Like Lucy yanking away the football just as Charlie Brown runs up to kick it, every 90 days investors confidently bid up the shares of Cisco Systems Inc., only to see the stock plunge when the networking equipment company’s quarterly results or guidance disappoints analysts.
Cisco shareholders fell for the trick in August, November and most recently in February, and there is no reason to believe the ball won’t be snatched away again when the company reports in May. That’s when savvy investors would step in to buy.
Last summer, Cisco shares rose steadily until Aug. 11, when the company’s quarterly sales and outlook disappointed analysts and CEO John Chambers warned of “unusual uncertainty” in the economy. The following day, the shares fell 10%. Over the next three months, investors had bid up the stock 15% to more than US$24. On Nov. 10, Cisco released guidance for 2011 that again fell short of analysts’ estimates, causing the shares to plummet 16% the next day. Undaunted, investors began buying again and confidently pushed up the shares over the next 90 days. Then, on Feb. 9, Cisco reported that profit margins had narrowed and that the outlook was bleak. Lucy snatched the ball away again, and the shares plunged 14% the next day.
The pattern suggests a trading opportunity — buy after results disappoint, then sell about 88 days later — but there is no need to be that clever.
The networking equipment company’s name always pops up when you use an online stock screener to search for large companies whose shares have fallen over the past year. At US$17.25, Cisco’s shares are down more than one third from where they were a year ago and near their 52-week low and look like good value for long-term investors. Despite the bad year, Cisco is still a giant with a market capitalization of US$96-billion and not surprisingly, such a large company is followed by a crowd of 48 analysts, 27 of whom say buy, 19 hold and only two say sell. Their average one-year target price is US$23.38, a 35% gain.
The highest target price — US$28 — comes from Brian White, an analyst at Ticonderoga Securities in New York City. In a note to clients this week, Mr. White said Cisco will be among the beneficiaries of a huge increase in capital spending if AT&T’s plan to acquire T-Mobile USA gets approved.
“Given the fact that AT&T plans to migrate the T-Mobile network over to AT&T, we believe this will be positive for Cisco,” Mr. White said. “Over the next three years, integration capital expenditures are estimated at $7-billion.”
Mr. White’s US$28 target price for Cisco is based on 15 times earnings per share plus cash of $4.47 per share, he says, noting the P/E is in line to slightly below historical multiples.
The company announced it would start paying a US6¢ per share quarterly dividend, yielding 1.4%, starting April 20.
“We believe that Cisco Systems’ balance sheet is an extremely powerful tool that provides the company with the necessary fire power to expand into new product areas, geographies and new markets,” Mr. White said.
By accessing websites at Google, Reuters and Cisco itself, you can see that Cisco’s balance sheet is solid, and its low share price means many of its fundamentals compare favourably to its competitors. For example:
Cisco’s price/earnings ratio of 13.1 is dramatically lower than its major competitor Juniper Networks Inc., at 38.5 times and Broadcom Corp. at 19.5 times.
Cisco’s price to sales ratio is similarly low, at just 2.3 times, vs. 5.2 times for Juniper networks and 3.1 times for Broadcom.
Cisco’s shares trade at just 2.18 times book value per share, a modest multiple in the technology sector. IBM, for example trades at 8.15 times book, Microsoft Corp. at 4.65 times book, Motorola Mobility Holdings Inc. at four times, Broadcom at 3.8 times and Juniper Networks at 3.34 times.
Cisco’s current ratio — short-term assets to short-term liabilities — is better than any other large-cap company in its sector. Cisco’s current ratio is a comfortable 2.67, better than Juniper Networks Inc. at 2.18, Microsoft Corp.’s 2.13 and LM Ericsson’s 2.05, and vastly better than Alcatel-Lucent at 1.27, IBM’s 1.19, Hewlett-Packard Co.’s 1.10 and Motorola Mobility Holdings Inc. at 0.81.
