Should You Avoid Cisco Systems Inc. (CSCO)?

Insider Monkey has processed numerous 13F filings of hedge funds and famous investors to create an extensive database of hedge fund holdings. The latest round of 13F filings reveals hedge funds and investors’ positions as of the end of the final quarter of 2015. Retail investors and other stock market participants can find write-ups about an individual hedge fund’s trades on numerous financial news websites. However, in this article we take a look at their collective moves and analyze what the smart money thinks of Cisco Systems Inc. (NASDAQ:CSCO) based on that data.

Cisco Systems, Inc. (NASDAQ:CSCO) was in 60 hedge funds’ portfolios at the end of the fourth quarter of 2015. CSCO shareholders have witnessed a decrease in support from the world’s most elite money managers of late. There were 67 hedge funds in our database with CSCO holdings at the end of the previous quarter. At the end of this article we will also compare CSCO to other stocks, including Philip Morris International Inc. (NYSE:PM), International Business Machines Corp. (NYSE:IBM), and Unilever N.V. (ADR) (NYSE:UN) to get a better sense of its popularity.

Today there are a multitude of gauges stock traders employ to value their stock investments. A duo of the most underrated gauges are hedge fund and insider trading sentiment. Our experts have shown that, historically, those who follow the best picks of the top money managers can outpace the market by a healthy amount (see the details here).

Cisco Systems Inc. (NASDAQ:CSCO) has seen its shares decline by only 5% over the past 12 months, despite experiencing a substantial pullback at the beginning of 2016, from which the stock has successfully recovered. Instead of channeling substantial capital towards research and development activities, Cisco opts for buying smaller tech companies to grow its business and expand operations. The networking giant usually buys in excess of ten companies a year, most of which involve relatively small deals. Having said that, let’s put a spotlight on the latest wave of acquisitions and possible reasons behind these deals. At the beginning of February 2016, the company revealed plans to purchase privately-held Jasper Technologies for approximately $1.4 billion in cash and share-based awards. Santa Clara-based Jasper provides a cloud-based Internet of Things (IoT) software-as-a-service platform that enables enterprises and service providers to manage and monetize IoT services. On March 1, Cisco Systems Inc. (NASDAQ:CSCO) announced its intention to acquire cloud computing start-up called CliQr for $260 million, which is intended to assist Cisco customers in accelerating their private, public and hybrid cloud deployments. One day later, Cisco revealed its plans to acquire Israel-based networking chip market Leaba Semiconductor for $320 million; a deal that is expected to “accelerate our plans for Cisco’s next generation product portfolio and bring new capabilities to the market faster”. Last but not least, Cisco Systems recently acquired privately-held Synanta, a search-technology start-up that will enable the networking giant to “take Cisco Spark’s existing search capabilities to the next level”.

Now, let’s take a gander at the fresh action surrounding Cisco Systems, Inc. (NASDAQ:CSCO), as well as briefly discuss the company’s financial performance.

Let’s now briefly turn our focus on Cisco Systems Inc. (NASDAQ:CSCO)’s recent financial performance. Cisco generated revenue of $24.61 billion during the six months that ended January 23, up from $24.18 billion reported for the same period of the prior year. The company’s sales, especially in the enterprise market, have been impacted by uncertainty in the global macroeconomic environment, which resulted in softer customer spending. Cisco’s net income for the six-month period that ended January 23 totaled $5.58 billion, up 32% year-on-year. It should be noted that Cisco shares are currently trading 11.35-times expected earnings, notably below the forward P/E ratio of 15.00 for the Information Technology sector.

How are hedge funds trading Cisco Systems, Inc. (NASDAQ:CSCO)?

Heading into 2016, a total of 60 of the hedge funds tracked by Insider Monkey were bullish on this stock, a decline of 10% from the third quarter. With hedge funds’ positions undergoing their usual ebb and flow, there exists an “upper tier” of noteworthy hedge fund managers who were increasing their stakes considerably (or already accumulated large positions).

According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, Yacktman Asset Management, managed by Donald Yacktman, holds the largest position in Cisco Systems, Inc. (NASDAQ:CSCO). Yacktman Asset Management has a $843 million position in the stock, comprising 6.4% of its 13F portfolio. The second largest stake is held by Robert Rodriguez and Steven Romick’s First Pacific Advisors, which holds a $445.2 million position; the fund has 3.9% of its 13F portfolio invested in the stock. Other professional money managers that hold long positions include Ken Fisher’s Fisher Asset Management, Cliff Asness’s AQR Capital Management and Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital.

Due to the fact that Cisco Systems, Inc. (NASDAQ:CSCO) has witnessed a declining sentiment from the smart money, it’s safe to say that there is a sect of money managers that elected to cut their positions entirely last quarter. At the top of the heap, Michael Messner’s Seminole Capital (Investment Mgmt) dumped the largest position of the “upper crust” of funds followed by Insider Monkey, comprising about $104.8 million in stock, and Clint Carlson’s Carlson Capital was right behind this move, as the fund cut about $45.6 million worth of shares. These transactions are important to note, as total hedge fund interest dropped by seven funds last quarter.

The concluding page of this article lays out the hedge fund activity in a few other companies that have market capitalizations similar to CSCO’s market capitalization.

Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as Cisco Systems, Inc. (NASDAQ:CSCO) but similarly valued. We will take a look at Philip Morris International Inc. (NYSE:PM), International Business Machines Corp. (NYSE:IBM), Unilever N.V. (ADR) (NYSE:UN), and Allergan, Inc. (NYSE:AGN). All of these stocks’ market caps resemble CSCO’s market cap.

As you can see these stocks had an average of 66 hedge funds with bullish positions and the average amount invested in these stocks was $9.76 billion. That figure was $4.31 billion in CSCO’s case. Allergan, Inc. (NYSE:AGN) is the most popular stock in this table. On the other hand Unilever N.V. (ADR) (NYSE:UN) is the least popular one with only 12 bullish hedge fund positions. Cisco Systems, Inc. (NASDAQ:CSCO) is not the least popular stock in this group, but hedge fund interest is still below average. This is a slightly negative signal and we’d rather spend our time researching stocks that hedge funds are piling on. In this regard AGN might be a better candidate to consider a long position.

Disclosure: None