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The quarterly miss by Cisco (CSCO) will undoubtedly lead to their shares getting hit hard today and most likely languishing in the low $20s and maybe even high teens over the next 3-6 months, regardless of how the general market performs. We have heard a lot of talking heads call for investors to move towards allocating a greater proportion of their portfolio into the big tech names based on value and although we do agree it is our opinion that one cannot simply do that blindly in the current market. There is a lot going on behind the scenes in the tech sector right now with the next wave of tech companies taking market share by offering products which are targeted towards certain industries and integrated into clients' IT infrastructure. In many cases the cloud is involved, but in others we are seeing smaller competitors catch up and finally offer products that are comparable to their bigger rivals - especially in the industries where hardware is involved.

Chart of the Day:

Even with the latest bull market the Nasdaq is well off of its all-time highs. The good news is that we are trading at 13 year highs and looking to take out 4,000 which will be key. The next leg up could be provided by the big tech names either through the return of capital to their shareholders or by going on acquisition sprees. Our bet is higher dividends and increased share buy backs will do the job, but we would not be surprised to see some M&A activity in the next 6-12 months.


(Click to enlarge)

Source: Yahoo Finance

We have economic news today and it is as follows:

  • Initial Claims (8:30 a.m. EST): Est: 330k Actual: 339k
  • Continuing Claims (8:30 a.m. EST): Est: 2862k Actual: 2874k
  • Trade Balance (8:30 a.m. EST): Est: -$39.1 Billion Actual: -$41.8 Billion
  • Productivity - Prelim (8:30 a.m. EST): Est: 2.0% Actual: 1.9%
  • Unit Labor Costs (8:30 a.m. EST): Est: 0.8% Actual: -0.6%
  • Natural Gas Inventories (10:30 a.m. EST): Est: N/A
  • Crude Inventories (11:00 a.m. EST): Est: N/A

Asian markets finished higher today:

  • All Ordinaries -- up 0.68%
  • Shanghai Composite -- up 0.60%
  • Nikkei 225 -- up 2.12%
  • NZSE 50 -- UNCH
  • Seoul Composite -- up 0.20%

In Europe, markets are trading higher this morning:

  • CAC 40 -- up 0.74%
  • DAX -- up 0.80%
  • FTSE 100 -- up 0.82%
  • OSE -- up 0.74%

Big Tech Fail ...

The latest quarterly results from Cisco were a complete and utter disappointment. There is no other way to describe the quarter or Cisco's guidance for next quarter. Many investors have been looking to big tech for their low P/Es (when you take the cash on the balance sheet out of the equation) and in most cases this appears as if it would be a great time to be investing in those businesses. However investors are finding out that too often this entails having to purchase names which are facing headwinds in their markets and putting a damper on stock price appreciation.

The excuse that Cisco used to justify their outlook for next quarter, saying that the NSA spying programs were making it hard for U.S. tech companies to do business overseas, seems disingenuous and even if true not capable of delivering the slowdown in revenues that the company just provided guidance for. In our opinion Cisco is seeing trouble due to their own fault in not having moved faster to adjust to their clients moving towards cloud computing. Tech needs change quickly and in this case it appears to us that Cisco has dropped the ball and is now playing catch up.

... But Are All Big Tech Names Down For the Count?

To answer this question simply, no. In our opinion the big tech names offer investors one of the last few areas in the market where value can be found. What is more, it appears to us that these companies have reached critical mass in their industries and will begin adjusting their capital strategies to pay more in dividends and buy back more shares. In the long run this will take care of the large cash stockpiles that have accumulated on the balance sheets and provide further reason for these names to move higher. Currently we are not allocating capital to this area, but as we do our focus will first be to buy the Powershares QQQ (QQQ) to get the diversification among many of the top names and spread our risk around.

As we look at the field though, we still think that our Apple (AAPL) pick will fare well and with Carl Icahn poking around will increase their buyback program and possibly even the dividend as they not only have a huge cash position but also tremendous cash flow each month. The underlying business is still showing strength and the company has new products coming out in the next year which should see a renewed interest in the shares from growth investors. The key is getting the company to use some of their cash in a more shareholder friendly manner, and with Carl Icahn and some of the other hedge fund managers around we think that this will happen sooner rather than later. We still think that Apple is a buy at these levels based on valuation alone, but the argument becomes even more compelling when one looks at the potential for cash to get utilized and the potential success of the products in their pipeline.

We have to be a bit tougher on these names, simply due to their strength over the past year but think long-term both should do well for investors. They will have to make some good moves in the next year or two, and those are the events we will wait for before becoming bullish.


(Click to enlarge)

Source: Yahoo Finance

Other names in the sector we would look at would be Microsoft (MSFT) and Oracle (ORCL), however we have to stress that we would want to see some improvement in these companies' business before doing so. As it pertains to Microsoft we would wait until a new CEO is named and would hope that the new CEO is named Alan Mulally. Anyone else and we would be forced to re-evaluate our thinking on the matter because some of the names we have seen attached to the opening create more questions than answers in our opinion.

As it relates to Oracle, we think that the company has done a great job of being a consolidator within the industry. The drawback to assuming that role has been that the company has morphed from a true tech company which creates solutions for clients to a software behemoth that finds clients to simply buy its software. There are a number of smaller companies using the cloud and much more user friendly software to gain market share right now and this could become a serious issue down the road. Oracle has been seeing some periodic periods of revenue growth stagnation which is almost always attributed to its more nimble and focused competitors racking up sales wins. Long-term we think the company solves this issue, but we would like to see a renewed focus on the customer and new offerings which better compete in the marketplace before making any big bets on the company outside of the Powershares QQQ. It may sound like we are being hard on the company, but it is trading near 52-week highs (like Microsoft) and we think that some of the value proposition is not as easily realizable as in other places, thus our setting a high bar.

Source: Today's Market: Big Tech A Buy?