Against The Grain: Buying Cisco On The Dip

| About: Cisco Systems, (CSCO)

Cisco Systems (NASDAQ:CSCO) is one of my favorite stocks. Not because of its long term earnings & revenue growth, or its ability to take advantage of the migration to the "cloud", and certainly not because of the consistency of the company in delivering results.

I actually like Cisco because of its consistent inconsistency. The company reliably disappoints investors once or twice a year either with poor earnings results or because of dismal forward guidance. The stock then suffers a one day double digit percentage sell-off. After a few days the stock stabilizes, then starts to recover and usually gets back to its previous levels when the company easily steps over a "low bar" during its next earnings report exceeding the poor expectations it put in place with its previous guidance.

As can be seen by the five year chart of CSCO below, the stock has been subject to numerous sharp spikes up and down over the years as it alternately disappoints and positively surprises shareholders.

(Click to enlarge)

I have found that Cisco is a great trading stock but a lousy "buy and hold" investment. I have experienced much success over the years in buying this dips either by purchasing the shares after it sell-offs outright or by selling just out of the money bull put spreads to pick up premium income and/or gain a lower entry point on the stock. I then will sell the shares when they rebound after the next positive "surprise".

I will be waiting to execute one of these strategies today or tomorrow as the stock sells off. I think a good entry point here is ~$21 a share.

5 reasons CSCO will go higher from ~$21 a share:

  1. The company guided to a revenue decline of 10% next quarter. The consensus was for a 4% increase. This seems a ridiculously low bar to step over and if the company just posts a 5% to 8% decline, the stock should rise as expectations are now so low.
  2. Lost in the disappointment due to Cisco's guidance, was the fact the company is upping its stock repurchase program by an impressive $15B. This will retire more than 10% of the stock float at these levels.
  3. The company has a fortress balance sheet and has ample cash on the books (~$40B or about a third or market capitalization) to do this and more easily.
  4. With the decline in the stock in trading today, the stock will yield over three percent which should help put a floor under the stock in this current low interest rate environment.
  5. Even with its own tepid FY2014 EPS guidance ($1.95 to $2.05 a share), the stock will be selling at just over 10x forward earnings at ~$21 a share. Subtracting cash, CSCO will be at ~7x forward earnings. This is a 30% discount to IBM Corporation (NYSE:IBM) which is experiencing the same revenue challenges and has a lower dividend yield as well.

In summary, buy the dip on Cisco. If everything plays to historical form, an investor will be booking a nice gain when the company surpasses its "guidance" in early February. A great way to start the new year.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in CSCO over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.