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Ultimate ‘Value Trap’ Microsoft Finally a Buy?

Since the pop of the Dot-com bubble, Microsoft has always been the bridesmaid for value investors, but never the bride. The world’s largest maker of software embodied the term ‘value trap’ for the last decade, appearing cheap relative to the market and its peers, but ultimately leaving investors at the alpha altar. Microsoft may finally be ready, some investors and analysts said.

“While seemingly always ‘cheap’, when the business endured some bumps in the road the shares would simply remain inexpensive,” wrote David Hilal, FBR Capital Markets analyst, in a note to clients today.

“When we think about how the next 12 months unfold for Microsoft, we see a lot of the trends common with the recent times of outperformance and very little commonality with the times of underperfomance. It is this relationship that leads us to believe the shares are not a value trap.”

The analyst cited the PC refresh cycle, the release of a new ‘Halo’ for Xbox and the launch of ‘Windows Phone 7’ as reasons why Microsoft may be able to realize its full potential this time around. The stock made a few runs in the last decade, but always seemed to end up back at $25 a share.

Microsoft is down 20 percent this year following recent concerns about back-to-school sales of PCs. Analysts tracking chip sales out of Asia have hinted that computer sales may be less than expectations this Fall. The drop has brought the stock’s forward price-earnings ratio down to 10, nearly half the average for the rest of the software industry and below the S&P 500’s 13 forward multiple.

In the past, costly product investments and delays, as well as large acquisition announcements, have turned Microsoft into a value trap, FBR’s Hilal said. He doesn’t see those same mistakes occurring again in the near term.

“All three profit drivers in Microsoft’s business are firing on all cylinders right now,” said Whitney Tilson, founder of T2 Partners. Microsoft is “crazy cheap.”

Microsoft may finally be a long-term buy or this is their most elaborate value trap yet.

With reporting by Drew Sandholm.

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Trader disclosure: On Aug 12, 2010, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s Fast Money were owned by the Fast Money traders; Terranova owns (AKAM), (BAX), (FCX), (MOS), (OXY), (PFE), (POT), (SU), (XBI), (GLD); Adami owns (AGU), (BTU), (NUE), (C), (GS), (INTC), (MSFT); Adami’s wife works at Merck; Finerman owns (AAPL); Finerman owns (GOOG); Finerman’s firm owns (HPQ); Finerman and Finerman’s Firm owns (BAC); Finerman and Finerman’s Firm owns (JPM); Finerman's firm is short (IJR); Finerman's firm is short (MDY); Finerman's firm is short (SPY); Finerman's firm is short (IWM); Finerman’s firm owns S&P 500 puts; Finerman’s firm owns Russsel 2000 puts; Jon Najarian owns (CSCO) short calls; Jon Najarian owns (VIX) Call spread; Jon Najarian is short (SQQQ)

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