Microsoft Sets New 52-Week High! Should You Buy, Sell, or Hold?

On Friday, shares of Microsoft rose 2.32%. When the closing bell rang, the stock price had climbed to $34.87 and set a new 52-week high. Since the beginning of 2013, shares have risen 30.55%, making Microsoft the fourth best performing Dow Jones component. Since the beginning of March, the stock has had only one losing week and 10 winning weeks.

The stock has been a little more volatile in May, but I would say most investors aren't complaining. The first week of the month, Microsoft was the best performing Dow component after it gained 5.34%, but the second week of the May, shares slipped 2.38%. The this past week, if it wasn't for an insane run by Cisco, gaining 14.88% over the past five trading sessions, Microsoft would have likely been the Dow's best stock of the week, as it rose 6.69%. With the stock on fire like this, it's attracted a lot of investors' attention, and the question they all want to find an answer to is: Should I buy, sell, or hold?

The biggest argument for selling is that Windows 8 is performing extremely poorly. This is supposed to be Microsoft's bread-and-butter product. And if its most important product is falling, where will the company be in a few years? The PC market was praying the new operating system would help with hardware sales, but to anyone who follows the industry, it's very clear that has not happened.

Dell , which just reported first-quarter earnings last week, saw profits drop 80% compared with the same timeframe last year, and the company is on the verge of losing money from its PC business because of disappearing margins. We should have a better idea of how the PC business is truly during after Hewlett-Packard reports earnings this coming week on May 22, but as of right now, things don't look good.

The company built Windows 8 so that it could run on tablets and other mobile computing devices, but those products have yet to gain any real traction in a market that's highly competitive and where everyone is fighting over a relatively small pool of customers.

While it was announced this past week that Microsoft passed BlackBerry in total smartphones shipped during the first quarter of the year, Microsoft still controlled only 3.2% of the smartphone market while BlackBerry fell to 2.9%. But I also believe this may be a slightly misleading report, because BlackBerry didn't release its newest smartphones and start selling them until late in the first quarter. And since consumers knew a new BlackBerry was coming out soon, they may have even held off purchasing a new device and just decided to wait. So we could see Microsoft relinquish the third spot in the smartphone industry once again to BlackBerry sometime later this year.

Microsoft also pays a dividend yield of 2.6%, which is fundamentally strong. The current payout ratio is only 44%, which means the company has a lot of room to increase the dividend in the coming years even if profits stay flat.

Even despite the poor Windows 8 sales and the slow start to the Windows smartphones, from a financial aspect the company is extremely healthy. Microsoft has more than $73 billion in cash, with less than $15 billion in debt. Operating cash flow for the past 12 months is more than $30 billion, while operating margins are at 35% and profit margins come in at 21%.

Furthermore, with the current share price and earnings per share of $1.94, the stock is trading at just 18 times past earnings, which is very reasonable. But with estimated 2013 earnings per share of $2.76, the forward price-to-earnings ratio of 11 is extremely cheap.

But while the balance sheet and fundamentals all look strong, the biggest reason I see for buying shares of Microsoft is its diversity. As I mentioned, the company's key product is not performing all that well right now, but Microsoft is still making good money. Microsoft has spread itself out over a number of different products and industries and built a company that doesn't need just one killer product, because it has five or 10 good ones. The Xbox, cloud data centers, email Web services, Microsoft Office, Skype, the company's investment in the Nook, and the list could go on.

My point is, at one time Microsoft was a one-hit wonder, but today the company is more like a multiplatinum artist who keeps recording new tracks that are all good but still occasionally writes a blockbuster. I'm a shareholder of Microsoft and believe the company is a strong buy today.

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Fool contributor Matt Thalman owns shares of Microsoft. Check back Monday through Friday as Matt explains what caused the Dow's winners and losers of the day, and every Saturday for a weekly recap. Follow Matt on Twitter: @mthalman5513. The Motley Fool owns shares of Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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