The CSCO Disco

Calling a bottom in Cisco (CSCO) has been a risky endeavor recently. Three times in the past year, CSCO has gapped lower after disappointing earnings reports.  Previous gaps lower have been followed by upward price movement to fill the gaps.

The most recent gap lower in Feb, however, was followed by further price weakness. After meandering lower for weeks, CSCO stormed some 5% higher--thought to be linked to an internal company memo issued yesterday by CEO John Chambers stating that the company had to make some changes.

Note the chunky volume on today's move higher. Note also the possibility of a 'double bottom at $17ish.

Perhaps this will turn out to be another false signal. But one factor that is providing tailwinds rather than headwinds at this level is valuation. CSCO generates $9-10 billion in free cash flow. As a perpetuity, $9 billion in annual cash amounts to $9 / .1 = $90 billion.

CSCO has $40 billion (!) in cash and $15 billion in debt. That's $40 - $15 = $25 billion in net cash. Market cap is currently $100 billion, meaning that enterprise value is $100 - $25 = $75 billion.

So the way I see it, I can currently buy a cash rich, high profit margin large cap stalwart with a dominant position in its sector and strong brand for about a 17% discount from list price. Is this discount warranted because CSCO is losing its edge like some market participants fear? I don't think so. CSCO operates in an industry that is attractive for profits. Moreover, it has a strong franchise and some of the most capable managers in industry.

My only reservation is my bearish macro view--which keeps me from getting really aggressive in a situation like this.  That said, I added to my position last week and will look to add more now that the technicals have perked up.

I'll be watching for pullbacks below $18.

position in CSCO