Unloved & Unwanted
Research for Online Investors

by John Dalt

5/25/11

Funny things happen in the stock market.  Sometimes investors and traders will get so scared, they throw the baby out with the bathwater.  Last week, the commentators on CNBC were talking about Cisco Systems (CSCO).  They decided buying now was like buying a falling knife.  It was better to wait for a good quarter or good news to reverse the fall.  Who wants to step in front of a speeding car going down a hill?

We suggest the stock is an obvious buy at $16 and change, but everyone is afraid of it. The stock hit a new 52-week low this week. In fact, the stock hit a new two year low…it is trading for less than it has since March of 2009. Prior to 2009, CSCO hasn’t been this cheap since May of 2003.

Does it really deserve this bad treatment?  In the 2003 fiscal year, CSCO had revenues of $18.9 billion dollars, with a net income of $3.6 billion or $0.50 per share.  Cash flow was $5.24 billion dollars for the year.  At the end of the year, the company had $20.7 billion dollars in cash and cash equivalents.

Where is the company now?  In 2011, analysts expect CSCO to earn $1.59 per share on sales of $43 billion dollars.  The company has $43 billion in cash in the bank.  That is a 218% increase in profits on a 227% increase in sales and twice as much cash…and the shares trade at the same price?

CSCO sells 50% of the routers sold in the world and 70% of the switches.  The company says 85% of Fortune 500 companies use CSCO products.  We use a CSCO wireless router in our small office.  I dare say if you check your home, you may have one!

CSCO has $7.87 of cash on its books for every outstanding share; they are buying back stock and just instituted a dividend of $0.06 per share.  The company’s products sell at almost a 60% gross profit margin.  You can almost buy CSCO today for the cash on its books plus the sales per share for this year.

There are two reasons we can buy CSCO so cheap.  Number One is Jon Chambers, the CEO.  He built the company, but is under fire for missteps.  The company has made some expensive mistakes.  The other reason we can buy CSCO cheap is the company is maturing.  It is not a growth stock anymore.  It doesn’t command the high multiples of a company that is growing sales 50% or 75% per year.  At today’s price, you can buy CSCO for 9.36 times earnings. That is more than 30% less than the earnings multiple of the S&P 500.  That is cheap.

According to one report I saw, you won’t be the only one.  Some of the biggest hedge funds are moving into CSCO this quarter.  We should see it when they file their reportts with the SEC later this summer…but then everybody will want to jump on the bandwagon and take the stock higher.

That is the best time to sell.

If you would like a little help with your investments, we invite you to check out our Long-Term Portfolio.  You might have just gotten a preview of our next recommendation, but you don’t know how we are going to enter at our best price.  This one recommendation will pay for your annual subscription, and you get 19 more plus monitoring.

Quote:
You can’t hit a HOME RUN unless you step up to the plate.  You can’t catch fish unless you put your line in the water.  You can’t reach your goals if you don’t try.—Anonymous, sent in by subscriber M.C.

The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions.  It may contain errors and you should not make investment decisions based solely on what you believe you have read here.  Do your own research, it is your money.  If you lose it, it is your responsibility, not ours or your grandmothers!  The editor may or may not have a position in any securities discussed.  The editor may have held a position in a security earlier, or in the future.

MarketToday Archive

Back to Top