In the last 3 months of 2011, Andreas Halvorsen’s hedge fund bought 7.4 million shares of Cisco (CSCO), currently an $86 billion market cap company. Due to Viking’s large AUM, the $134 million position was not even enough to crack the fund’s top 25 holdings. Over the first 3 months of 2012, however, Viking added another 24.9 million shares of CSCO for a total of 32.3 million shares by the end of March. This made it Viking’s largest holding at about 5.6% of the fund’s portfolio.
Other hedge funds have been getting behind Cisco as well. First Eagle Investment Management had an even larger stake than Viking, with 41.7 million shares at the end of March (see other stock picks from First Eagle). First Eagle had owned 9.6 million shares at the beginning of 2011 and increased its stake over the course of the year. Edinburgh Partners, a long-time holder of CSCO, owned 16.1 million shares, making Cisco 14.7% of the fund’s portfolio (see other stocks owned by Edinburgh Partners).
These funds are likely attracted to Cisco because of its valuation. The company’s P/E is under 12 despite achieving reasonable revenue growth over the past couple years and offering a small but not unwelcome 2% dividend yield. The enterprise value implied by the company’s market cap is only 4.3x trailing EBITDA- again, despite revenue growth and a dividend. One concern for a potential Cisco investor is the company’s large cash holdings- with $9 in cash per share ($6 per share net cash) on the balance sheet compared to a stock price of $16, Cisco is a safe investment but might not be investing enough in its business to secure future growth. On the other hand, the company might consider increasing its dividend in the future, drawing attention from income investors.
Cisco is expected to make around $1.80-$1.90 per share over the next 12 months. Excluding cash, the stock’s forward PE ratio is less than 6. This is something we have seen a lot in the mega-cap tech space. Apple (AAPL) has no debt and around $110 net cash per share. The stock will make around $48 per share in 2012. It is mind boggling to see one of fastest growing mega cap stocks at a PE ratio of 10. It is the same story with Microsoft (MSFT). The stock has nearly $6 in net cash and is expected to make around $2.70 per share in 2012. The stock’s forward PE ratio is also less than 9 excluding cash. Google (GOOG) also has more than $40 billion in net cash and is expected to make around $40 per share in earnings. The stock’s forward PE ratio (excluding cash) is 11. Google is also one of the fast growing mega cap companies. The stock can easily grow by 10-15% annually over the next 5 years. Investors are staying away from all of these attractively priced mega-cap tech companies but hedge funds love them. Apple, Google, and Microsoft are the three most popular stocks among hedge funds (see the 10 most popular stocks).
Cisco isn’t expected to grow as fast as these three but its expected growth rate is still positive. We think Cisco is a much better investment than most of the other stocks trading in the market. This is probably why Andreas Halvorsen bumped its holdings and billionaire Dan Loeb initiated a brand new position in the stock during the first quarter. The stock lost around 20% since then because of worries about macroeconomic growth. We think this presents a great long-term buying opportunity that will yield more than 50% over the next 2-3 years. Buy Cisco before it’s too late.