Cisco (CSCO)

He likes this here. This is a case of old tech which, a generation ago, turned up their nose at dividends, but have now got religion in terms of turning cash back to the owners of the company. Their dividend growth rate over the last 5-7 years has been one of the strongest of any stock in the Dow. The bad news is that as the tech industry continues to evolve, some of the old switches, etc. they are selling to telcos, are not in the same kind of demand that they were. Given the current valuation and its dividend, this is a good bet.

(A Top Pick March 17/16. Up 17%.) Sold this recently. They are still undergoing a move from the traditional business, which is still making money, but they have been very aggressive in making acquisitions.

This has a very strong seasonality. There are 2 periods of seasonal strength. October through until January and April through until the middle of July. Recently, the stock has been in a trading range and broke a key support, establishing a downward trend, and is underperforming the market.

A big leader on routers, switches, and also moving towards the Cloud and into security. The last quarter, the US hyper focused on growth, numbers were a little disappointing so it sold off. Feels this is great valuation. They have a lot of cash. If you are patient and a long-term holder, he would continue holding this.

Valuations are getting slightly rich in terms of their PEG ratio. Their forward PE is trading at about 13X earnings. The growth rate has come down to 6%-7% or so. A little bit expensive relative to the higher growth type of names. (See Top Picks.)

A kind of “steady as she goes” company relating to Internet infrastructure. Don’t expect dramatic growth, but it pays a good dividend yield. Going forward, all the wireless, technology, routers and switches that are needed for the backbone will grow, but will be slower than in the past. Well-run company and great balance sheet, but you can find other companies exposed to the Internet that would be faster growing.

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.