Cisco Systems, Inc. (CSCO), Apple Inc. (AAPL): Are They Cheap For a Reason?

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What does a bargain stock look like to you?

If you ask me, just having a low price to earnings (PE) ratio doesn’t make a stock cheap. Nor does simply having a declining stock price, or trading at a 52 week low make a stock cheap.

All of those numbers matter, but they’re how you measure a value; they’re not the reason value is created. To me, what creates value is when the collective market decides to “write a story” on a stock despite the facts. And despite what the naysayers think, these three stocks truly are as cheap as they look.

Cisco Systems, Inc. (NASDAQ:CSCO)

Boring is beautiful

I often wonder why Cisco Systems, Inc. (NASDAQ:CSCO)’s stock seems perpetually stuck in neutral. This maker of networking and communication technology has a truly dominant market position, and seems to outperform quarter after quarter.

The first quarter of 2013 was no exception, as Cisco Systems, Inc. (NASDAQ:CSCO) again beat earnings ($0.51 to $0.48) expectations and grew earnings in excess of 10% year over year. Year over year growth, is no small feet for a company of Cisco’s size! In addition to a good quarter Cisco Systems, Inc. (NASDAQ:CSCO) pays a healthy dividend of 3.22%. So why does the stock look so cheap, with a P/E of 12 and a PEG ratio of just 1.27, these days?

My opinion is that Cisco has become International Business Machines Corp. (NYSE:IBM). The “market storyline” is that mature tech companies like Cisco Systems, Inc. (NASDAQ:CSCO) and International Business Machines Corp. (NYSE:IBM) shouldn’t have their growth and cash flows fairly valued. When you’re in tech growth and gobs of cash are a given (says Mr. Market), so unless you’re “unexpected” the market doesn’t care–for now. But that’s where the value lies.

There was a time when Cisco Systems, Inc. (NASDAQ:CSCO) was a new, fast growing, tech company and traded at a multiple that reflected the quality of the business. But once Cisco (and International Business Machines Corp. (NYSE:IBM), etc.) stopped being “sexy,” and once the double-digit growth cooled, the stock lost its premium. Today Cisco, and many names in “old tech,” trade at multiples befitting utility companies.

Sure, Cisco Systems, Inc. (NASDAQ:CSCO)’s days of hyper-growth are long over but it still has a great competitive edge due to the scale of its business and the 18% returns on equity that come with it. When you combine Cisco’s market position, its dividend, and the fact that the earnings are still growing–the stock looks cheap.

iCan’t believe it’s so cheap!

So is Apple Inc. (NASDAQ:AAPL) the next Cisco or International Business Machines Corp. (NYSE:IBM)? Has the market decided to treat it like a utility? How else can we even try to explain the fact that Apple Inc. (NASDAQ:AAPL)–which was once Mr. Market’s darling–trades at  P/E of just 10? Factor in that the company has a return on equity of 33.34%, and a healthy dividend, and it seems analysts are expecting a much darker tomorrow than today. That’s the only rational explanation for the disconnect in Apple Inc. (NASDAQ:AAPL)’s fundamentals.
But when you step back from the negative headlines and worry, it’s easy to see that there’s still time to take a bite out of this one.
Apple Inc. (NASDAQ:AAPL) is receiving negative sentiment from nearly every analyst, but this can actually be a good thing. Apple just had a decent quarter, and stocks that perform well–especially as analysts jockey to be “negative first”–ultimately rally. Bottoms in stock prices are made when every last bull has turned negative, despite good fundamentals. I think we’re close with Apple.
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