Recently in Sivy on Stocks Optimistic about the stock market Blue chips that can ride out a recession Rocky market, smart strategies

A 17-part series on how to achieve maximum returns for the right amount of risk. See all the lessons.

NEW YORK (CNN/Money) - Microsoft's earnings report last Thursday was strong across the board. Net income came in 2 cents a share above the consensus forecast. Nonetheless, the stock price continues to languish.

Over the past five years, the stock has ranged from a low of just over $20 a share to a high of nearly $60. Currently, it trades at $26.18, or 31 percent above its low. The Dow, by contrast, is up 45 percent from the bottom.

Why has the performance of Microsoft been so much weaker than that of the overall market? Basically, the company is completing a transition from high-growth tech stock to mainstream moderate growth investment. As it does that, the natural shareholder base changes.

Such transitions are not seamless. In the case of Microsoft, it appears that growth investors are already getting out of the stock, while a new constituency of more conservative shareholders has yet to develop.

Microsoft's prospects remain bright, however. Some investors worry that customers would hold off buying software until Microsoft releases its updated version of Windows next year. In fact, office products suffered a 3 percent sales decline, but revenues from the consumer version of the Windows operating system and related products were up 5.3 percent, chiefly because of robust PC sales.

Other major divisions showed positive trends, as well. Online businesses grew revenues by 7.7 percent. Sales rose an even more impressive 18 percent for Microsoft's server-software division.

Finally, the home entertainment and video game division posted an 11 percent revenue gain. More important, the division turned a quarterly profit for the first time.

Microsoft may not be able to boast a growth rate in the high teens, but the company's earnings are projected to grow nearly a percentage point faster than those of the S&P 500.

The stock also pays a 1.2 percent yield, which boosts the total return potential to a clearly above-average 12.5 percent a year. Moreover, that rate could accelerate if some of the new products Microsoft will be introducing in 2006 perform better than expected.

Finally, Microsoft remains among the financially strongest of all American corporations. The company has virtually no long-term debt. And even after paying a special dividend in December of $3 a share, or about $33 billion, Microsoft has $34 billion in cash and short-term investments left.

That ongoing cash reserve allows the company to make strategic acquisitions -- a software firm, for instance -- that could increase Microsoft's growth rate.

Such a profile sounds appealing for a moderately conservative investor with a long-term time horizon. Based on the current share price, Microsoft trades at 21 times earnings for the current fiscal year ending June 30 and less than 19 times projected earnings for next year.