YCG Investments
“If you buy above average businesses at below average prices, on average, we believe you should come out ahead.” — Brian Yacktman

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From the market bottom, the S&P 500 is up about 34% whereas MSFT is up over 55%. Why is this blue chip behemoth getting a lot more attention on Wall Street?

Well three things…1. There is much talk about Windows 7, Microsoft has maneuvered this product effectively through the various preparatory stages and appears to be set for distribution in the fall of this year. 2. “Bing” is now the new buzz word and is gaining traction very quickly in the world of search. Instead of friends telling me to Google it, I’m starting to hear “Bing It!” instead. Microsoft has marketed the site very well and continues to spend a lot of money on this baby to maintain and grow its prominence. 3. Microsoft continues to improve its financial stability maintaining a whopping cash balance of a mere $30 billion (useful for stock repurchases – something MSFT is no stranger to).

In addition, the current stock price to many analysts appears to be cheap and you will receive a nice 2.2% dividend yield while we wait for the gap to converge. While we agree that this cash cow is still extremely cheap relative to current cash flow, the reason it is not a top 10 holding any longer is our concern to accurately forecast future cash flows.

This is where we here at YCG start to depart from consensus views. No doubt – it’s a cash flow generating machine – but knowing how quickly technology innovation can turn and the competitive nature of the industry, we’re just not clear on the future viability of Microsoft’s business. Now certainly we don’t expect businesses to switch from Windows to Linux based operating systems in the next year or two, but what about in ten years? Could we see a paradigm shift in the world of operating systems? Could there be an increased demand for web-based office software? The answer is that no one knows and this is the reason why we have less exposure to MSFT than other managers would warrant. I say “less”…we are owners of such a business and it pleases us much to see that for the first time in a long time the company is innovating and keyed in to its users. Perhaps this connectivity between company and user could provide a bridge for our highlighted concern. We shall have to wait and see…

Disclaimer: The specific securities identified and discussed should not be considered a recommendation to purchase or sell any particular security. Rather, this commentary is presented solely for the purpose of illustrating YCG’s investment approach. These commentaries contain our views and opinions at the time such commentaries were written and are subject to change thereafter. The securities discussed do not represent an account’s entire portfolio and in the aggregate may represent only a small percentage of an account’s portfolio holdings. These commentaries may include “forward looking statements” which may or may not be accurate in the long-term. It should not be assumed that any of the securities transactions or holdings discussed were or will prove to be profitable. Past performance is no guarantee of future results.

Posted by: Will Kruger | June 22, 2009 | Permalink

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