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

Biotech Insider Alert - $6 Stock To Hit $40

$200 Million Dollar Healthcare Hedge Fund's #1 Best Idea Right Now

The best healthcare hedge fund out there right now is one of the largest shareholders in this biotech stock. The fund returned more than 20% in each of the last 2 years with a virtually fully hedged portfolio, and it's sending out a BUY signal on this biotech stock. Get your FREE REPORT today (retail value of $300)

This is a FREE report from Insider Monkey. Credit Card is NOT required.
Comments
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

The Oldest Money Managers

The Greatest Directors in the World

Largest Animals in the World

World’s Most Expensive Desserts

Best Selling Comic Books of All Time

A-list Actors who Sabotaged Their Career

Rappers With a College Degree

The Best Jazz Albums of all Time

The Most Influential Jazz Musicians

The World’s Most Famous Photographers

The Best Oscar-Winning Songs

Most Influential Choreographers Ever

Most Expensive Department Stores in the World

The Most Expensive Stolen Paintings in the World

The World’s Most Expensive Teas

Top Oscar Record Holders

The Most Expensive Flowers in the World

Countries With a Booming Film Industry

Most Expensive Cupcakes in the World

Uncommon European Escapes

The Most Stolen Artists in History

Best Travel Destinations in Australia

World’s Most Expensive Musical Instruments

World’s Most Famous Animals

Most Expensive Cakes in the World

Most Expensive Kosher Champagne in the World

Most Expensive Kosher Wine in the World

The Most Surprisingly Dark Fairy Tales

Most Popular Travel Destinations in Asia

The 10 Most Expensive Dresses Ever Worn to the Oscars

World’s Most Visited Art Museums

Best Countries for Photographers to Work in

Best Paid Jobs in the Film Industry

The Most Renowned Recovered Paintings Ever

Child Stars That Turned out Just Fine

Books That Were Banned in the Past Century

World’s Richest Dancers

Best Remedies against Bad Breath

Foods That Improve Your Skin Texture

Best-Selling Children’s Books of all Time

Foods That Boost Your Libido

Best-Selling Books of all Time

The Most Expensive Academy Awards Jewelry in History

Most Expensive Japanese Restaurant In New York City

The Best B-Boy Movies

Most Awesome Hip Hop Documentaries

Foods That Stain Your Teeth

Richest Doctors in the World

The Best Movie Sountracks Ever

The Highest Grossing Musicals on Broadway

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 129% in 2.5 years!! Wondering How?

Download a complete edition of our newsletter for free!