An Opportunity to Make 14% a Year on Cisco Systems, Inc. (CSCO)

Page 1 of 2

Cisco Systems, Inc. (NASDAQ:CSCO) is the architect of the internet. It produces the routers and switches without which there would be no internet. With an ever growing demand for high-speed internet traffic, Cisco Systems, Inc. (NASDAQ:CSCO) is well-positioned to satisfy that demand. In addition, the rise of internet video means that someone has to handle the higher bandwidth requirements. Bigger networks mean more routers and switches. Much of that new spending winds up in Cisco Systems, Inc. (NASDAQ:CSCO)’s pocket.

Cisco Systems, Inc. (NASDAQ:CSCO)

The opportunity

Back in the year 2000, Cisco Systems was the most valuable publicly traded company in the world. Its market cap was more than $500 billion. Mr. Market fell deeply in love with Cisco Systems, Inc. (NASDAQ:CSCO), sending it to a peak valuation of 155 times earnings. But since then, shares have lost about 70% of their value. Cisco’s business has become better, and its competitors such as Hewlett-Packard Company (NYSE:HPQ) and Alcatel Lucent SA (ADR) (NYSE:ALU) are almost invisible. At today’s price, Cisco Systems, Inc. (NASDAQ:CSCO) is a great buy for the following reason:

  1. It has a fortress-like balance sheet. The company currently has $8.8 of cash per share. This means that a third of each share is pure cash. That’s a hefty margin of safety.
  2. It dominates its sector – It owns 75% of the market for enterprise routers, which are used by large corporate clients, and it controls more than 65% of the Ethernet switch market. This strong dominance leads to inherently high barriers to entry for newer rivals. Contrast that to Hewlett-Packard Company (NYSE:HPQ) and Alcatel Lucent SA (ADR) (NYSE:ALU) – both of which don’t dominate any field. In fact, both are money-losing businesses. In 2012 alone, Alcatel lost a staggering $1.9 billion, while HP lost $12.5 billion. You could literally launch a Fortune 500 company just from these losses.
  3. Cisco is very cheap on an absolute level. It currently trades at a forward price-to-earnings of only 11.6x. That’s way cheaper than the average P/E of 18x of the S&P 500. And for that price, you receive a company with a 22% net profit margin. Hewlett-Packard Company (NYSE:HPQ) and Alcatel Lucent SA (ADR) (NYSE:ALU), on the other hand, boast a negative profit margin of 11% and a 15%, respectively.

How to take advantage of this opportunity

Investors can do one of two things — they can either buy the stock in the open market, or they can sell put options and pocket fat cash premiums on this trade. As of this writing, shares of Cisco Systems, Inc. (NASDAQ:CSCO) are trading at $24.60 and the January 2014, $24 strike puts are selling for $165. This translates into an immediate 6.9% gain on your investment by waiting six months until the January 2014 expiration.

To put it differently, investors can act as an insurance company and collect a premium of $165 for each option contract they sell. This contract, in turn, obligates them to buy shares of Cisco on the expiration day of January 2014 if shares are trading under $24. Repeat this trade two times a year, and you will have a 14% return annually.

Page 1 of 2
blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months Click to see monthly returns in table format!

Lists

10 Top Reasons For Getting Fired

The 3 Best States to Start an LLC

10 Jobs That Allow You to Travel

7 High-Paying Jobs You Can Do From Home

12 Best Cities to Shop in USA

10 Best States To Practice Medicine

The 10 Best States to Have a Business

The 12 Most Expensive Apple (AAPL) Apps in the Market

The 10 Richest Billionaires in the World

10 Biggest Kickstarter Failures

The 10 Best Places to Work At

The Top 10 of Google Inc (GOOGL)’s Most Expensive Acquisitions

13 Best Cities to Visit in South America

10 Most Expensive Works of Art of All Time

The 10 Richest Banks in the World

The 10 Best-Paying Jobs in America (2014)

7 Most Expensive Foods in the World

The World’s Top 10 Earning Authors

Five Wicked and Very Expensive Items (and Other “Stuff”) Sold on eBay

10 Biggest Celebrity Bankruptcies

The Top 10 Highest Paid CEOs in 2014

The 10 Most Expensive Real Estate Cities in America

10 Most Expensive States To Live In America

The 10 Best Airlines in the World

The 10 Best-Selling Cars in 2014

The 10 Best Industries to Invest In

The 10 Most Expensive States to Own a Car In

Top 10 Business Schools in US: 2014 Rankings

Top 20 Female Billionaires in 2014

6 Movies That You Should Watch to Better Understand The Cold War

Top 15 Best Paying Jobs for Women in 2014

Top 6 Things Rich People Do Differently Every Day

5 Retirement Mistakes To Avoid (and Einstein’s Famous Quote)

11 Smartest People in the World

6 Films About the Financial World You Need To Watch (While “The Wolf” is Not Around)

Warren Buffett and Billionaires Are Crazy About These 7 Stocks

The Top 10 States With Fastest Internet Speeds

10 Best Places to Visit in USA in August

Top 10 Cities to Visit Before You Die

Top 10 Genetically Modified Food In the US

15 Highest Grossing Movies Opening Weekend

5 Best Poker Books For Beginners

10 Strategies Hedge Funds Use to Make Huge Returns

Top 10 Fast Food Franchises to Buy

10 Best Places to Visit in Canada

Best Summer Jobs for Teachers

10 Youngest Hedge Fund Billionaires

Top 10 One Hit Wonders of the 90s

Fastest Growing Cities In America

Top 10 U.S. Cities for Freelancers

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!