Apple Can’t Kill Microsoft But It’s Crushing HP

Microsoft Corporation (NASDAQ:MSFT)‘s Windows 10 isn’t boosting PC sales as much as experts had hoped. Market research firm Gartner estimates PC shipments fell 7.7% year over year to 73.7 million units while research firm International Data Corp had an even worse read of the situation, with the firm estimating PC shipments fell 11% year over year to 71 million in the third quarter. The launch of new Windows operating systems usually boosts sales as many consumers typically buy the latest and greatest from Microsoft when Windows comes out but the research data show wide spread customer apathy and that’s bad news for leading PC makers Hewlett-Packard Company (NYSE:HPQ), Lenovo Group Limited (ADR) (LNVGY), and potentially good news for Apple Inc. (NASDAQ:AAPL). Let’s take a closer look at the news and examine the hedge fund sentiment towards the tech companies.

Most investors don’t understand hedge funds and indicators that are based on hedge funds’ activities. They ignore hedge funds because of their recent poor performance in the bull market. Our research indicates that hedge funds underperformed because they aren’t 100% long. Hedge fund fees are also very large compared to the returns generated and they reduce the net returns experienced by investors. We uncovered that hedge funds’ long positions actually outperformed the market. For instance the 15 most popular small-cap stocks among funds beat the S&P 500 Index by more than 53 percentage points during the 3 years since the end of August 2012 (read the details). That’s why we believe investors should pay attention to what hedge funds are buying (rather than what their net returns are).

PC sales have declined as consumers flock to Apple Inc. (NASDAQ:AAPL) and Android devices instead. Gartner’s data is just the latest example of the personal computer’s secular fall and is bad news for Lenovo, the top PC maker with 20% market share, and Hewlett-Packard Company (NYSE:HPQ), the PC maker in second place. Weak PC sales have been killing Hewlett-Packard as shares are off more than 26% year to date. Microsoft has done reasonably well with its shares up 4.23% year to date, as the company’s Office and Server products are more than offsetting Windows’ decline. Investors can only hope Hewlett-Packard’s additional layoffs and cost control measures will turn things around for the giant.

One potential reason for the disappointing sales is Microsoft is allowing existing users of Windows operating systems to upgrade to Windows 10 free of charge. Microsoft, which is one of the biggest software companies in the world, wants as many consumers to use its Windows 10 operating device as possible so more programmers make apps for its platform. With the data, it seems that many consumers decided to keep their existing devices and upgrade to Windows 10 for free rather than buying a new PC outright.

The data is good news for Apple investors, as less PC sales means more mobile sales, of which Apple dominates in profit share. Apple shares look very appetizing right now, with a forward PE of 11.2 versus the NASDAQ’s forward PE of 17.75. Apple also pays a 1.9% dividend yield. In the next page, let’s take a look at what the smart money thinks of the three tech companies.

According to our data, the smart money loves Apple Inc. (NASDAQ:AAPL), as it was second most widely held position by elite funds in the second quarter. A total of 144 funds were long the computer maker in the latest round of SEC filings, down slightly from 150 from the prior quarter. The hedge funds owned $21.27 billion worth of the company (2.9% of the float) versus $21.52 billion a quarter earlier. Carl Icahn‘s Icahn Capital Lp owns 52.76 million shares while Ken Fisher’s Fisher Asset Management owns 11.01 million shares.

The smart money was also optimistic in Hewlett-Packard Company (NYSE:HPQ) in the second quarter. Of the around 730 elite funds we track, 55 funds were long the computer maker, with a total position of $3.12 billion (representing 5.80% of the float) in the latest round of 13F filings, versus 55 funds and $2.83 billion a quarter earlier. Richard S. Pzena’s Pzena Investment Management owns 17.98 million shares.

The smart money is also bullish on Microsoft. Although the number of funds decreased to 107 from 110, the total value of their holdings in the stock increased to $18.32 billion (representing 5.10% of the float) from $16.13 billion. Jeffrey Ubben‘s Valueact Capital owns 75.27 million shares, good for 17.49% of his portfolio. Ubben acknowledges that Microsoft has lost a step in consumer products, but still thinks Micosoft has plenty of growth ahead, as it makes the basic plumbing that makes small and large businesses function. Ubben bought his shares two years ago when Microsoft shares were ‘stupid [cheap]’ and have been holding on ever since. Shares of Microsoft currently trade at a reasonable 15.4 times forward earnings, lower than the NASDAQ’s forward PE of 17.75.

Disclosure: None