Cisco Systems Inc (CSCO) – Buy

We bought more shares in Cisco (CSCO) today at 19.429/share.

The Bad News

The selling today is an overreaction to the some negative news reported yesterday regarding their recent earnings report. They had a smaller gross margins (.90% less than expected) and the CEO’s outlook was more negative than expected.  Chambers sited concerns in weaker IT spending by local, state and federal governments as a major concern in the near future.

The Good News

However, the good news is:

1. Revenue and earnings beat estimates.

2. Revenue is still growing.

3. Cisco will be soon starting a dividend (1-2% projected yield)

4. With $40 billion in cash, which easily covers long term debt, the company isn’t going out of business anytime soon and has plenty of money to weather economic downturns and fund continued development.

5. One of the reasons their margins are down is because they are rolling out some new products and it’s typical to have some margin pressure in the beginning of any new production introduction.

6. There will be continued demand for internet/networking services and Cisco dominates the enterprise routing and switching market. The switching costs to other competitors is high giving them a good wide moat for their business. Long term demand oulook looks great as internet usage growth continues.

7. Therefore, I believe most of “Bad News” is already priced in to the stock at the current price.

Buy When Everyone Hates a Stock

When everyone hates a stock can be the best time to buy if the reaction to news is very short term focused and if the company is still strong with good long term prospects and the price is good compared to current earnings, which I believe is the case with Cisco.

However, because of the strong negativity right now, it’s very well possible the price will continue to go lower before recovering.

It may be a good idea to buy in stages if you are concerned about this. This way if you buy a 3rd now and if it goes down more you can buy another 3rd then and if it goes lower still, buy the remaining 3rd.

If it goes up at least you got some when the price was cheap.

I wouldn’t expect the price to go too much lower, possibly retouch the 52 week low of $19/share, but who knows how badly the market will overreact.

In the long run, I’m not very worried on this one.

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