beginners Guide for Business and Financial

Posts Tagged ‘stocks’

Bill Gates is super rich but his once high-flying software company has been in the doldrums since mid-2002 after falling from the $35 level. The problem with Microsoft (MSFT) has been its failure to grow both its revenues and earnings at the superlative rates the company once enjoyed.

Any company the size of Microsoft, with a market-cap of $242 billion, will find growth an issue because of its size. But this is not to say the stock is dead. Far from it, Microsoft remains a viable long-term software company and is cash rich with $34 billion or $3.28 per share in cash. This gives the stock plenty of financial flexibility to develop or buy growth technologies. Microsoft just announced it would spend $1.1 billion in R&D at its MSN Internet unit in the FY07. And according to the Wall Street Journal, Microsoft is exploring the possibility of taking a stake in Internet media company Yahoo (YHOO) to take on Internet advertising behemoth Google (GOOG).

But with an estimated five-year earnings growth rate of a pitiful 12%, the company has its work cut out for it. Trading at 16.30x its estimated FY07 EPS of $1.44, the stock is not expensive but appears to be priced not as a growth stock.

Its PEG on the surface of 1.51 is not cheap, but if you discount in the cash of $3.28 per share, the estimated PEG falls to around 1,0, a decent valuation. Also, if Microsoft can improve on its estimated 12% growth rate, the PEG would decline further.

The fact is Microsoft at the current price deserves a look. If you want to play the stock but don’t want to shell out the $2,347 for a 100-share block, you may want to take a look at the long-term options, also known as LEAPS. For instance, the in-the-money January 2008 $22.50 Microsoft Call LEAPS not set to expire until January 18, 2008 currently costs $380 a contract (100 shares).

This means you risk a total of $380 for the chance to participate in the potential upside of 100 shares of Microsoft over the next 20 months. The breakeven price is $26.30. If Microsoft breaks $26.30, you would begin to make money on your LEAPS. Conversely, if Microsoft fails to do anything, your maximum risk is $380 on the initial option play.

Warning: The aforementioned example is for illustrative purposes only and not to be construed as an actual option strategy. Due to the higher risk inherent in options, I recommend you speak with an investment professional before deciding to employ any strategy involving options.

Interviewer:
Before we talk about the potential of uranium shortages and the steep price rise in that energy source, could you explain how you got started with this idea, and what is the philosophy behind Strathmore’s acquisition program of uranium properties?

Dev Randhawa:
Several years ago, Strathmore Minerals started with the idea of acquiring properties “out of the money” at very cheap prices in the belief that the uranium prices would recover so that our assets would be worth more. No one was paying attention to the commodity we chose: uranium. Strathmore Minerals is basically a call on the price of uranium. That’s how we started the company. This strategy is similar to what Lumina Copper (AMEX: LCC) used and what Silver Standard used. For example, the chairman of Silver Standard Resources (NASDAQ: SSRI) is on our board of directors. Our first step was to buy every pound we could for as cheaply as possible. The second step is to buy property that we think we can put into production. We are actively looking for those.

Interviewer:
But uranium has a powerful environmental stigma. Why, then, are you enthusiastic about this type of energy source?

Dev Randhawa:
As with most people, when I began investigating uranium, I thought this was bad stuff. I thought of Three Mile Island and everything else. The more homework I did on this, the more I realized that nuclear power is clean and safe. That is primarily what uranium is used for now. It should be known that no one ever died at Three Mile Island. No one actually died at Chernobyl. Yes, people got sick. Compare that to coal or the oil spills in the fossil fuel sector, and the damage it has done to the environment. The problem is no one is championing nuclear energy. Frankly, the “greenies” have done a great job of burying the story. As I did homework, I found out France relies on nuclear power for about 78 to 80 percent of its electricity needs. I realized that somebody did a great job lobbying and built a very unhealthy picture toward uranium, when really it’s needed. We don’t talk about the cost of coal. We don’t talk about global warming. But, look at what coal has done. Global warming is a function of fossil fuels. That is why you are seeing a growing positive response to nuclear power. For example, one company has applied to put a new nuclear reactor into the US.

Interviewer:
To what do you attribute the recent, steep price rise in uranium?

Dev Randhawa:
Since last year, the price of uranium (U3O8) has climbed back steeply back up. At one point, the price was moving up about $1/pound per month. Uranium’s price is more in line with the price of oil as opposed to other commodities. For a long time, we’ve only produced on the average about 90 million pounds, when we needed 140 (million pounds). There’s been an imbalance for a number of years. This extra came from foreign sources, or from internal US inventories. Since the 1980s, we’ve been using more uranium than we have been producing in the western world. As a result, the extra that we’ve needed has come from Russia, the US government or inventory that utilities had.

Interviewer: Read the rest of this entry »