Cisco Systems (NASDAQ:CSCO), the world's largest supplier of internet networking systems, is an interesting technology firm to examine. Offering Internet and telecommunications routers and switching products that help network administrators manage and connect the computers across their organizations, the company stands in a very dominant market position today. However, with respect to the pricing of its equity shares, Cisco is currently trading at $16 levels after a yearly peak of ~$21 in late March. I contend that at current valuations, despite price levels not seen since last fall, investors should not buy; better opportunities for capital investment exist, especially after the worst two months of the year for equity markets.
Management has focused sales on distribution partners around the globe in recent years, with 54% of sales from North America, 20% from Europe, 11% from emerging markets, and 15% from the Asia-Pacific region. With 74% of revenue potential concentrated in stagnating economies, unless Cisco looks to emerging economies such as Latin America and East Asia, future growth is limited (especially in the short term). Taking a look at Cisco's performance vs. the S&P 500 since December 2010, uptrends are generally in line with the greater market but downward movements are greatly magnified by the company, contributing to the equity's beta of 1.46.
Those who are long Cisco should monitor their positions carefully over the next month, and perhaps exit if the European economic climate resolves and a summer buying trend emerges. Technicals give an even bigger reason to shy away from Cisco: relative strength indicators are bearish, moving average convergence/divergence (MACD) indicates a bearish trend, and the 10-, 21-, and 50-day moving averages are bearish. Moreover, analysts' predicted resistance levels of $18 failed to emerge.
At the end of the day, Cisco is priced more or less accurately with respect to the material factors involved in the firm's operations. I'm not expecting any major price moves this summer. The stock price should remain relatively stable and, if anything, may go down as investors realize higher-return opportunities exist and exit. Therefore, I'm neutral to bearish on Cisco -- though I wouldn't recommend it as a short candidate quite yet. Within the industry, smarter plays may exist with Alcatel-Lucent (NYSE:ALU), Hewlett-Packard (NYSE:HPQ), or Juniper Networks (NYSE:JNPR). IBM (NYSE:IBM), Dell (NASDAQ:DELL), Xerox (NYSE:XRX), Toshiba (OTCPK:TOSBF), and Apple (NASDAQ:AAPL) all offer opportunities in the greater sector.
For investors who believe in the long-term growth potential of the company, however, options strategies may be extremely appealing. A covered call buy/write play on Cisco is especially promising for potential longs who discount some of these arguments, as long as it's a short-term proposition. Unless any of these factors change, though, I'm keeping Cisco out of my portfolio for the time being.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in AAPL over the next 72 hours.