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The Most Undervalued Tech Stock On The Planet

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One of my favorite scenes from the brilliant Steve Martin film The Jerk was when the deranged sniper played by C. Emmett Walsh is firing at Martin’s character, the hapless gas station attendant Navin Johnson, yelling “Die milk face!” The sniper’s aim is poor and as the bullets whiz past him, Martin yells, “He hates these cans!”

Having been a long-time bull on the seven-million-pound networking gorilla Cisco Systems (Nasdaq: CSCO)and for quite a while, I’ve felt a little like Navin Johnson where the market is the sniper and I’m running around yelling “It hates this stock!”

What am I missing?

Big Tech, Low Price
On average, the company has grown earnings per share at an 11% annual rate over the last four years. The common dividend per share has grown at a 13% annual rate for the same time period. Total cash per share is a staggering $14.12, representing 45% of Cisco’s current share price.

Rationally, this is a stock investors looking for high quality, blue-chip brand names should own. But investors and markets are rarely, if ever, rational.The biggest concern the herd has is revenue weakness. For fiscal year 2017 (Cisco’s ends in July), the company finished with $48 billion in annual sales, a 2.43% dip from 2016’s $49.2 billion. What was the reason for this? Over the last few years, the company has been concentrated on growing its software and services businesses. One component of this transformation is the company’s switch from a contract to a subscription revenue model.

While 45% of the company’s revenue mix still relies on selling its market-leading switching and routing hardware (60.7% globally for Ethernet switching and 70% for enterprise routers), 24% of Cisco’s revenue now falls under the “service” column. In its reporting, the company refers to this as “deferred revenue,” which is defined as a product or service not yet delivered to a customer and will show up as a liability on a company’s balance sheet.

In Cisco’s case, if a customer is paying on a monthly basis for a subscription service, the fees they will pay in October will not be recognized until then therefore it will not be included in a mid-year earnings report. However, in time, the company’s revenue stream becomes much more predictable regardless of the accounting treatment.

In the company’s most recent annual report, subscription and software deferred revenues mushroomed 50% from $3.308 billion in 2016 to $4.971 billion for the end of the 2017 fiscal year. That’s growth, hands down.

Like every smart, successful big tech company, Cisco is executing on the transition from hardware to software and services which over time will lead to higher margins and increased earnings per share (EPS).

To further grow in this space, Cisco is dipping into its massive $70 billion cash pile to fund acquisitions. Most recently, the company announced plans to acquire hyper-convergence software firm Springpath for a measly $320 million.

Putting company-specific minutiae aside, the real story is in the “Internet of Things” (IoT) big picture. According to Business Insider’s BI Intelligence, by the year 2020, 34 billion devices will be connected to the Internet. And that’s not just computers and mobile devices, it’s cars, televisions, farming irrigation systems, and refrigerators. You name it — it will be connected.

By 2020, it’s estimated that businesses will have spent nearly $9 trillion on global IoT investments. Cisco’s market position in networking and related services and their ability to execute successfully ensures that a decent portion of that $9 trillion will find its way into the company’s cash register.

Risks To Consider: The biggest risk facing Cisco is their ability to execute. A significant business shift from hardware to software and services is never a simple task for a huge, mature, tech company. However, based on reports and the growth trajectory of the areas they want to move toward, it would seem they are doing everything right.

The macro challenge facing Cisco and all capex-dependent tech companies is the overall health of the economy. A recession can put the brakes on growth faster than a jack rabbit on a date. But the Internet has become a business necessity, almost a utility. The notion that everything Cisco sells is integral to accessing that utility provides a relatively deep moat of defense even in an economic downturn.

Action To Take: Investors looking to add technology names but discouraged by the lofty valuations in the FAANG names (Facebook, Apple, Amazon, Netflix, Google), would do well by picking up bargain priced shares of Cisco.

Currently, the stock trades around $31.55 (an 8.8% discount to its 52-week high) with a forward P/E of 13 and a growing 3.7% dividend yield. If the company continues to successfully shift its business model and maintains the growth of its subscription based revenue stream, shares could reach a 12- to 18-month price target of $38.

With the dividend, the result would be a 24% total return. I would encourage investors to hold the stock longer, though, considering its solid dividend and dividend growth history.

Editor’s Note: With reports of deteriorating production, performance, and revenue… this high-profile CEO is ditching his auto empire. Now he’s set his sights on an even more lucrative business. And if you jump in at the ground level of this opportunity you can ride it upward to sky-high profits. Grab a piece of this $1.3 trillion industry in the making today.

Adam Fischbaum owns shares of CSCO.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.

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Trump Says He Will Make A “Major Statement” When He Returns To The US

After a 12-day tour through five Asian countries where he discussed the threat posed by North Korea and how America might shrink its massive trade deficits, President Donald Trump is heading back to the US Tuesday. And in true Trump fashion, the president hinted that he would be making a “major announcement” upon his return to the states – but offered no clues about what the topic of said “announcement” might be.

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After a 12-day tour through five Asian countries where he discussed the threat posed by North Korea and how America might shrink its massive trade deficits, President Donald Trump is heading back to the US Tuesday. And in true Trump fashion, the president hinted that he would be making a “major announcement” upon his return to the states – but offered no clues about what the topic of said “announcement” might be.

Here’s the tweet, sent around 1 a.m. Eastern Time:

Of course, there’s a lot happening in Washington right now, and Trump’s hinted-at announcement could be in reference to one of any number of issues. Will he deliver an update on the administration’s position regarding tax reform as two bills that differ in dramatic fashion wend through Congress? Perhaps some type of security announcement? Or the revelation that the US has finally entered into talks with North Korea after Trump adopted a notably softer tone toward his favorite Asian antagonist over the weekend?

