It may surprise you, but the one stock that looks like the best opportunity to profit in the new post-election environment right now is networking giant Cisco Systems, Inc. (NASDAQ: CSCO).
Cisco has quietly been positioning itself for a major boon, and becuase it has lagged in the current rally, now is a terrific time to add to or establish your position. Here’s why.
In September, without much fanfare, CEO John Chambers said the board thinks the time is right for the company to start paying a dividend. The current plan is to target a dividend yield that, at most, would be about 2% annually, but the final number will depend on the dividend tax rate and Cisco’s “ability to repatriate $30 billion in cash to the U.S. on a favorable tax basis.”
Chambers said if both of those factors go the right way, the dividend would be at that high end of the range. If both went the wrong way, it would be at the low end. A final decision will probably come in the spring of 2011. But here we are right after the elections, and the new-look Congress is much more likely to provide a favorable outcome on both these issues.
Why is that so important? There are billions in dividend-yielding mutual funds that would be compelled to buy Cisco stock when it begins paying a dividend. And on top of that, President Obama has already started signaling his willingness to work with the new Republican Congress on extending the Bush tax cuts.
In addition, CSCO’s business remains strong. The Internet, as we know it, wouldn’t be the same without Cisco. As the world’s largest provider of Internet Protocol networking systems, the modern, interlinked world wouldn’t be nearly as powerful without the products and services offered by this San Jose, Calif.-based company.
The good news for you, though, is that Cisco is not a has-been. Its game-changing dominance in data networking is clear, and this is unlikely to change in the foreseeable future. Its Ethernet switches, which move data along local computer networks, are omnipresent in business information technology. Cisco’s share of the $21 billion switch market is still consistently and conservatively above 60%, and has been for more than five years — while Hewlett-Packard Company (NYSE: HPQ), its closest competitor, is at a 5% share! In fiscal 2010, switches powered Cisco’s growth, with sales rising 12% to $13.6 billion.
Service providers are increasingly moving toward a single converged network based on Internet protocol. IP has been Cisco’s specialty all along, and this technology shift has helped the company enjoy fat profits and rapid growth over the last several years at the expense of large legacy vendors such as Alcatel-Lucent and Nortel. It’s also important to note growth in other new areas (in addition to IP), and Cisco is successfully moving into adjacent markets, including network security, video conferencing and home networking.
How to Play CSCO Now
Fiscal first-quarter earnings will be reported on Wednesday, Nov. 10, and I’m eager to hear the guidance — which Chambers famously downplays. But I look for a good report, as numbers were compelling in the last quarter with sales rising 27% after a seriously ugly dip during the financial crisis.
Now is a good time to buy CSCO when you can get it below my buy limit of $23.50. It is up with the broader market, but I think you’ll get a chance to get in before earnings and definitely before the dividend decision brings the recognition that Cisco is an attractive stock to own. For now I’m maintaining a $30 target on the stock, but I wouldn’t be surprised to see it move beyond that.
Keep an eye on Cisco, and be ready to pounce on any dips under $23.50.
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