Cisco (NASDAQ:CSCO) is a possible Goldilocks stock right now. The company is priced about right. It’s not too cheap or too expensive and Cisco offers investors profitability and growth along with a level of stability during a toppy market.
Nervous investors could consider adding Cisco to their portfolio as a relatively conservative play. The company has a history of growing fundamentals, fares well during downturns and seems well-positioned for future earnings growth.
Here’s a deeper look into what makes CSCO stock a buy today.
3 Reasons To Look
First, Cisco is a leading provider of internet networking and data transmission technology with a history of growing earnings. The past 5 years earnings have improved about 7% per year and projections call for future earnings growth around 6% to 8%.
According to the company’s 2020 annual report, sales, cash flow and book value all have grown at a stable rate of 5% to 7% per year over the past 5 years. Projections call for similar growth in the future.
Secondly, Cisco’s stock tends to fair reasonably well during market downturns. The key, of course, is patience. A review of the past 5 and 10 years demonstrates continued fundamental growth and price improvement recoveries even after price pullbacks.
Lastly, Cisco seems well-positioned for future growth. A recent acquisition has positioned the company well for continued steady earnings growth.
Next we will examine whether CSCO is reasonably priced at current levels.
CSCO Stock Is Reasonably Priced Right Now
One way to value a company’s stock is to examine the stock’s price history to determine what shares are worth at current levels.
With a recent (April 9) closing price around $52.10, Cisco seems reasonably priced. Over the past 5 years the share price averages 15.3X earnings.
Looking back over the past decade, the stock price declined each time the price rose to around 18X earnings. Conversely, good buying opportunities emerged around 14X-16X.
Today, shares are available for 16X earnings. This suggests the price is about right — not a screaming buy, but certainly not grossly overpriced, either.
A fairly priced stock in a high quality company presents several opportunities for profit. Outright share purchase is an opportunity. Options-skilled investors can also consider the purchase of shares combined with a sale of a call and put to juice returns further and create a margin of safety.
3 Ways to Profit Today
Here are three ways to profit on Cisco stock. First, buy shares outright. Investors are buying a quality company and will collect a 2.84% dividend yield along the way.
Secondly, consider buying shares and selling covered calls. As a real-market example, an options-savvy investor could buy 100 shares of CSCO stock at $52.10. The investor could then immediately sell Jan 22 at-the-money-calls for $3.83 per 100-share contract. At expiration in January 2023, if the stock price is above $52.50, those 100 shares will be called away for $5,250. The call seller will have received $5,633 in total share sale and premium.
If the stock price at expiration closes below $52.50, the call seller simply pockets the $383 premium. Now the net cost of those shares is $48.17 when considering the premium.
Stick with me here. A third way to profit is to buy 100 shares of Cisco stock, sell a covered call and simultaneously sell a naked put. Assume the sale of the covered call fetches $383 per contract, and the naked put fetches $558.
Here’s how the transaction brings in cash and creates a margin of safety. The investor buys 100 shares for $5,210. Selling a Jan 22 $52.50 covered call brings in $383 and selling a $52.50 naked put brings in $558. (seller must stand ready to buy 100 shares at $52.50 at expiration). The net cash spent for the initial 100 shares is $4,268.
With this set-up, either the shares get called away in January 2022 for an annualized gain of 35% or the seller buys more shares at a net cost of $47.59. The final outcome could be that the options seller keeps the shares and has collected $941 in premium.
Any of those would be fine with me.
Parting Thoughts
Cisco is a well-known industry leader with a history of growing fundamentals. The company is fairly priced right now, does well in market downturns and is positioned for future growth. Investors concerned about a toppy market could buy shares outright. Those willing to sell call or put options can create an even sweeter investment for their portfolio.
As of this writing, Doug Morse did not have (either directly or indirectly) any positions in the securities mentioned in this article.
