MSFT INTC Microsoft Intel . . . Three for three?

[twacowfca]

Last year we posted two unusual situations re a value stock, BRK, and BRK's addition to the S&P500 and later the Russell indexes.  Both additions were massive in their impact, and both trades worked very well, the first resulting in about a 20% profit for us and the second about an 8% profit.

 

We are into a similar, massive, once in a decade rebalancing of the QQQ's. We bought INTC earlier this month and it is currently up about 11%. However, MSFT is only up slightly from a similar very large purchase earlier this month.  It will be interesting to watch the price action through this Friday when the rebalancing will occur after Friday's close.  :)

[Shane]

I think this is a very interesting concept, I know Seth Klarman has mentioned he prefers to find companies who were recently kicked out of an index... your capitalizing on something I haven't heard of before.  Are you suggesting MSFT will gain based on the rebalancing of the index because MSFT will become a larger position in the Index?

 

[claphands22]

Interesting twacofca,

 

Looked up the information for the reblancing, if the math and the data I got were right, the index would have to buy twice the current daily volume of MSFT to get it's target position size of 8.30%.  Do you know if these funds are allowed to start purchasing their holdings before the target date? Are you purchasing the commons or the options?

 

 

QQQ size last updated 3/30/2011

49.35B

Current Holdings MFSFT

3.86%

Expected Holdings of MSFT

8.30%

Current Share price

26.19

Precent QQQ would have to increase position

2.150259067

Amount of Money QQQ has in MSFT

$1.9B USD

Amount of Money QQQ will have to pay

$4.09B USD

Amount of Shares needed to purchase

156,397,00

Average Daily Volume of MSFT

63,230,000

 

 

 

[prunes]

The idea is compelling. The biggest risk seem to be speculation prior to the reweighting, but this seems to be more of a risk with INTC than MSFT.

 

The other thing I note is that with BRK, I think more shares were purchased (4% perhaps) than with MSFT and INTC (only approximately 0.4%). Is this enough to move the needle significantly? Are there other ETFs that track the QQQQ that will also bring buying pressure?

[claphands22]

The idea is compelling. The biggest risk seem to be speculation prior to the reweighting, but this seems to be more of a risk with INTC than MSFT.

 

The other thing I note is that with BRK, I think more shares were purchased (4% perhaps) than with MSFT and INTC (only approximately 0.4%). Is this enough to move the needle significantly? Are there other ETFs that track the QQQQ that will also bring buying pressure?

 

Was wondering the same thing. The QQQQ is just rebalancing whereas BRK was added to the S&P 500 from scratch. Also the average volume of BRK is/was much lower than MSFT so it was harder for these funds to accumulate shares without bidding up the price.

[Guest Bronco]

You're looking at this all wrong.

 

MSFT is cheap on an earnings basis and with all there share buybacks, the stock is bound to go up.

[claphands22]

You're looking at this all wrong.

 

MSFT is cheap on an earnings basis and with all there share buybacks, the stock is bound to go up.

 

I agree with you Bronco. Yet, I still think the rebalancing is an interesting phenomenon.

[twacowfca]

You're looking at this all wrong.

 

MSFT is cheap on an earnings basis and with all there share buybacks, the stock is bound to go up.

 

 

Good point.  However, If one has been sniffing around these two purely as good values, it's a nice kicker to get a possible extra boost in the share price from the rebalancing.  

 

If the price goes up significantly it could be a short term trade, if not it's a great long term hold.

 

The percentage of shares that will have to be purchased by the ETF is merely the tip of the iceberg.  Many other funds will have to own a greater percentage of INTC and MSFT to avoid de facto tracking error that might cause them to underperform many of their peers.

[prunes]

Can you elaborate on that last statement?

 

Are you going to buy shares or options of MSFT?

[twacowfca]

Interesting twacofca,

 

Looked up the information for the reblancing, if the math and the data I got were right, the index would have to buy twice the current daily volume of MSFT to get it's target position size of 8.30%.  Do you know if these funds are allowed to start purchasing their holdings before the target date? Are you purchasing the commons or the options?

 

 

QQQ size last updated 3/30/2011

49.35B

Current Holdings MFSFT

3.86%

Expected Holdings of MSFT

8.30%

Current Share price

26.19

Precent QQQ would have to increase position

2.150259067

Amount of Money QQQ has in MSFT

$1.9B USD

Amount of Money QQQ will have to pay

$4.09B USD

Amount of Shares needed to purchase

156,397,00

Average Daily Volume of MSFT

63,230,000

 

 

 

 

 

Most funds that are indexers or quasi indexers will rebalance at the last minute Friday or Monday.  Other funds have more leeway on their timing.  I suspect that most will wait until MSFT releases earnings after the close Thursday.  Then, they will buy late Friday or early Monday, perhaps with a market at close order or from an investment bank that buys this week or is willing to go short and then cover soon to provide liquidity.

[onyx1]

Last year we posted two unusual situations re a value stock, BRK, and BRK's addition to the S&P500 and later the Russell indexes.  Both additions were massive in their impact, and both trades worked very well, the first resulting in about a 20% profit for us and the second about an 8% profit.

 

We are into a similar, massive, once in a decade rebalancing of the QQQ's. We bought INTC earlier this month and it is currently up about 11%. However, MSFT is only up slightly from a similar very large purchase earlier this month.  It will be interesting to watch the price action through this Friday when the rebalancing will occur after Friday's close.  :)

 

The rebalancing is gravy on top of a fundamentally cheap stock.  How often do you find a company whose products command 80% gross margins and are ingrained into the computing habits of users in every country of the world, priced at an 11% FCF/EV yield and growing 10% annually?  With no net debt on the balance sheet and annually buying back 3% of outstanding shares while paying 2.75% in dividend?  The rebalancing may not be the only once in a generation opportunity here.  Good call Twacowfca.

[prunes]

Per Barron's:

 

And the number ten big surprise that’s possible (drum roll) Microsoft’s consent decree with the U.S. Department of Justice expires on May 12th. On the simplest level, with some 600 Microserfs working just on documentation required by the decree, Microsoft could eliminate a lot of overhead and save a penny a share in annual costs. But it could also offer Microsoft more “strategic flexibility” to do a variety of things, such as, perhaps, bundle.

[twacowfca]

Still batting 1000, but in a surprising way.  the trade was complicated by both INTC and MSFT reporting earnings close to rebalancing day for QQQ.  This introduced a wild card, and my hypothesis was that a negative reception of an earnings report would be largely neutralized by the extra buying associated with the rebalancing and that a bounce associated with a positive earnings report would be accentuated by the extra shares purchased before the rebalancing.

 

We made less than one percent profit on the MSFT part of the trade, but at least we didn't lose after the negative reception to MSFT's earnings neutralized most of the gains we had before the earnings came out.

 

We made over 17% on our INTC trade.  Nice pay for less than one month's work for that capital.  :)

 

We exited both trades with a market at close order on Friday, the last trading day before the rebalancing.  As per our hypothesis that there would be an imbalance in buy and sell orders toward the end of the day because of the massive size of the unusual rebalancing, the highest price for the day was the market at close price.  That price was in fact higher than the published closing price for the day.  :)

 

The guys at our broker's trading desk tried to talk us out of using the market at close order, but I imagine there were some WTF's when both stocks peaked in the last minute and actually closed even higher when all the MAC orders were tallied.  :)