A gain of 34.13% in 2019 for shares of Microsoft Corporation (MSFT) likely couldn't have happened without institutional support for the shares. The way the shares have traded tells a story of a stock gaining alongside a large amount of unusual trading activity. It's bullish activity because the shares are heading higher on increasing volumes, indicating that a buyer is likely involved.
Over time, we've learned how stocks with a history or strong fundamentals tend to rise in price. Smart money managers are always looking to bet on the next outlier stocks … the best in class. I actually wrote about this same activity for Microsoft stock two months ago. See that article here. Shares are up 8% since that post.
The main criteria we look for when betting on upside are a history of strong fundamentals, strong technicals, and big potential buying in the shares. I'll go into the fundamental picture later, but the true tell on the near-term trajectory of a stock lies in the trading activity of the shares.
Simply put, it's all about supply and demand. When demand is higher than supply, the stock rises. When demand is lower than supply, stocks fall. For most of 2019, Microsoft stock has been gaining alongside unusual buy signals. It's all about stacking the odds in your favor.
For Mapsignals, when we look for an entry on a leading stock, we want to see an increase of potential buying. Just to show you graphically what our unusual trading activity signals look like, have a look at all of the unusual institutional (UI) signals Microsoft stock has made over the past year.
Looking at 2019, there have been days when the shares appear to have had a buyer. This is notable because stocks move based on supply and demand. What is really catching our eye now i/s the recent UI buying. After the meltdown late last year, shares of the software giant have been in bull mode:
Year to date (YTD), Microsoft stock has logged 12 unusually high-volume days, indicative of buying in the shares starting on March 13, 2019 (see chart above). This points to Microsoft gaining in an unusual way, which suggests that demand for the stock is staying consistent.
If you are going to make a bet on the direction of a stock, it is prudent to pay attention to how the shares are trading. Just like you don't want to fight the trend, you also don't want to fight a stock that shows increasing price alongside an increase in the volume traded. Someone could potentially be accumulating a position.
Mapsignals' goal is to identify tomorrow's top stocks today. We're basically looking for outlier companies with healthy fundamentals accompanied by outsized unusual institutional trading activity. By studying these data points, we can make an educated guess as to which equities institutions are trafficking in and marry this information with fundamentally sound companies. We want the odds on our side when looking for the highest-quality stocks.
When we decide on a strong candidate, we consider prior leaders that have a history of technical outperformance. When they show leadership, we see these as opportunities. The following are a few areas in which Microsoft stock has grabbed our attention:
- YTD outperformance vs. market: +16.62% vs. SPDR S&P 500 ETF (SPY)
- YTD outperformance vs. technology sector: +8.63% vs. Technology Select Sector SPDR Fund (XLK)
- Recent bullish unusual trading signals
Now, we take it a step further and score the best stocks showing unusual trading activity. Below you can see the historical times since 2015 when Microsoft stock made the top 20 report for Mapsignals. These are the highest-rated signals in our stock universe. Clearly, we caught the big run-up beginning in 2016 and the latest move in 2019. That's exactly what our process is designed to do. We'd even venture to call this stock an outlier:
On top of a technical picture that is strong, one should also look under the hood to see if the fundamental picture supports a long-term investment. Microsoft has been firing on all cylinders for a company of this size … just look at the following from its recent earnings report:
- Q3 2019 year-over-year (YoY) revenue growth rate: +14%
- Q3 2019 YoY diluted earnings per share growth rate: +20%
Microsoft stock is breaking out recently alongside other software stocks. We believe that the current level for the shares is in position for further upside. The narrative for Microsoft and other highly profitable software and cloud names is one of strong growth. This is particularly true for companies that have demonstrated an enviable track record of success.
We are always on the lookout for great companies showing usual trading activity in the shares. The best companies tend to trend higher over the long run. All of this points to a long-term opportunity for the stock.
The Bottom Line
Microsoft stock represents a potential buying opportunity for the long-term investor. Given the lift in price, strong fundamentals, and recent unusual buying signals, this stock could be worth a spot in a growth-oriented portfolio.
Disclosure: The author holds a long position in Microsoft shares at the time of publication.