If you buy Cisco now, you may well be able to gain by selling in early May, while long-term investors can hold on and buy more when — or if — Lucy next jerks the football away.
Cisco shareholders fell for the trick in August, November and most recently in February, and there is no reason to believe the ball won’t be snatched away again when the company reports in May. That’s when savvy investors would step in to buy.
Last summer, Cisco shares rose steadily until Aug. 11, when the company’s quarterly sales and outlook disappointed analysts and CEO John Chambers warned of “unusual uncertainty” in the economy. The following day, the shares fell 10%. Over the next three months, investors had bid up the stock 15% to more than US$24. On Nov. 10, Cisco released guidance for 2011 that again fell short of analysts’ estimates, causing the shares to plummet 16% the next day. Undaunted, investors began buying again and confidently pushed up the shares over the next 90 days. Then, on Feb. 9, Cisco reported that profit margins had narrowed and that the outlook was bleak. Lucy snatched the ball away again, and the shares plunged 14% the next day.
The pattern suggests a trading opportunity — buy after results disappoint, then sell about 88 days later — but there is no need to be that clever.
The networking equipment company’s name always pops up when you use an online stock screener to search for large companies whose shares have fallen over the past year. At US$17.25, Cisco’s shares are down more than one third from where they were a year ago and near their 52-week low and look like good value for long-term investors. Despite the bad year, Cisco is still a giant with a market capitalization of US$96-billion and not surprisingly, such a large company is followed by a crowd of 48 analysts, 27 of whom say buy, 19 hold and only two say sell. Their average one-year target price is US$23.38, a 35% gain.
The highest target price — US$28 — comes from Brian White, an analyst at Ticonderoga Securities in New York City. In a note to clients this week, Mr. White said Cisco will be among the beneficiaries of a huge increase in capital spending if AT&T’s plan to acquire T-Mobile USA gets approved.
“Given the fact that AT&T plans to migrate the T-Mobile network over to AT&T, we believe this will be positive for Cisco,” Mr. White said. “Over the next three years, integration capital expenditures are estimated at $7-billion.”
Mr. White’s US$28 target price for Cisco is based on 15 times earnings per share plus cash of $4.47 per share, he says, noting the P/E is in line to slightly below historical multiples.
The company announced it would start paying a US6¢ per share quarterly dividend, yielding 1.4%, starting April 20.
“We believe that Cisco Systems’ balance sheet is an extremely powerful tool that provides the company with the necessary fire power to expand into new product areas, geographies and new markets,” Mr. White said.
By accessing websites at Google, Reuters and Cisco itself, you can see that Cisco’s balance sheet is solid, and its low share price means many of its fundamentals compare favourably to its competitors. For example:
Cisco’s price/earnings ratio of 13.1 is dramatically lower than its major competitor Juniper Networks Inc., at 38.5 times and Broadcom Corp. at 19.5 times.
Cisco’s price to sales ratio is similarly low, at just 2.3 times, vs. 5.2 times for Juniper networks and 3.1 times for Broadcom.
Cisco’s shares trade at just 2.18 times book value per share, a modest multiple in the technology sector. IBM, for example trades at 8.15 times book, Microsoft Corp. at 4.65 times book, Motorola Mobility Holdings Inc. at four times, Broadcom at 3.8 times and Juniper Networks at 3.34 times.
Cisco’s current ratio — short-term assets to short-term liabilities — is better than any other large-cap company in its sector. Cisco’s current ratio is a comfortable 2.67, better than Juniper Networks Inc. at 2.18, Microsoft Corp.’s 2.13 and LM Ericsson’s 2.05, and vastly better than Alcatel-Lucent at 1.27, IBM’s 1.19, Hewlett-Packard Co.’s 1.10 and Motorola Mobility Holdings Inc. at 0.81.
If you buy Cisco now, you may well be able to gain by selling in early May, while long-term investors can hold on and buy more when — or if — Lucy next jerks the football away.
