Why I'm Exiting Cisco

As a value investor, I believe every asset is attractive at a certain price. Whenever markets have moved to extremes and presented the opportunity to buy shares at depressed levels, I have been a ready buyer. Since value has outperformed growth in recent years, this approach has been wise and profitable.

The current bear market, however, has altered my thinking. During this crisis, all correlations have zoomed to 1 as markets imploded worldwide, cheap stocks became cheaper, and a value bias led to losses. Knowing that the world has indefinitely changed and we can no longer invest in a vacuum, today I consider the expected trend of prices before making an investment selection. Believing that lower prices lie ahead, I will be a seller rather than a buyer at this time.

Having bought shares for the portfolio in my weekly newsletter EPIC Insights at the market lows, we are now positioned to take profits ahead of the expected decline. Consider the purchase of Cisco Systems (CSCO). Believing fair value was $18, we purchased CSCO on March 2 at $14.31. Within a week the market bottomed and prices headed higher. In spite of this week's decline, we still have a 25% gain in just over two months.

With a large gain, expectations that the broad market will head lower, and a fully valued stock price, the only choice is to sell the shares. As we enter a volatile trading market, many opportunities will exist to buy stocks at bargain levels and then sell them when they reach fair value. Repeating this process will accumulate large gains and reduce risk. Within our portfolio, this approach has allowed fundamental trades to account for 58% of the total profit. In the future we will be buyers once more. Until then, prudence reigns. I recommend selling the CSCO position as this week's fundamental trade.

Comments

[DonFurio:]

If your time-line is 3-5 years, I think this is a horrible move. CSCO will be in the 30's and should outperform the S&P 500.

May 20 09:57 AM

[User 417131:]

LOOK AT WHERE IT IS GOING NOT WHERE IT HAS BEEN BAD MOVE SEAN ONLY UP FROM HERE 6 MONTHS CISCO IS 30

May 20 10:39 AM

[raytayzmd:]

...check this guy's "portfolio":

www.covestor.com/mbr/e...

...he doesn't even own CSCO --at least not in his covestor portfolio...and checking some of his other "recommendations" on seekingalpha, I couldn't find similar trades there as well...probably just an "investment adviser" who posts on a variety of websites and when he lucks out and is right, those are the ones he feeds to potential clients...

May 20 11:29 AM

[capgain:]

I don't want to be on the road anywhere near this dope.......he's the guy that is using his rear-view mirror to steer.

May 20 01:43 PM

[raytayzmd:]

...what's really funny is what he hasn't posted from his newsletter:

www.stocktradingtogo.c...

...according to that he's holding naked June 145 calls on FSLR...FSLR is up 13 points today to over 203!...HAW!...customers that bought that advice oughta be sitting on some pretty tight sphincters right now!

May 20 03:23 PM

[ArtfulDodger:]

Fellow Investors,

I have to agree with the lot of the comments above: it doesn't make a lot of sense to sell Cisco at this point.

Personally, I consider Cisco one of the few stocks that you can buy and put away --- at least as long as John Chambers is there.

Indeed, some of its metrics have gotten a little out of my buying range, but it's still selling at only ten times free cash flow, retains nice margins, has a good average return on equity, and stands to profit greatly from every one of its recent plans, i.e., building a smart grid, etc.

Moreover, Cisco has the type of balance sheet that can stand an Economic Katrina, if one were to show up again.

Cisco is the least of my worries in my stock portfolio. I'm hanging on.

May 21 09:29 AM

[desicon:]

Good move to avoid CSCO for now.

CSCO's strategy to enter the server market is a bad strategy. The odds of success are low. Cloud/grid computing are not disruptive technologies. It is unlikely CSCO has any technological competitive advantage. It would have been a better strategy to follow acquisition model instead of building it. In the past CSCO was successful by acquiring companies for its technology products and integrating it well with its business model. Now they have invited its competitors to sharply focus on execution in CSCO’s core business, while they will be mired with what they have bit.

May 21 01:03 PM

[Fighting Yoda:]

Buy CISCO and put away? I had done that post dot com - still down and not a dime of dividend


On May 21 09:29 AM ArtfulDodger wrote:

> Fellow Investors,
>
> I have to agree with the lot of the comments above: it doesn't make
> a lot of sense to sell Cisco at this point.
>
> Personally, I consider Cisco one of the few stocks that you can buy
> and put away --- at least as long as John Chambers is there.
>
> Indeed, some of its metrics have gotten a little out of my buying
> range, but it's still selling at only ten times free cash flow, retains
> nice margins, has a good average return on equity, and stands to
> profit greatly from every one of its recent plans, i.e., building
> a smart grid, etc.
>
> Moreover, Cisco has the type of balance sheet that can stand an Economic
> Katrina, if one were to show up again.
>
> Cisco is the least of my worries in my stock portfolio. I'm hanging
> on.

May 25 03:30 PM

[Moon Kil Woong:]

Although I agree that Cisco's enterance into the server market is a bad one as I stated before and am thus bearish on any upside to them in the near future, I agree with the commenters who said that the author's point is not well made. An argument the market might go down so I'm selling it is an argument against the market, not Cisco.

May 26 12:27 PM

[Tom Armistead:]

The author has made a nice profit from the point in time where he wrote Cisco up as a buy. 25% in two months would be 150% annualized, not chicken feed.

There is nothing wrong with taking large, quick and easy profits, unless you prefer the opposite.

In today's market it often makes sense to sell before the stock hits the target, because there are plenty of other stocks out there that are even more under-valued.

May 26 02:33 PM

[sky2evan:]

Selling at 25% in 2 months with no other momentum drivers is prudent. It's much better than potentially losing money, or even missing an opportunity to make more. Lost Opportunity is much better than Lost Money, as most people probably know by now.
So congratulations to the author.

CSCO is a "safe" stock balance sheet-wise, but just like its INTC & MSFT brethern, it is a Monster Cap, and hard to budge. During the last 10 YEARS, excluding the Internet Bubble, it has only barely touched $30 once. Worse yet, no dividends so you don't even get paid to wait for it to budge. There are tons of stocks that have much better charts (and earnings growth prospects), & quite a few that have great dividends.

Whether your time frame is Long or Short-term, it's difficult to tell whether the market (or economy) will go Up or Down. Predictions that CSCO will be at $30 in 1 or 2 or 5 years, they're all just predictions - usually motivated by what we want to see & hope to happen, as opposed to what will actually happen. The recovery could be sooner or later, fast or gradual, long or short - who actually knows for sure?

Personally, I buy based on fundamentals & technicals. But after that, I just do whatever the Market (or the stock I own) tells me to do. Strong price action = hold. Weak price action = look to sell. I prefer to hold Longer, but if I have to Sell, I will. The Market is an Ocean... it's unwise to fight the ocean & insist on your own opinions & forecasting - especially in Hurricane season.

Buy-and-hold-and-forge...
Buyer beware.

May 26 05:52 PM

[Jeez:]

This is the stupidest article I have ever read. Read the logic carefully and note that you could also be "published" (!) by doing a "replace" of CSCO with XYZ.
It is really irritating to see such articles on the front page of SeekingAlpha and then getting duped by such silliness. What a waste of time (I know - this comment is also waster of time!)

May 26 07:33 PM