I'm a Cisco Bull

The Stay Invested portfolio was UP today: $407.01 (+0.38%)

Overall GAIN/LOSS YTD: +$3,288.66 (+3.20%)

Our benchmark index, the S&P 500 is UP Year-To-Date +6.54%

http://money.cnn.com/data/markets/sandp/

"Investing is the only school where you get the final exam first,

and the education afterwards."

― Clay Baker

(I'm sure someone has said this before me, please let me know who)

No Buying Today

The rally in the market continues and there is still nothing in the bull pen to buy. The markets will be closed on Monday, so look for some buying on Tuesday, especially if the market declines.

Cisco Systems

Cisco is on my radar and may well be the next buy I make for the portfolio. Cisco is one of those underappreciated companies that does all the heavy lifting in the background. There success could be measured by the absence of problems with our network and internet connections. Cisco is a Silicon Valley household word, for those that don't know the company here's a bit about what they do.

Cisco Systems, Inc. designs, manufactures, and sells Internet Protocol based networking and other products related to the communications and information technology industry worldwide. The company offers switching products; routing products that interconnect public and private wireline and mobile networks; data center products; and wireless access points for use in voice, video, and data applications. It also provides collaboration products comprising unified communications, TelePresence, and conferencing, as well as the Internet of Things and analytics software. In addition, the company offers security products, including network and data center security, advanced threat protection, Web and email security, access and policy, unified threat management, advisory, integration, and managed services; and other products, such as service provider video software and solutions, and cloud and system management products. Further, it offers technical support services and advanced services; and hyperconvergence software, cloud calling and contact center solutions, and AI-driven relationship intelligence platform. The company serves businesses of various sizes, public institutions, governments, and service providers. It sells its products directly, as well as through channel partners, such as systems integrators, service providers, other resellers, and distributors.

Why Cisco? I think the battle with Chinese tech company Hauwei (pronounced "Wah-Way") is just getting started and the U.S is going to do everything it can to squash this competitor. In an article I wrote last year about the Trade War with China I discussed my view that the trade war is more about making sure the U.S leads in 5G technology and that Chinese competitors are kept at bay or even eliminated as competitors.

Recently Chinese president Xi Jinping stated that he wants China to become an cyber-superpower. In a a June 2018 Atlantic article, Samm Sachs wrote:

In late April, just days after the Commerce Department announced the denial order against ZTE, Xi Jinping, the president of China, gave a major speech laying out his vision to turn his country into a “cyber superpower.” His speech, along with other statements and policies he has made since assuming power, outlines his government’s ambition not just for independence from foreign technology, but its mission to write the rules for global cyber governance—rules that look very different from those of market economies of the West. This alternative would include technical standards requiring foreign companies to build versions of their products compliant with Chinese standards, and pressure to comply with government surveillance policies. It would require data to be stored on servers in-country and restrict transfer of data outside China without government permission. It would also permit government agencies and critical infrastructure systems to source only from local suppliers.

China, in other words, appears to be floating the first competitive alternative to the open internet—a model that it is steadily proliferating around the world. As that model spreads, whether through Beijing’s own efforts or through the model’s inherent appeal for certain developing countries with more similarities to China than the West, we cannot take for granted that the internet will remain a place of free expression where open markets can flourish.

So what's all this got to do with Cisco? Simple, Hauwei is a direct competitor, and if the U.S takes a hard line stance on Hauwei, as other countries have started to do, Cisco is a direct beneficiary. I also suspect that Cisco will become a dominant global player in cyber security, most likely through an acquisition of a company like (Palo Alto Networks, Fireye, or another player).

JPMorgan's Samik Chatterjee wrote that Cisco's product momentum will continue in coming quarters and outperform investor expectations -- despite any effects from the prolonged partial government shutdown. Approximately 20% of Cisco's revenues come from the government, the analysts noted, but such headwinds are likely fleeting.

"We are positive on shares of Cisco heading into its F2Q19 earnings (Jan-end) led by the sustainability of the recently demonstrated product momentum underappreciated by investors in our view," wrote Chatterjee.

The networking giant is also in a strong position to gain from intensifying scrutiny on Huawei, which it completes with in certain lines of business, including routing, campus and data center switching, the analysts added.

Cisco Valuation

Cisco's P/E of 171.87 indicates that it trades at a premium compared to an average of 102.03 for the Communications Equipment industry. Compared to the S&P 500 average of 19.91, it's a big premium. However, Cisco's price-to-book ratio of 4.45 indicates a discount versus the industry average of 4.53; or at least its on par. The price-to-sales ratio is also well above both the S&P 500 average and the industry average. Cisco seems to be trading at a premium to alternatives within the industry based on what we know today about Cisco's future. However, if Cisco takes market share from Hauwei, these numbers get revised and I think we'll see that Cisco is trading at a discount at today's prices. Just last October Cisco shares reached $50/share. And while stock holders equity is down a whopping 33% from the same time last year, there is no indication that the company is facing financial problems, in fact just the opposite is true.

Cisco closed today at $45.03/share and has an average analysts 12 month price target of $52.64. If the U.S continues to put pressure on Hauwei I think this stock could rise to $60/share or roughly a 33% gain.

Stay Invested,

Clay Baker

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Keep Me Honest

  1. S&P 500 declines to 2,350 or more (1-3-2019)

  2. Healthcare and Biotech sectors outperform (1-3-2019)

  3. S&P reaches 3,000 by year end (1-11-2019)

  4. CSCO reaches $60/share (1-18-2019)

Disclosure: I am personally invested long in some or all of these stocks or funds that appear in the Stay Invested portfolio and may purchase or sell shares within the next 72 hours. I am also invested in other stocks and funds that do not appear in the Stay Invested portfolio but may be mentioned or related to this article. It is not my intention to advise or encourage the purchase or sale of any security. I am invested long in these securities mentioned in this post:

VEEV, STZ, AMZN, NVDA, BCRX, GS, BDSI, VEEV, VTI, GLD.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. This article is not intended to offer investing advice, guarantee 100% accurate predictions, or to be interpreted as providing a personal recommendation.

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This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice.
This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities.

© 2016 by Clay Baker all rights reserved