Inside Wall Street: A Big Opportunity in a Beaten-Down Cisco

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Cisco CEO John ChambersYou would think that, from reading the grim headlines and watching the often clueless talking heads on TV, Cisco Systems (CSCO) is doomed and that Wall Street has jumped ship. Not true.

Wall Street analysts who track Cisco for the most part are still high on the tech giant, with 32 of them continuing to rate the stock a buy and 15 staying with a hold recommendation. Only one analyst holds a negative view, rating it as "moderate underperform."

Cisco's stock did take a beating right after it posted, on Nov. 10, solid fiscal first-quarter results that exceeded most analysts' forecasts but had one sour note: CEO John Chambers lowered expectations for the fiscal second quarter. For traders, that's a big no-no, an invitation to bail out because they believe it's a harbinger of bad things to come.

Nonetheless, I would classify Cisco, the world's largest maker of computer-networking equipment, as a "fallen angel" whose impressive and consistent growth record over the years almost assures that the company will have the capacity, resources, tech knowhow and innovative products to pull itself up from its near-term woes before long.

Expect to Be "Amply Rewarded"

Cisco's stock has steadily followed an upward narrow path since early 2009, trading between a 52-week low of $19.82 a share ad a 52-week high of $27.75. On Friday, Nov. 12, the stock closed near its year's low, sinking to $20.

Some pros believe Cisco is a steal at this depressed price. "The key basic values in Cisco as a dominant player in technology are so compelling, [with the stock down to $20], that you can surely expect to be amply rewarded," says David A. Katz, chief investment officer of Matrix Asset Advisors. Katz quickly bought more shares when the stock tumbled about 16% on Nov. 11 -- after Cisco posted its first-quarter results.

"We expect to continue adding to our holdings, as we believe the stock will climb to the low $30s in 12 to 18 months," says Katz. He notes that Cisco has free cash of some $6 a share, and with earnings projected to total about $1.60 in fiscal 2011 ending July 31, and around $1.70 in fiscal 2012, the stock is truly undervalued, figures Katz.

And he reminds that Cisco CEO Chambers (pictured) is committed to start paying a dividend in 2011, initiating a payment with an estimated 1% to 2% yield, which Katz says will add to the stock's attraction.

Superior Downside Protection

Although the bullish analysts tweaked their earnings forecasts to adjust for the lower projections by Cisco's management, they still predict the stock will trade higher over the next 12 months and certainly for the longer term. Their 12-month price targets range from $25 to $30.

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Cisco has "strong strategic positions in key secular growth markets," says Rohit Chopra, analyst at investment firm Wedbush, who rates the stock as outperform. The stock, he adds, offers investors more downside protection than its peers if prospects for info-tech spending worsens. Given new uncertainties about the global economic recovery, "investors looking for relative safety should be invested in Cisco," advises Chopra.

Kevin Downing, analyst at investment research outfit Value Line, says Cisco's "high-quality shares are a solid choice." The tech leader's "exposure to video streaming, mobile data usage, videoconferencing, and data center consolidation augurs well for the company's long-term, revenue goals," he says. Cisco's depth of product line and one-stop-shopping convenience give it a competitive advantage, adds Downing. Value Line gives Cisco a ranking of 1 for safety, its highest level.

So, with Cisco trading close to its 52-week low, investors are getting a rare opportunity to buy inexpensively into a leader that has over time proved its dominance in the rapidly changing tech universe.
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