Cisco (CSCO)

There is a split right now in the technology space. If you think of Cisco, Intel, and even IBM, they are old legacy businesses and are starting to drop off the vine. It is commoditized and they are not making much money off of it. They are desperately hurrying into the tech side of the business. With this one, you are getting away from the set-top boxes, and getting into Cloud and other services. Everybody is up in the Cloud right now and you are starting to get commoditization on prices, which is not going to help this company over time. If they start to see a slowdown on their upscale business, then of course, with a slowdown in the hardware side, it is going to hurt. People are investing for the yield, and he thinks there are better tech stocks out there. 3.7% dividend yield.

(A Top Pick May 24/16. Up 23%.) This company, throughout its history, has done a good job of changing with the times, and it is doing that now, morphing into services into more of a recurring venue business. There is still skepticism on whether they are big enough, and how long that transition is going to take. Feels that has been keeping a lid on the valuation. She feels there is more upside on this.

It has an interesting chart. It has been banging up against 2.5 times book value for some time and has not been able to break out. If it does, then it could have quite a run. Over $35 you might get a decent move. He is watching it quite closely. It is close.

In the heyday of the 2000 timeframe this was a growth stock. We have ended up with 2.5 players, with the biggest opportunity in the developed markets. China is a huge market on the back of mobile growth, but thinks QUALCOMM is winning that. The opportunities for this company are in other markets, but he doesn’t think it has legs. A very cash rich story, so it could be a dividend growth story. If looking for a reasonable attractive valuation with a dividend that can grow over time, this is one to look at.

We are in the early stages of this theme and CSCO-Q is very well positioned. Chinese preference for a North American vendor could be a real benefit to CSCO-Q.

If you include the cash, this is quite a cheap stock. It is basically trading at about 16-17X earnings and the market cap is about $165 billion. People forget that there is $60 billion plus in cash sitting on the balance sheet. Even if you net out the debt of about $30 billion, you are taking the valuation down to about 13 or 14 times. Not including the debt, it is about 10 times. The growth profile is going to be low. The dividend is about 3% and there is a strong potential that you could see some special dividends, or an acquisition to drive growth. An attractive investment.

A matured technology company. Their heavy growth days are behind them, but they own the market. They have enough money to go out and develop new products. The problem is that they own this market, so there is not a lot of growth, so they are under the pressure of new technology coming on cheaper. At this price, it is probably fine and you won’t lose money. If it were below $28, he would buy this again.

There is going to continue to be a lot of spending in the IT space. This is one of those companies that is very innovative. They provide a lot of important things. The “Internet of things” they talk about is a really big deal. This has a good strong balance sheet and a decent yield and they keep buying back stock. He worries about competitive threats. China is getting into this business as well. There are potential trade wars looming. The stronger US$ is hurting sales. He would rather buy this on weakness, down around $28.

He is thematically focused, and tries to find themes where something is changing for the better, where investors can make returns and get a multiple expansion in the stocks they own. A key theme in this market are some of the large cap technology stocks that generate tons of cash, and return some to shareholders. This one generates a free cash flow yield of about 7%. Pays a 3.4% dividend, and has been growing it north of 15%, and likely will for the next 5 years. Generates a lot of cash and their commitment is to return 50% of that to shareholders. This is the supplier of gear that is connecting all the Cloud infrastructure together, and that is not slowing down anytime soon.

Thinks the dividend is safe. It has become a mature cash cow. They are reinventing themselves from the old router and switching company. If you look at what they have done over the last few years, it is similar to what a lot of old technology has done; trying to reinvent itself and basically treaded water. There are better opportunities in technology, newer and growthier ones, and he would probably gravitate towards them.

This has gone from a hardware company to software. They are trying desperately to do that quickly, being in the Cloud and providing artificial intelligence moving forward. The old hardware business is pretty much gone and they are trying to make a transformation. The jury is still out as to whether they are going to be hugely successful. He would avoid this.

He likes this company. It shows up on his radar as decent value. In the near term, it is probably a little overbought. He likes this particular space. Trading at about 14X with a 7%-10% growth rate. 3.4% dividend yield.

Not an expensive stock. On the switching side, they’ve not been able to get that to grow more aggressively which has really hurt them. They’ve augmented the slower growth by making acquisitions and buying assorted things. Now they are going to get squeezed on the margin side. The numbers are going to be OK numbers, but you can put your money in other places and do better. Over the next couple of years, you may get some margin compression, as their switching business is just not running on all cylinders.

Cisco Systems (CSCO-Q) or Intel (INTC-Q)? Both are old economy tech stocks, and both are excellent companies. If he had to choose, he would choose Intel, which has done more to turn the corner.

Technology tends to do well from October through to January, so we have just exited the period of seasonal strength where the stock gains about 25% on average. We are out of the period of seasonal strength, and currently are in a period of seasonal weakness, which runs through until about mid April. Technically, this has run up with the broad market, and all the indicators on his screen indicate that it is vastly overbought. Wait until it comes back down to some of the major moving averages, the 20 day at $32.89, the 50 day at $31.34. Start looking for your entry point at about mid-March through to mid-April.