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Market Opportunities for the value investor

Recently, a couple of people asked my opinion on the market and where I think the opportunities are so I decided to dedicate a post to it.

I wanted to start off by thanking the Cisco investor's who have stuck with us through the last 6 quarters. As most of you know given our customer base, product lines, market cap, global positioning, and pulse in the market, Cisco has a tendency to read and feel market transitions 2-4 quarters before our competitors. As John said, I'm not sure if it's a blessing or burden but it does mean that the market uses our performance as a leading indicator for sector and industry health. We saw the financial crisis in 2001 before our competitors, again in 2008, and finally most recently a couple of quarters ago.

We posted earnings yesterday of $11.2B on $0.40EPS, exceeding analyst expectations for the first time in 6 quarters and provided steady guidance for Q1 in the 1-4% range. The market reacted and Cisco shares are up 17%, leading the way in a much needed market rally today:
http://www.marketwatch.com/story/street-sees-feistier-cisco-shares-jump-2011-08-11


You can also find a transcript to our earnings call below:
https://seekingalpha.com/article/286531-cisco-systems-ceo-discusses-q4-2011-results-earnings-call-transcript?part=qanda

The recent downgrade from the S&P, uncertainty in the job markets, stalemate in government, instability in the housing markets, and numerous other factors have contracted investors' expectations and misaligned them with fortune 500 balance sheet strong companies.

To put it simply: The market has created opportunities to buy strong companies cheap.

I'm a value investor, mostly because I don't have the time to put in the required diligence, nor do I want to pay taxes and broker fees on short term positions. Therefore, where I see opportunity I believe in putting your money long behind companies with:
• Strong balance sheets
• Good management teams
• Track records of success and ability to evolve
• Products and R&D activity that migrate along the development curve in anticipation of future consumption trends
• Externality plays off the above as suppliers, channel partners, distributors, etc... where the common money is less diluted
• Holistic economic hedges/ futures in commodities

Furthermore, I like to put my money behind what I know and that's Tech. Here are a few interesting plays from my perspective in the market right now:

Intel - they just dedicated $300M into an R&D incubator dedicated to developing ultra books designed to host their new line of stacked mobile processors. I think they're undervalued given their market share in the semiconductor industry and have an amazing management team. I'd also look for big announcements from them in mobile security.

Look for strength in markets that reduce travel costs, especially in the public sector (e.g.): Collaboration and Video.

Other than Cisco, look at:
Citrix- a little pricey at 5x revenue and 24 P/E but has a strong balance sheet and is a major player in this space. I'd expect them to increase orders in the public sector but would wait to get in below $55/ Share.

Mobility/ SP Infrastructure:
We see service providers ramping orders in mobility infrastructure to keep up with mobile data consumption growth and the evolution of applications. I'd expect more routing / switching / mobile security orders from service providers going into fy12. Keep your eyes out for movement around service providers / channel partners/ disty's in this sector.


B of A: The situation has been pretty exciting at B of A. The smart money is getting in and at $7 / share and I can't blame them. Look for them to dip further before you get in but keep it on your radar. I don't like playing financials but this is an interesting case.

Anyway, this is just my two cents. I don’t claim to be a trader or expert by any means.
As usual I’d love to hear your ideas.

If you liked this post, you can find more from the same author here:

thesvtb.blogspot.com/2011/08/market-opportunities-for-value-investor.html

Karl Laughton