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Cisco Systems (NASDAQ:CSCO) is a tech stock I successfully traded in and out of a few times in 2013 after the stock suffered declines triggered by a couple of earnings disappointments in the previous year.

In this week's Barron's, the magazine laid out the case of how Cisco could be more of a "buy and hold" play in the New Year. The article cited several positives to holding Cisco longer term and why the shares could return 20% in 2014. Among the positives cited in the piece were:

Article Positives:

  • At $22 a share, the stock is selling for less than it was a decade ago despite substantial increases in earnings & revenues over the decade.
  • The threat from software defined networks (where commodity hardware can be deployed) is overstated. Any meaningful defection is unlikely to occur until 2017. In addition, Cisco is deploying product in that space 'Application Centric Infrastructure' that is getting good traction.
  • The company has achieved a #2 market share in blade servers despite only entering the market five years ago.
  • Cisco's management has issued guidance and lower expectations to such a point, that any surprise is likely to be on the upside.

2014 will be different than 2013:

2013 was a stellar year for investors. The S&P rose almost 30% for its strongest showing since 1997. Most of the rally was driven by multiple expansion as earnings only increased 5% during the year. Most of the best performers in the market were High PE stocks with impressive sales growth like Tesla Motors (NASDAQ:TSLA), Netflix (NASDAQ:NFLX) and Amazon (NASDAQ:AMZN) but little in the way of earnings.

2014 is likely to be a very different year from 2013. The Federal Reserve is starting to withdraw from its $85B in monthly liquidity measures and multiples are much higher than they were to start 2013. Goldman Sachs came out this morning with a call to underweight U.S. Equities, something the investment firm has not done for quite some time. Goldman cites the markets high valuations & margins versus other markets in the world for its caution. It also believes U.S. stocks could suffer a 10% "drawdown".

Valuation:

2014 will likely see deep value stocks outperform the overall market. Dividends will also be important to overall return as the consensus is currently calling for equity gains just in the mid-single digits in 2014.

In this sort of environment, Cisco should perform well. The stock sells for under 11x forward earnings which is significantly under the market multiple of just over 15x forward earnings. In addition, the company has approximately $30B in net cash & marketable securities on its balance sheet. Taking this cash hoard out of the equation and Cisco sells at just 8x forward earnings.

The company is using its balance sheet to reward shareholders. Cisco has been public since 1990 but only initiated a dividend in 2011. It has aggressively raised its payout since then and now sports a 3.1% yield. It should also raise its payout again in 2014. In addition, the company has a $15B stock repurchase program in place which would remove ~10% of its float at current prices.

Cisco is not the sexiest pick due to its low growth rate, but it should be a solid play in 2014 due to low expectations, a high dividend yield and low valuations. It could well attain the 20% overall return predicted for the year by Barron's.

Source: Barron's: Cisco Has 20% Upside In 2014