Top Picks 2020: Cisco Systems (CSCO)

01/07/2020 5:00 am EST


Chris Quigley

Contributing Editor, The Prudent Speculator

Chris Quigley — contributing editor to The Prudent Speculator — selected Target (TGT) as his Top Pick for last year; he still considers the stock attractively valued, but given the 100%+ gain, he now highlights a technology idea for more conservative investors.

Cisco Systems (CSCO) is a tech powerhouse that specializes in Internet Protocol (IP)-based networking equipment for professional, telecom provider and residential use.

While shares rose strongly in the first seven months of 2019, the stock faded in the back half of the year. CSCO faced global macro pressures that resulted in weaker-than-expected EPS guidance for fiscal 2020 and pedestrian revenue growth.

These headwinds, plus competitive challenges coming primarily from Broadcom (AVGO) — another one of our holdings — caused CSCO to alter its course and open its chip portfolio to third-party development.

CSCO announced the move in December, saying that it will start supplying chips to major data center operators, regardless of a customer’s choice for networking machines. That is a significant change, as previous CSCO policy was for the company’s chips to be included only with its own networking equipment.

The company said via press release, “Cisco’s new flexible business models will allow customers to consume solutions as they see fit. Some will buy the Series 8000 systems, others will subscribe to the software and perhaps run it on their own hardware. Still others will do something that’s a departure for Cisco.”

We like the added flexibility and believe that the competition for 5G-related hardware and software is both a significant opportunity to gain and a significant opportunity to lose.

We also like the strong balance sheet and believe that shares are still inexpensive, with forward earnings projections of at least $3.25 each of the next three years, a forward P/E ratio of 15 and solid yield near 3%.

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