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This Dominating Blue-Chip Company Has Never Been Cheaper

By Jeff Clark
Thursday, May 19, 2011

Cisco (CSCO) is the Rodney Dangerfield of Wall Street. The stock gets no respect.
CSCO shares dropped to a new 52-week low yesterday. They're down 33% in the past six months. Analysts have been downgrading the shares. And CNBC's Jim Cramer recently hit the "Sell, Sell, Sell" button when asked about the stock.
It's a funny thing though... At $16.50 per share, CSCO is all the way back to where it was trading in 2005. Back then, the company earned $0.87 per share on $24.8 billion in sales.
For 2011, however, analysts expect Cisco to earn $1.59 per share and ring up $43 billion in sales. That's an 83% increase in earnings and a 73% increase in revenue on the 2005 numbers. Yet the stock is in the same place.
The company is the 800-pound gorilla in the technology room. Cisco manufactures networking and communication devices. It makes the routers and switches that allow information to move through the Internet. And it rules the market.
Cisco owns 50% of the router market and 70% of the switch market. Eighty-five percent of Fortune 500 companies use Cisco products. Chances are, if you're on the Internet, a Cisco product enabled you to get there.
Cisco makes money. It enjoys gross margins of more than 60% and profit margins of almost 20%. Business is growing in nearly all its operating segments and across almost all its geographic regions. It generates billions of dollars in cash flow, which it often uses to buy back its own stock. And the company just started paying a $0.06 quarterly dividend to shareholders.
So what's the problem? If everything is so rosy in the land of Cisco, why is the stock in the dumpster?
That's simple... Our little 800-pound gorilla is growing up.
Cisco used to be the growth stock darling of Wall Street – the teenager with the rapid metabolism who outgrew his clothes every few months. Investors were willing to pay 25, 30, even 40 times earnings just to get a piece of that growth.
But our young darling has matured. Cisco is now a cash-flow-generating adult. It's still growing – just not at the pace it once was. And while the company is more profitable than ever, growth-oriented investors aren't willing to pay sky-high multiples to own a piece of it.
But value investors should take a look at the shares.
CSCO is trading at just 10 times next year's earnings estimates. That's 33% less than the earnings multiple of the S&P 500. The company holds nearly $8 per share cash – almost half the share value – on the balance sheet. And Cisco pays a 1.4% dividend. That's more than twice the yield of a one-year Treasury bill.
This is a unique situation for Cisco. The stock has never traded at a valuation this cheap.
Somehow, I suspect, it won't stay this way for long.
Best regards and good trading,
Jeff Clark

Further Reading:

Dan Ferris has Cisco on his list of World Dominator stocks: "World Dominators are the No. 1 companies in their industries. They're consistently profitable, year after year," he writes. "They gush free cash flow. And they pay a lot of that cash out to their shareholders."
Be sure to read Dan's World Dominator essays on Altria, Procter & Gamble, and Microsoft.

In The Daily Crux
Market Notes
Cigarette giants continue slow and steady rise... Altria and Lorillard touch fresh all-time highs.
Biotech giant Amgen touches fresh 52-week high.
Restaurant uptrend continues... Yum Brands (KFC, Taco Bell) and Darden (Olive Garden) soar to all-time highs.
Solar stocks LDK, ReneSola, and Canadian Solar plummet 40% in just three months.
Market Watch
Symbol Price
S&P 500 1340.68 +0.9% +19.6%
Oil (USO) 39.50 +2.5% +18.0%
Gold (GLD) 145.60 +0.6% +21.9%
Silver (SLV) 34.23 +3.5% +84.3%
U.S. Dollar 75.26 -0.5% -13.8%
Euro 1.42 +0.0% +17.1%
Volatility (^VIX) 16.23 -11.0% -51.6%
Gold Stocks (^HUI) 526.57 +0.6% +11.3%
10-Year Yield 3.17 +1.6% -6.2%

World ETFs
Symbol Price
S. Korea (EWY) 65.34 +2.2% +40.2%
Taiwan (EWT) 15.64 +1.4% +35.0%
S. Africa (EZA) 70.53 +1.6% +29.5%
Singapore (EWS) 14.10 +1.4% +26.7%
Russia (TRF) 21.24 +1.1% +22.7%
Canada (EWC) 32.40 +1.5% +22.1%
USA (SPY) 134.36 +0.9% +21.9%
Lat.America (ILF) 51.00 +0.6% +21.3%
Israel (ISL) 17.07 +0.3% +20.8%
China (FXI) 44.14 +2.3% +16.6%
India (IFN) 29.42 +0.2% +10.3%
Japan (EWJ) 10.27 +0.8% +6.2%

Sector ETFs
Symbol Price
Semis (PSI) 18.08 +1.7% +39.3%
Oil Service (OIH) 148.83 +2.5% +39.1%
Internet (HHH) 76.57 +1.2% +38.7%
Basic Mat (IYM) 79.20 +2.0% +37.6%
Telecom (IYZ) 25.02 +0.7% +29.9%
Real Estate (IYR) 61.54 +1.1% +27.5%
Retail (PMR) 22.07 +1.2% +26.0%
Big Tech (QQQQ) 58.04 +0.8% +26.0%
Industrials (IYJ) 70.86 +1.3% +25.5%
Health Care (IYH) 75.73 +0.9% +25.1%
Transportation (IYT) 98.47 +1.6% +24.7%
Big Pharma (PPH) 72.55 +0.4% +24.7%
Biotech (PBE) 23.31 +1.0% +24.4%
Consumer Svcs (IYC) 74.06 +1.0% +24.3%
Software (PSJ) 26.84 +1.4% +20.8%
Media (PBS) 15.40 +1.7% +20.4%
Utilities (XLU) 34.09 -0.3% +19.9%
Insurance (PIC) 16.82 +0.0% +16.3%
Water (PHO) 19.63 +1.3% +16.2%
Defense (PPA) 20.33 +0.9% +13.4%
Financials (IYF) 58.17 +0.5% +9.8%
Construction (PKB) 13.66 +1.6% +9.2%
Alt. Energy (PBW) 9.53 +1.5% +5.9%
Nanotech (PXN) 9.15 +0.9% -4.0%

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