AOL, Inc. (AOL) Is Down and Out, Buy Microsoft Corporation (MSFT) Instead?

Microsoft continues to have a dominant position in the PC market, with its operating systems being used in the majority of PCs worldwide. However, the PC market has been slowing over the last two years due to natural disasters and supply chain issues. This remains Microsoft’s biggest weakness.

There is cannibalization of the core desktop market by mobile devices, and Microsoft’s Windows segment is dependent on its ability to build a position in mobile devices, particularly tablets. Yet, its Surface and Surface Pro have had supply constraints.

Hedge fund trade

Going into 2013, there were a total of 95 of the hedge funds long Microsoft. With the smart money’s sentiment swirling, there exists a select group of notable hedge fund managers who were upping their holdings considerably. Donald Yacktman of Yacktman Asset Management is the top hedge fund owner by market share, with a $797 million position that makes up 4.8% of the firm’s 13F portfolio (check out Yacktman’s top five).

In second is Yahoo!, with 60 hedge funds owning the stock. Billionaire activist Dan Loeb’s Third Point had the most valuable position in the stock, worth close to $1.4 billion, comprising 26.6% of its total 13F portfolio (see Loeb’s small cap picks).

AOL had the lowest hedge fund interest of the three stocks listed, with only 19 hedge funds long the stock. This includes its top hedge fund owner billionaire D.E. Shaw, owning $93 million in the stock, which made up just 0.2% of his fund’s 13F portfolio (check out D.E. Shaw’s latest picks).

By the numbers

Both Yahoo! and AOL are two of the cheapest stocks in the industry, with PEG ratios of 0.1 and 0.5, respectively. What’s more is that these two turnaround stories are already generating returns well in excess of the other two industry giants.

	AOL	Yahoo	Google	Microsoft
Return on equity	44%	29%	16%	23%
Return on assets	34%	24%	12%	13%

Don’t be fooled

Although AOL is still working double time on its turnaround, I believe that Yahoo! could be the AOL of 2013. Where AOL was up nearly 100% in 2012, Yahoo! is up 33% so far in 2013, but could easily see further upside with the IPO of Alibaba, as well as the growth in display advertising.

AOL, Inc. (AOL) Is Down and Out, Buy Microsoft Corporation (MSFT) Instead?

Published on May 21, 2013 at 10:18 am by The Motley Fool in News

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