There’s also the possibility that he could deliver an official statement about Alabama Senate candidate Roy Moore, who Trump previously said should “do the right thing” and step aside if allegations about him having inappropriate sexual contact with a 14-year-old girl turn out to be true?

Shortly before his teaser tweet about the upcoming announcement, the president hinted that he had made some major breakthroughs on behalf of the US’s trading relationship in the region, claiming that the US’s regional partners now understand that trade deficits “most come down”?

The president also took the time to thank the staff of the US embassy in the Phillipines for doing such “GREAT WORK” during his visit. Strangely, similar praise for other US embassies in the region was not forthcoming.

He also took a swing at polls that reflect a presidential approval rating below 40%, pointing to a Rassmussen poll that puts his approval rating at a reasonable 46%…

With the House gearing up to pass its version of the tax reform program on either Thursday or Friday, it’s possible Trump could be taking to the bully pulpit to try and whip up votes among intransigent blue-state Republicans. Or the announcement could be on any one of a number of topics. North Korea, trade, tax reform, the upcoming Alabama special election – all are priorities for the White House and the Republican Party right now.

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The Price Swings In Bitcoin Are Making Me Sick To My Stomach

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Well, that de-escalated quickly…

All the hopes and dreams of Bitcoin Cash officianados have been dashed in the last 24 hours. After its mega spike from $600 to over $2400, the forked cryptocurrency has crashed back to around $1000 overnight as traders switch back to the mainstream Bitcoin branch, sending it surging back above $6600 – erasing all the weekend’s “the end is nigh” losses…

As CoinTelegraph reports, cross-exchange data for Bitcoin Cash, which describes itself as “the best money in the world,” shows a swift turnaround in the altcoin’s fortunes through the weekend.

The result of a giant publicity effort from its proponents, BCH saw mass investment as it heads towards a potentially contentious hard fork set for just after 7 p.m. GMT today.

The failure of SegWit2x, coupled with endorsement from the soon-to-be-defunct Bitcoin Classic team meant BCH became the major ‘competitor’ to Bitcoin overnight.

Its rapid rise has ignited the community, with widespread condemnation of lead supporters Roger Ver and Jihan Wu coming in tandem with public praise from Ethereum creator Vitalik Buterin.

As BCH approached its highest-ever point Nov. 11, Buterin delivered his “congratulations” to Ver on Twitter, adding it was a “key reason why he is now so confident in crypto.”

Criticism meanwhile has focused on the ‘corporatized’ nature of BCH in contrast to Bitcoin’s decentralization, while figures involved insist the altcoin is an improvement on Bitcoin.

The project even has a CEO in the form of Finnish Pirate Party founder Rick Falkvinge, who released a statement aimed at harmonizing its structure.

“…As Chief Executive Officer of this disorganization with made-up titles, where every document is as official as people pretend it to be, I further emphasize that we cannot resolve social disputes by voting, for two reasons: first, there is no boundary on the electorate that determines who gets to vote, which creates winning by trickery rather than by argument, and second, we don’t want to vote anyway.”

But that is all over for now…

As Bitcoin soars back above $6600…

Leaving Bitcoin Cash about half the market cap of Ethereum once again…

So what happens next?

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7 Quotes That Sum Up Buffett’s Entire Strategy

Unlike other highly successful value investors, Buffett spends a large amount of time doing interviews. There have also been thousands of articles written about him and possibly hundreds of books.

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Warren Buffett is the world’s greatest and most prominent value investor.  Unlike other highly successful value investors, Buffett spends a large amount of time doing interviews. There have also been thousands of articles written about him and possibly hundreds of books.

Not only is Buffett the world’s most successful investor, he is also the investing world’s biggest celebrity. In some ways, this success has been a doubled-edged sword.

Since Buffett is a larger-than-life celebrity, his interviews stray away from the topic of investing. At the same time, he has produced so many sound bites on the topic of investing, many have lost their true meaning. For instance, almost all investors know Buffett’s first two rules — “Rule No.1: Never lose money. Rule No.2: Never forget rule No.1.” More often than not, however, I have seen this interpreted as “If I don’t sell, I don’t lose money” — clearly not the right viewpoint at all.

So considering all of the above, in this article I have tried to pull together seven quotes I believe best describe Buffett’s investment process and give essential insight into how the average investor should look for value and high-quality investments. These are not one-liners, they are specifically picked to give as much detail as possible.

How to pick the best businesses:

“I like businesses I can understand. We’ll start with that. That narrows it down about 90%. There are all kinds of things I don’t understand, but fortunately, there’s enough I do understand. You got this big, wide world out there. Almost every company is publicly owned. You got all American business, practically, available to you. Now, to start with, it doesn’t make sense to go with things you think you can[‘t] understand. But you can understand some things. I can understand this (picks up can of Coca-Cola (NYSE:KO)). I mean you can understand this. Anybody can understand this. I mean this is a product that basically hasn’t been changed much since 1886, and it’s a simple business. It’s not an easy business. I don’t want a business that’s easy for competitors. I want a business with a moat around it with a very valuable castle in the middle. And then I want the duke who’s in charge of that castle to be honest and hard-working and able. And then I want a big moat around the castle, and that moat can be various things.

The moat in a business like our auto insurance business at GEICO is low cost. I mean people have to buy auto insurance so everybody’s going to have one auto insurance policy per car, basically, or per driver. And I can’t sell them 20, but they have to buy one. What are they going to buy it on? They’re going to buy it based on service and cost. Most people will assume the service is fairly identical among companies, or close enough, so they’re going to do it on cost, so I gotta be the low-cost producer. That’s my moat. To the extent my costs get further lower than the other guy, I’ve thrown a couple of sharks into the moat.”

 



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