Stockpickr Snapshot: Microsoft

Take the signs that this stock offers and adapt them to future analysis.
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As every investor now knows, Microsoft (MSFT) - Get Report blew away earnings expectations Thursday morning. So I looked at Stockpickr portfolios to see if there were clues to the potential here.

The company reported that its third-quarter profits were boosted by a strong showing from its new operating system, Windows Vista. The company also offered solid guidance on 2007 and 2008, which led to two analyst upgrades, including a new $36 price target.

But rather than look back wistfully, let's figure out if we could have seen this coming. Several things pointed to this ahead of time. Despite CEO Steve Ballmer's comments about Vista that caused a healthy pullback in the stock a short while ago, there were a few different indicators that would have allowed us to capitalize on this earnings report. In particular, I took note of the fact that that short interest in Microsoft went up more than 4% (4.3 million shares) in April, just as the software giant was entering its strongest product cycle in 10 years.

Here are some Stockpickr portfolios that provided a backdrop to the Microsoft earnings report. It might be interesting to examine the other stocks in these lists to identify similar opportunities.

Nasdaq short interest

: Microsoft had 98.8 million shares short in the April report. These shorts are all scrambling to cover in the wake of MSFT's good news. Other stocks on this list include

Sirius

(SIRI) - Get Report

coming in at No. 1 with 120.4 million shares and

Level 3

(LVLT)

with 108.4 million shares sold short.

Historically, you could not go wrong investing in Microsoft, as it is one of the

Top 25 stocks

over the past 25 years and is consistently listed as one of the

Top 20 Most Profitable

companies.

Most people know that MSFT has had huge gains over the past 25 years, up 29,266%, but it is not No. 1 on the list. That honor belongs to

Franklin Resources

(BEN) - Get Report

, which is up 64,224%. And why not? It sells the one thing we all love: stocks. The mutual fund manager has been dispensing advice throughout the 20-year bull market (with a few bear markets here and there as well). Another company on this list is a

new Warren Buffett

holding,

UnitedHealth

(UNH) - Get Report

, which is up 37,642% in the past 25 years.

Microsoft is also a member of the

Dogs of the 21st Century

whereby it had one of the higher dividend yields of the

Dow

components. It also has a high payout yield, which takes into account both dividends and stock repurchases of which Microsoft has historically been a fan.

After seeing that Microsoft was included as a member of the

Top Payout Yield

portfolio -- along with the short interest factor as well as the recent 10%-plus slide in the stock and historically solid profitability -- one would think this was a decent play going into earnings.

The payout yield turns out to be even more important than just the dividend yield.

DuPont

(DD) - Get Report

and

Disney

(DIS) - Get Report

are the first two on the payout yield list.

But sticking with the premise of Stockpickr, we also notice that Microsoft is held by some of the best and brightest funds. It was recently selected as part of

Forbes'

Piggyback portfolio

, which consists of the top stocks most widely held by top investment managers, meaning managers who have outperformed their peers in 10-year, five-year, three-year and one-year periods. According to this list,

Pfizer

(PFE) - Get Report

is the most popular large-cap, with 15 of the funds that

Forbes

tracks, and Microsoft was No. 4.

It's easy to spot ideas after the fact, but the key is to find other stocks with similar setups and similar signs, so we are prepared to play those earnings calls in the future.

At the time of publication, Altucher and/or his fund had no positions in stocks mentioned, although positions may change at any time.

James Altucher is a managing partner at Formula Capital, an alternative asset management firm that runs several quantitative-based hedge funds as well as a fund of hedge funds. He is also the author of

Trade Like a Hedge Fund

and

Trade Like Warren Buffett

. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Altucher appreciates your feedback;

click here

to send him an email.

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