Cisco Systems among 10 hot stocks

Cisco Systems' (CSCO) fiscal-third-quarter earnings suggest that corporate customers are changing their penny-pinching ways, at least when it comes to technology upgrades.

Cisco posted better-than-expected financial results last week and sounded an upbeat note about the current quarter, saying it expects growth in revenue and profits as the economy continues to slowly mend.

The San Jose, Calif., company appears on a daily list created using StockScouter, an MSN Money tool that identifies stocks with strong growth prospects in the near term. All stocks with Scouter ratings of 8, 9 or 10 are considered for the list, which is then shortened to exclude those with a trading volume of less than 50,000 shares a day. The remaining stocks are ranked on the basis of market capitalization, sector membership and whether they are growth or value stocks.

Cisco's position as the largest provider of networking gear has insulated it from some of the price erosion that has hobbled the consumer-hardware side of the tech sector.

The company has long supplied most of the routers and switches used by communications companies and others to exchange data on the Internet. Cisco in recent years has been diversifying with the aim of establishing itself as the nation's dominant information-technology company. It is aggressively courting customers that it can help in building up cloud-computing services to deliver more of their products and services online. Cisco has also begun selling server systems and has offerings to help customers beef up network security.

Cisco is well-positioned to benefit as companies step up investments in data-traffic networks to accommodate users who increasingly use smartphones and tablets to consume media and surf the Internet.

"I am extremely confident with the hand Cisco has to play," John Chambers, Cisco's chief executive, told analysts and investors during a May 16 conference call following the company's quarterly earnings release.

Profit rose 14% year over year in the three months through April 27. Revenue from sales of routing and switching devices was roughly flat. Cisco's revenue growth came from sales of data-center equipment, wireless equipment and gear to help customers deliver video. Overall, revenue was up 5.4% to $12.2 billion.

Chambers said the global business climate appears to be improving, especially in the United States. Cisco sells its networking gear to enterprises and governments around the world, with about 60%  of sales coming from the Americas.

Chambers' optimism was welcomed on Wall Street, but no one in the market is looking for Cisco to return to its highflying days in the 1990s, when investor exuberance for all things digital briefly made the company the world's largest by market value.

Today, the stock is viewed more like a solid blue-chip, luring investors less with its prospects for outsize growth than with a respectable dividend yield of 2.9%.

Of 30 analysts who cover the company, 20 have "strong buy" ratings on the stock, two have "buy" recommendations, seven rate it a "hold" and one has a "strong sell" rating.

Cisco Systems has a StockScouter rating of 10, the best possible, meaning the stock is expected to significantly outperform the market over the next six months with less than average risk.  

StockScouter beats the market

Here at MSN Money, we think our StockScouter rating system is about as good as it gets when you're trying to decide where to invest. StockScouter looks for stocks whose business fundamentals, price behavior, valuation and stock-ownership characteristics appear to predict a rising price in the future, based on how those factors have influenced stock prices in the past.

The system assigns each stock an expected six-month return and balances that return against the stock's expected volatility. Scouter rates stocks on a scale of 1 to 10, and ratings can change daily. Ratings and data in the chart above were current as of this article's publication date.

In addition to the daily top 10 list described above, StockScouter is used by investment research firm Verus Analytics (previously known as the quantitative business unit of Gradient Analytics) to generate a monthly benchmark portfolio of stocks that, refreshed monthly, has outperformed the market since its inception in August 2001.

An investor who began in 2001 by investing in each of the benchmark portfolio's top 10 stocks at the start of the month, selling them at the end of the month and then starting fresh with a new group of 10 stocks, would have generated returns, before trading costs and taxes, of 976% through April 30, 2013.

Writer Jon Markman, at the time a columnist for MSN Money, collaborated with company researchers on the tool. Markman suggested rolling over the top 10 stocks every six months to hold down trading costs, a strategy that might be a better fit for most investors; that would yield different results, which would vary based on your starting point.