Microsoft primes itself for growth
Shares of Microsoft (Nasdaq: MSFT) have averaged annual gains of about 12 percent over the past 20 years, but were down about 5 percent over the past year, at the time of this writing. The tech giant’s recent malaise – due in part to its $8 billion write-off of its purchase of Nokia’s phone business – makes it an intriguing opportunity.
CEO Satya Nadella has a “mobile-first, cloud-first” transition underway. Microsoft’s cloud revenue posted triple-digit gains in seven recent quarters, and the revenue is especially attractive because it’s mostly recurring. Meanwhile, the company has adapted its industry-leading software, Office 365, for competing operating systems such as Android and iOS, reaching more consumers.
As for hardware, the Surface Pro 3 and Surface 3 tablets are performing admirably, with sales more than doubling last quarter to nearly $900 million in revenue. The Surface Pro 4 and other mobile devices will be debuting soon.
Windows 10 appears to be off to a strong start, with an estimated 53 million downloads in three weeks. Microsoft is even tackling the Internet of Things, with its Windows 10 IoT Core, a slimmed-down version of its operating system designed to operate on a wide range of “smart” devices.
Microsoft is setting up the foundations for future growth. With a dividend that recently yielded 2.9 percent, it’s worth consideration. (The Motley Fool owns shares of Microsoft.)
Q: What’s the difference between a 401(k) plan and a 403(b) plan? – C.S., Port Dickinson, New York
A: 401(k) plans are tax-advantaged retirement plans for private-sector workers. 403(b) plans are very similar, but are primarily for employees of tax-exempt employers, such as educational institutions and some nonprofits.
With both, employers will often match employee contributions to some degree. If yours does, be sure to grab all the matching funds you can, as that’s free money. Employer contributions may take several years to fully vest, but 403(b) plans are more likely to feature immediate or quicker vesting. In both cases, employee contributions are immediately fully vested.
Q: What are derivatives? – M.M., Gresham, Oregon
A: Derivatives are financial instruments such as warrants, futures contracts and options.
While shares of stock represent real ownership stakes in real companies, derivatives often represent contracts, not assets. Their value is based on, or derives value from, the value of other investments, such as stocks, bonds, currencies or commodities – thus, the name “derivative.”
Sophisticated investors use derivatives to hedge their bets, engage in arbitrage (profiting from differences in prices), lock in prices and use leverage (i.e., invest with borrowed money). For example, several derivatives may be based on a single bundle of home mortgages, with one representing the bundle’s interest payments and another representing its principal payments. Since they will react differently to interest rate changes, they will each likely appeal to a different kind of investor.
Derivatives are typically used by large institutional investors that want to boost their overall return or hedge against risk. Many derivatives are very risky, though, and when used aggressively can result in investors losing more than their initial investment.
My dumbest investment
My dumbest investment happened when I got very excited about antiangiogenesis as a treatment for cancer. It’s a strategy that involves cutting off the blood supply to cancer cells. The technology was developed by Dr. Judah Folkman, and licensed to the biotechnology company EntreMed.
I bought a lot of shares of EntreMed at $25, and as the excitement grew about the concept, the stock surged to over $100 per share. This was before they had produced a product approved for the marketplace. Instead of cashing in a percentage of my sizable gain, I figured that if the stock rose this high without a product, imagine how much higher it would go when products hit the market.
Unfortunately, EntreMed’s products in development didn’t do well in initial clinical trials, and ultimately other companies brought to market successful drugs based on antiangiogenesis principles. – S.S., Newtown, Connecticut
The Fool responds: That’s a classic error, being swayed by a compelling story and overlooking a dearth of products on sale, revenue and profits. EntreMed has changed its focus and even its name – to CASI Pharmaceuticals. It is now “dedicated to the acquisition, development and commercialization of innovative therapeutics addressing cancer and other unmet medical needs for the global market with a commercial focus on China.”