We purchased an initial position in Microsoft on June 13, 2007. Here is the stock selection guide we used for the purchase decision.

Microsoft Corporation (MSFT) engages in the development, manufacture, license, and support of software products for various computing devices worldwide. Its Client segment offers operating systems for servers, personal computers (PCs), and intelligent devices. The company’s Server and Tools segment provides server applications and developer tools, as well as training and certification services.

Growth. Value Line projects 3-5 year revenue growth of 12.5% and EPS growth of 13.5%. Reuters reports an analysts consensus EPS growth of 11.5% (based on 20 analysts). M* projects future growth at 10%. The attached SSG assumes revenue growth of 9.5% and EPS growth of 10.9%. This resulting in a 5year EPS of $2.03.

Quality. Microsoft is a high quality company. Part 1 of the SSG shows consistent revenue and earnings growth. From Part 2 of the SSG we see that MSFT has averaged a 17.1% return on equity over the last five years with no debt less.Part 2 of the SSG and the PERT chart, and PERT graph (see attached SSG), show consistent pretax margins over 40%. M* gives Microsoft a stewardship grade of A. Value Line rates Dell’s financial strength A++ and earnings predictability of 90. The Robertson quality rating is 83.2 (a rating above 65 is excellent).

Valuation. MSFT has a PAR of 15.2% and TR of 18.1%. See SSG. (Manifest Investing projects PAR as 17.7%.) U/D ratio for MSFT is 7.7 to 1 and the buy price using 25%-50%-25% zoning is $32.10. M* rates MSFT five stars meaning it is undervalued.