I am a long-term holder of Microsoft stock. It has tripled in value in recent years and I am in a quandary as to whether I should take the profit or continue to hold the stock. I hold it in my registered retirement savings plan and I do not need the proceeds. What do you think?
First, let’s get something straight. The fact that Microsoft Corp. (MSFT) has tripled in value is, in and of itself, not a reason to sell the shares. Those gains are in the past and should have no bearing on your decision. All that matters now is how you expect Microsoft’s shares to perform in the future. I see too many investors with itchy trading fingers who “take profits” because a stock has risen in value, only to watch with regret as the shares zoom even higher.
There is a name for this sort of behaviour – it’s called “anchoring," and it refers to the use of irrelevant information to make investing decisions. In your case, the anchor is the low price you paid for Microsoft several years ago. But – to continue the nautical analogy – you are in the same boat today as every other Microsoft investor. The fact that you are sitting on a large capital gain is nice, but it’s not relevant to what you should do now.
So the question you should be asking yourself is: Based on Microsoft’s future prospects, do the shares offer attractive return potential at their current price?
The answer, according to Wall Street, is a resounding yes. Of the 36 analysts who follow the company, 33 have buy recommendations on the shares, with two holds and one sell, according to Refinitiv. Even after a 37-per-cent increase in the share price this year, analysts see further gains ahead: The median 12-month price target is US$146 – 5.1 per cent higher than Friday’s close of US$138.87.
Does this guarantee that Microsoft’s shares will continue to rise? No. But analysts make a compelling case that the company has lots of growth ahead thanks to strength in products such as Office 365 and Azure, a cloud-computing platform that provides a wide range of services to supplement or replace on-premise servers.
“As these businesses grow within the mix and as margins improve (especially in Azure), we expect revenue and gross profit growth to accelerate,” RBC Dominion Securities analyst Ross MacMillan said in an April note after Microsoft posted strong fiscal third-quarter results that sent its stock sharply higher.
Just this week, brokerage Cowen & Co. initiated coverage of Microsoft with a buy rating and US$150 price target. Cowen analyst Nick Yako said Microsoft has the potential to post an additional US$100-billion of revenue by fiscal 2025, with Office 365 and Azure the key growth drivers. “Despite its recent success, we see further opportunity ahead, as we believe double-digit annual revenue and earnings growth [from fiscal 2020 to fiscal 2025] is more than achievable,” he said in a note.
Notwithstanding such glowing endorsements, it’s important to remember that every business faces risks and even great companies can stumble. For that reason, if your Microsoft investment has grown to the point where it accounts for an unduly large percentage of your portfolio, there may be a case for trimming part of your position and reinvesting the proceeds elsewhere simply to improve diversification and control your risk. Because you hold Microsoft in your RRSP, there would be no capital-gains consequences from selling a portion of your shares. Whether to trim or not is a judgment call; in my own portfolio, I generally aim to cap each security at about 5 per cent of my equity exposure, but if I really like a stock I’ll let the weighting go higher than that. The old Wall Street saw – “Let your winners run” – is often good advice.
Tweaking your portfolio to control risk is one thing. But selling your entire Microsoft stake because the shares have tripled and you want to lock in your profit does not strike me as a prudent strategy given the company’s bright prospects.
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