Value Investor of the Week- Edward Lampert

Edward Lampert is the founder of ESL Investment, Inc and the Chairman of Sears Holding. Lampert started ESL at the ripe age of 25 and since its inception he has managed to produce returns averaging 29%.

His investment style is very similar to the great investor Warren Buffett. He looks for established businesses with strong cash flow. He also looks for companies that have the ability to produce cash of the long haul. Unlike Mr. Buffett, he does not look at a companies management team because he believes he can influence management and implement changes. Lampert, has experience in the investing in retail.

Mr. Lampert has been compared to Mr. Buffett on numerous occasions and with a track record of successful value investing he will undoubtedly continue to be compared to Buffett in the future.

Value Investor of the Week- Mohnish Pabrai

Mohnish Pabrai is the managing director of Pabrai Investment Funds. He adheres strictly to the principals of Warren Buffett, even structuring his funds like the Early Buffett partnerships. He began his fund with $ 1 million and now has assets of under mangagement of roughly $400 million. He delivered cumulative returns of over 90% vs a -27% return from the S&P index from Oct. 2000 to 2008.

His strategy is simple he looks for undervalued companies typically in smaller companies with market capitalizations of $500 million. He runs a concentrated fund consisting of 10 to 20 holdings. He is mentioned as a new school Warren Buffett. All this from a guy who was a successful entrepreneur, having run a successful computer and it consulting firm before selling it to become a excellent value investor.

For those more interested in learning about his methods you should check out the Dhando Investor: The low-risk value method to high returns.

Stock Pick of the Week: Microsoft

For those of us that use a computer, for business or personal use, this company needs no introduction. Microsoft (Nasdaq: MSFT), generates earnings through the development, manufacturing, licensing, and supporting a wide range of computer software products, such as its wildly successful Windows operating system and Microsoft Office. Microsoft also designs and sales the gaming system Xbox 360 and its accessories. It currently operates in 5 business divisions: Windows, Server and Tools, Online Services, Business, and Entertainment and Devices.

Strengths

Management

Although not considered to be the visionary like his predecessor Bill Gates, Steve Ballmer, who has been with Microsoft since 1980, and his staff have done an masterful job of consistently growing revenue, operating income, and net income in recent years. Management has also been able to have a strong return on equity of roughly 42% all while facing tough economic conditions and ever increasing competition from the likes of Google and Apple.

On top of the steady growth and high return on equity, Microsoft has also repurchased $170 Million in stock and are authorized to continue a $40 million buyback until 2013.

Products

Along with strong management, you have to look at Microsoft's product line. The Kinect, the motion game sensor for Xbox 360, sold 8 million units in 60 days. Demand will surely continue to be steady for Kinect as those who missed out at on the product during Christmas rush begin to get them in the upcoming months. Alongside the Kinect, Microsoft Office 2010 became the fastest selling version of Office in history and helped the the Business division revenue grow 24% year over year.

Windows has also recently released the windows phone 7 operating system in 30 countries through 60 operators and 9 different devices.

Weakness

The main weakness for Microsoft is the competition they face. This competition from Google, Apple and other software developers will effect the ability of Microsoft to provide future returns on equity as high as seen in previous years and also will slowdown growth prospects and profit margins.

Opportunities

The move toward cloud computing represents a major opportunity for Microsoft. The move has already begun with the development of Windows Azure and firms such as Pixar animations have shown possible uses of the platform. With the vast amount of cash reserves and a strong research and development department, Microsoft will be able to enter the area and quickly gain market share.

Threats

There will continue to be threats from Google and Apple in many areas in which Microsoft operates such as online search, cellular handeset operating system.

Valuation

Using Discounted Cash Flows with a 14 % growth rate (average of past 10 years) in the next 5 years, Microsoft has a fair value of $36.01 which is a 22% margin of safety from Wed. closing price of 27.94.

Investment Analysis

While not the superior growth machine it once was, Microsoft is still a company with solid growth, and strong and shareholder friendly management. With $41 billion in cash and cash equivalent it can still be seen as the 800 puond gorilla in the software space.