Here Is Where Value Remains in Today's Stock Market

Ferris believes the stock has upside potential, if Windows 8 is enough of a success. "The personal computer isn't dying, as hundreds of millions of PCs are still being made each year. Windows 7 sold over 600 million copies," he reminds.

Also, MSFT just came out with Office 2013. "Its business software division is thriving and generates huge amounts of cash!" Then Ferris, who likes MSFT's forward PE of less than 9 and its 3.3% dividend yield, representing a 45% payout ratio, made a remarkable observation.

"In the quarters and years ahead, MSFT will continue raising its dividend by double-digit amounts." He wrote a letter to the board of MSFT telling them in essence, "... you'll give shareholders more value and your stock could easily double in price if you'd repatriate the massive cash holdings you keep in foreign banks to avoid taxes."

As of the most recent quarter, MSFT was sitting on more than $68 billion in total cash, with a little more than $14 billion in debt. Ferris believes that it should follow the example of Expeditors International of Washington (EXPD), which provides logistics services in the United States and internationally.

In a 2011 8-K filing, the CEO of EXPD tackled the topic of bringing home to America what a company earns overseas, paying the taxes and using the net cash profits to reward its employees and the company's shareholders. You can see from the chart below this approach hasn't hurt EXPD's share price, in spite of a tough worldwide economy during the past four years.

EXPD data by YCharts

EXPD steps into the earnings confessional on February 26. There are good reasons to anticipate an improvement in its operating margin and trailing 12-month cash flow from continuing operations. It has no debt and almost $6 billion in total cash as of the last quarter.

"In the February issue of Extreme Value, we recommended a company that dominates its market, has a ton of cash on the balance sheet and gushes free cash flow, year after year. We believe its business will grow substantially in the next few years, due to several industry trends we detailed."

Extreme Value isn't for everyone, as Ferris points out. "It's for patient, intelligent investors who understand that a business' value is what ultimately determines the value of its stock. Most people simply can't tolerate a two- to three-year wait in a safe stock. They want it all right now.

Extreme Value investors are different." That's part of what made this interview so interesting. Stay tuned for more insights from my interview with Dan Ferris, in future articles.

As of the time of publication, Courtenay was long INTC and MSFT.

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