You bought stock in a company, and it has now or is about to meet the target price you assigned. What do you do now? This is the question we now have in regards to Microsoft (NASDAQ: MSFT).
August 17, 2013, we set a target price for Microsoft at $41. Currently, the price is $39.87 per share, and has paid two dividends at $0.28/share. That is a healthy 29% return since we made our original recommendation.
Therefore, we now ask, “What now?”
Warren Buffett is possibly the most famous “buy and hold” investor ever. His typical timeframe for holding a stock is “forever”. If the underlying qualities of the stock are what initiated the purchase, then there should be no reason for one to sell the stock. Just let it keep growing.
The metrics for Microsoft are still strong:
- Z Ratio (5.09) shows the company is on sound financial footing. Currently, its debt rating is AAA.
- Gross margins are 71% and net margins are 27%
- Revenue grows at 9.23% per year and earnings are better at 14.7%
- Return on equity is 28%
- It generates free cash flow at $2.90 per share
- We see a new fair price for MSFT at $56
Add to the position
Given the new fair price is $56; one should consider adding to their MSFT position. However, this should only happen if it does not create a “large holding” position. If adding more of any stock causes imbalances in one’s portfolio, then do nothing.
If you had a specific strategy of selling the stock when the original target price was met, then sell it. A fair warning must be issued though. If you bought the stock in a taxable account, just understand that it will be a taxable event. The taxes for short-term holdings can be greater than for long-term holdings, so check and make sure whether you have held the stock for at least one year. For the IRS, that is a big deal.
Write a call option
Again, there will be tax implications here, but one interesting strategy is to write a call option set at your target price. You can write a contract to sell your MSFT at $41 with the contract to expire in June, and earn an additional ~$1.00. Do some research on this, but it is a great way to increase one’s gains, especially if the stock hits a period of depreciation. It also reduces one’s cost basis.
This blog site is just for fun. We do own Microsoft, and we plan to hold it for now. Do your own due diligence, and assume your own risks. Ultimately, you are responsible for your own decisions.