Top Investor Avoids Energy, Buys Microsoft
Company Profile: Microsoft is best known for its flagship Windows operating systems, as well as other software applications and consumer products, like the Xbox 360 video game console.1-Year Total Return: -0.2% Schoenstein's Take: Information technology has the largest weighting in the Jensen Portfolio at 25% as of Dec. 31, and Microsoft represents the largest equity position in the fund at 5.18% as of Jan. 26. Schoenstein says the IT space represents such a large chunk of the portfolio because of the competitive advantage associated with switching costs. "It's very hard to switch to a competitor's product, so you have a real recurrence to the revenue stream," he explains. "Over the last few years, we have had a higher exposure to the IT space with Oracle (ORCL), Adobe (ADBE), Cognizant (CTSH) and Microsoft. Those are companies that do have the ability to keep up better with the market and give us more growth on the upside." Microsoft gets top billing in the fund and has been in the Jensen Portfolio for roughly five years. In order to meet the standard of 15% return on equity each year for 10 years, the portfolio waited to see whether the company would have the same growth it traditionally enjoyed under former CEO Bill Gates. One of the key reasons Microsoft remains a top pick is due to the technology cycle that will force Windows users to upgrade their operating system soon. "You've had almost a 10-year cycle where people haven't upgraded their operating systems since Windows XP," Schoenstein says. "Windows 7 has been well regarded and well received and yet, there still is a lot of pent up spending in the IT area because of the recession we went through where businesses weren't spending. They need to. You need to maintain efficiencies. You need to continue to allow your employees to perform at the levels that you want them to perform at and match or compete effectively with competition. The operating systems are key to that." Schoenstein is impressed with Microsoft's recently expanded dividend payment as well as the cash flow it generates. He says he's impressed that Microsoft understands the importance of redeploying cash back into the business or to shareholders through dividends, share buybacks, investments in the business or acquisitions. Even more impressive, he says, is Microsoft's ability to bounce back after flops. For every success like the Xbox 360 and Kinect, there are maligned products like the Zune, Kin and even Windows Vista. But for all the buzz the consumer side gets, the enterprise side is the real driver and cash generator, Schoenstein says. "There isn't necessarily the same dependency upon the buzz to continue to create value," he says. "If there's a misstep on the consumer side, it can be pretty painful. If there's a misstep on the business side, you know there is going to be something coming pretty quickly behind that. Windows Vista was not well regarded by the market place, and yet even during that period, the company still continued to grow. Free cash flow never actually declined during that period of time by any material nature. "When you think about a company that had a product that was a flagship product that wasn't necessarily well regarded by the market place, still being able to grow its free cash flow, that's real power and real quality," he adds.
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