Commentary: Microsoft needs more than just buybacks to lift its shares

Tomi Kilgore,

NEW YORK (MarketWatch) -- Don't bet on buying alone to lift a stock's price.
Microsoft shares, which have been dormant for the last few years, have been looking up over the last couple months. The Dow industrials component has gained about 20% since hitting a 4-year low of $21.46 on June 13.
To help move things along, Microsoft not only launched a $40 billion stock repurchase program that lasts through 2011, the company also said its previously announced 4-year, $30 billion stock buyback program was completed in just 2 years.
And by the way, it probably hasn't hurt that the company topped fiscal third-quarter revenue forecasts, and provided a fiscal 2007 outlook was about expectations.
The stock's recent strength has been enough to get it above one well-known technical indicator, but it still has another level to hurdle before it's safe to jump back in.
Microsoft seems to have the will to make this happen, but will $40 billion dollars be enough?
Buying tops 200-day, but not gap resistance
Microsoft spiked 4.4% on Aug. 19 following news that it would only buy $3.8 billion worth of stock, out of the $20 billion that was available, given that its tender offer was undersubscribed. The $24.75 limit it was willing to pay was just too cheap to sell. Read more.
Add that to the $20 billion it has available in a more conventional stock repurchase program, Microsoft still had $36 billion to get the stock out of its doldrums.
The good news is that the buying has pushed the stock above its 200-day simple moving average, which many view as a bull vs. bear market trigger point. And for the most part, the 200-day had acted as pivot point for the shares several times in the past. See java chart. Change "# of Days" to 200.
What makes this move a little more significant, is that the last time the stock was above its 200-day was April 27, the day before it plunged 11% after Microsoft reported disappointing fiscal third-quarter results and provided an outlook that fell short of expectations. Read more.
The not-so-good news is that the stock has appeared to stall before reaching the top of a resistance zone defined by the gap in the charts between the April 27 low of $26.94 and the April 28 high of $24.50.
The stock topped out at $26.25 last Tuesday, and has flat-lined ever since.
Until the gap is filled on a closing basis, you can expect to still see silent selling interest, as those that bought ahead of the April 27 close out positions.
Given the stock's history, it wouldn't be prudent to assume this resistance level will be cleared just because of the company still has $36 billion to spend. Unless the company shows that it can continue to grow its business and beat expectations, you have to stay with the status quo, which in this case suggests the upside will remain capped.
From the close of July 19, 2004 -- the day before the company announced a 4-year, $30 billion stock buyback program -- to the close of July 20, 2006 -- when the program was said to be completed -- and if you take out the $3 special dividend that was paid out in late 2004, the stock lost $2.10, or 8.4%.
Bottomline, if you're going to buy the stock, wait till it proves that it can clear resistance. Or, better yet, wait to see if it will fall to support first.
You can expect some strong buying interest at $24.75, which was where investors were not willing to sell their shares in Microsoft's tender offer; if they won't sell there, shouldn't they want to buy there?
Coincidentally, that price is just above the bottom of the April 28 downside gap.
Lesson learned
One of the hardest hitting lessons I learned in trading was that if you hear about a lot of buying, and the market still doesn't go up, the silent seller is usually the winner. At the risk of dating myself, I thought I'd share the experience.
On one day during the dollar's downtrend against the yen in the early-1990s, there was talk of large selling interest about 0.5% above where the currency market opened during New York hours.
But the dollar still traded higher that day, as talk centered on a certain big-name investment bank that supposedly bought a very large amount of dollars (for an unknown client). While the dollar never reached where the selling interest was supposed to be waiting, and even though the gains were pared by the end of the day, the size and boisterous nature of the buying, coupled with the fact that the dollar had already fallen significantly, convinced me to hold onto a long-dollar position (for a spot FX trader, an overnight position was considered long-term).
If someone that big was willing to buy that many dollars, I better buy too.
Shortly after the Tokyo market opened, however, my position was "stopped out" (my stop-loss was triggered), and the dollar fell throughout the night.
The next morning, an experienced friend of mine mentioned who made money on the overnight move, explained that it doesn't matter who the buyer is or how much they buy, only what the buying was able to accomplish. In this case, all that buying and the dollar couldn't even reach the selling interest -- that's a clear sign that there's enough natural supply in the market to absorb the buying.
Lesson learned -- the market's reaction to the news is more important than the news itself.
Microsoft and the $36 billion left on its current repurchase program sounds big, but so did its previous $30 billion buyback. And if the stock still can't get above resistance.... End of Story
Tomi Kilgore is a reporter for MarketWatch in New York.

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