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Moving Into a Tech Biggie

The action in this stock lately tells Cramer the time has come to add it to the portfolio.
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Tech stocks are taking a breather today because of the lower revenue outlook at Cisco Systems (CSCO) . That said, I believe we need to remain overweight this sector heading into 2006, so I'm going to purchase 2,500 shares of Microsoft (MSFT) , here around $27.09. This once again gives me a total of 25 stocks in the portfolio.

This sleeping giant has seen a reawakening of late, with the stock breaking out of its narrow trading range, and gaining about 10% in the past month. I know that some of you out there will say, "Oh no, not big, old, boring Microsoft!" But computers have been flying off the shelves in the early stages of the back-to-school season, and at less than 19 times expected fiscal 2006 (ending June) earnings of $1.44 a share, I believe the market is underestimating this momentum upswing.

Remember, I've been saying that the tech rally will be product-driven. I believe that Mister Softee will be launching two must-have products in the coming quarters, led by the latest incarnation of its Xbox gaming platform, due out this fall. The company is really going to give Sony (SNE:NYSE ADR) a run for its Playstation dollars this time around, and should gain considerable market share in the lucrative video game market.

There's also the Longhorn/Vista operating system, due out next year. I believe investors are really underestimating the potential demand for these two products. The added features and speed also will likely make this piece of software a must-upgrade for the computing world.

Finally, I think we're currently in a market in which cash is king -- and even though Microsoft paid out more than $30 billion in dividends last December, the company still completed the June quarter with nearly $38 billion of cash and equivalents on the balance sheet. And while I'm not yet convinced of rumors circulating that another special dividend is potentially in the cards, investors likely will continue to gravitate toward Microsoft's pristine balance sheet.

As with most new positions, I'm leaving room with my initial purchase to keep building this stake up on any pullbacks. I see 20% to 25% upside potential for Microsoft in the coming quarters, and eventually want to make this one of my core holdings.

Regards,

James J. Cramer

DISCLOSURE: At the time of publication, Cramer had no positions in the stocks mentioned.

Send email to james.cramer@thestreet.com.