Always be willing to make a switch in positions
Prudent investors are always willing to switch positions when circumstances warrant it. Today, the market valuation applied to switch and router maker Cisco Systems, Inc. (NASDAQ:CSCO) requires serious consideration from investors. Cisco’s products facilitate Internet traffic and will continue to be essential through upgrades and in the transition to remote data storage and cloud computing.
As is the case with Microsoft Corporation (NASDAQ:MSFT), Cisco was a darling of Wall Street during the Internet bubble, and millions of shareholders lost billions of dollars when that bubble popped. The stock became hated as people who threw money at the stock when the valuation was foolish paid the price when sanity returned. The collapse in the share price of Cisco did not signal that it had become a bad business — it was simply vastly overvalued by the market.
Today, Cisco Systems, Inc. (NASDAQ:CSCO) is still a great business and now it carries a very reasonable and safe valuation. Its current price is in line with its projected five-year earnings growth rate of 9.9%, and it’s paying a very sustainable dividend yielding 3.3%. Cisco should be positioned to provide investors today with a reasonable expectation of 12% to 13% annualized returns for years to come.
After more than 10 years of turmoil and negative price performance, many of the major technology companies have successfully made the transition from hyper-growth to value based businesses. Shareholders who owned the shares during this transition period have suffered a great deal of pain. Shrewd investors today should remember that the old adage, “no pain, no gain” contains no specified requirement that the pain must be felt by the gainer. Therefore, while we should have no desire for others to make bad investments, we should feel no remorse if we profit from them. Shares of Microsoft Corporation (NASDAQ:MSFT), Cisco Systems, Inc. (NASDAQ:CSCO) and especially Apple Inc. (NASDAQ:AAPL) offer us that opportunity today.
Ken McGaha owns shares of Microsoft. The Motley Fool recommends Apple and Cisco Systems. The Motley Fool owns shares of Apple and Microsoft.