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 Most Influential Papers In Economics

Top 8 Biggest Charities in the US

10 Worst Celebrity Career Moves Ever

Top 10 Best Paid Tennis Stars in the World

10 Cities with High Demand for Nurses

6 of the Worst Greeting Card Messages Ever Crafted

6 Ways to Make Money in ArcheAge and Build Your Empire

10 Foods To Eat To Lower Cholesterol Levels

The 10 Most Hated Television Characters of All Time

The 30 Worst Halloween Costume Ideas Ever Brought to Horrible Life

10 Vocational Skills in Demand Today with Jobs Waiting to be Filled

10 Best Places to Visit in Central and South America

The 10 Greatest Empires in History Which Nearly Conquered the World

The 6 Cheapest Boarding Schools In America 2015

5 Clear Reasons LoL is Better than DotA, Continues to Rule MOBAs

The Only 9 Teams with a Chance to Win the Super Bowl

The 15 Most Common Phobias in America that Induce Fits of Panic

Top 6 Least Expensive Tourist Destinations in 2014

Jim Goetz, Peter Fenton, Jim Breyer: Top 6 Venture Investors for 2014

Top 15 Billionaires in 2014

5 Pitfalls To Avoid When Buying a Franchise

Top 20 Medical Schools in the US – 2014 Rankings

4 Business Strategies that Turned Jamie Oliver into the World’s Richest Chef

6 Qualities That Make You A Good Team Player

10 High Paying Seasonal Jobs in America this Holiday Season

The 10 Busiest Shipping Lanes in the World

5 Most Valuable Brands in China

The 10 States with Highest Substance Abuse Rates Crippling Their Populace

The Top 10 Things to Do Before You Die That Will Echo for Eternity

The 10 Best Selling Items on Etsy

Top 10 Things to Do in Tokyo, the Greatest City in the World

10 Mistakes on Social Media that Can Harm You and Will Probably Get You Canned

The 10 Best Cities to Find Jobs in 2014

The 10 Most Controversial Songs Of All Time to Hit (and get Banned from) the Airwaves

The 20 Biggest IPOs in US History

The 10 Best Places to Visit in Mexico that Are Beautiful and Safe

7 Bad Habits that Age You Beyond Your Years

The 40 Best Fortune Cookie Sayings That Will Leave You Bemused, Befuddled, or Beguiled

10 Foods to Eat Before a Workout to Make Every Drop of Sweat Count

The 5 Best Documentaries On Netflix You Must See

The Most Heartwarming and Inspirational Story Of This Halloween Season, It Will Make You Cry and Jump For Joy

10 Best Party Songs of All Time to Bring the House Down With

5 New World Order Conspiracy Theories that Will Strangle the World

The 10 Highest Rated Movies of 2014

The 10 Largest Container Shipping Companies in the World

The 10 Largest Armies in the World: Who Should We Be Afraid Of?

Best Warren Buffett Quotes on Money You Need to Hear

The 10 Highest Suicide Rates by Profession

The 20 Most Underrated Movies of All Time

The 10 Fastest Growing Companies in America

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!