Stay away from Cisco Systems
Earnings could spark another leg down in this enterprise tech stock.
Cisco Systems (CSCO) is up about 13% this year, so many investors may not be too upset with this enterprise tech stock.
And considering Cisco stock pays a nice 3% dividend yield, many investors are in this play more for the income and stability than growth anyway.
But while Cisco has admittedly hasn't bankrupted anyone and has done much better than its peers -- IBM (IBM) and Oracle (ORCL) for instance, are both in the red in 2013 while Cisco stock is sitting on a profit -- that doesn't mean this stock is good for your portfolio.
After earnings, it's pretty clear that Cisco is in trouble. Here's why investors should sell:
Enterprise tech faces headwinds. Across the board, enterprise technology sales have been weak. IBM just dipped on ugly earnings including very soft performance in Asia, and Oracle earnings in September marked the third straight quarter that the stock missed earnings expectations. Don't expect a lot of fireworks out of Cisco earnings in November, given these broader headwinds for the space. . . especially after CSCO missed the mark slightly on guidance last time around.
Gains are from cuts, not growth. It's important to remember that while Cisco earnings are indeed in recovery, a lot of the perceived strength in the numbers has simply been the result of cost-cutting. In 2011, Cisco stock slumped to under $15 before the company announced a massive 10,000 layoffs. Those reductions have been rolling out for a while, with a more recent round of 4,000 job cuts at Cisco to knock down its workforce by about 5%. The bottom line has improved, yes, with EPS increasing almost 60% in the past two years. But Cisco has seen a meager 12% increase in the top line from fiscal 2011 to fiscal 2013. . . and those profit gains simply cannot continue until the sales picture improves.
Momentum is weak lately. Cisco stock has rolled back quickly from its 52-week high in August, giving up 16% in just two months, and investors should expect continued trouble ahead if Cisco earnings are bleak this time around. And bigger picture, the tech sector remains a bit frothy and is at risk of becoming out of favor with investors looking to rotate into safer asset classes after this huge run-up in the S&P 500 in 2013.
Sure, Cisco stock pays a decent dividend. And with a forward price-to-earnings ratio of less than 10, it's not like the stock is so overbought that investors should expect its stock price to get cut in half over the next year as the money runs out.
However, given the headwinds for enterprise tech broadly and the fundamental challenges that CSCO has growing the top line. . . well, there doesn't appear to be more than just sideways movement at best in store for this tech blue-chip.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. As of this writing, he did not own a position in any of the stocks named here.
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