Why I'm Buying Shares of Cisco -- Again

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In late June, I notified readers that I'd be buying about $600 worth of Cisco Systems (Nasdaq: CSCO  ) shares for my real-money Motley Fool portfolio. Since that time, the stock has dropped close to 7%, providing me with an opportunity to grab even more shares, but at a much cheaper price.

Should you be scared of the price drop?
Consider the drop in Cisco's stock price in context. Over the past three months, Cisco has shed about 17% of its share price, but rivals Juniper (Nasdaq: JNPR  ) and F5 Networks (Nasdaq: FFIV  ) have lost about 42% and 22%, respectively. The Nasdaq Composite is down about 13% as well.

Also over the past three months, unemployment has remained stubbornly high and still sits at 9.1%, while the debt crisis in Europe has intensified even more. And now the United States' credit rating has been downgraded for the first time in modern history. These events obviously don't bode well for any company, let alone one like Cisco that has had its fair share of problems.

And there's no denying that problems still exist at this $80 billion tech behemoth. Cisco has lost market share to competitors such as Juniper, Brocade (Nasdaq: BRCD  ) , and Riverbed Technology (Nasdaq: RVBD  ) . Internal affairs have served as a distraction to management, and the past few years of consumer-oriented focus has caused Cisco to lose momentum and profitability.

What else has happened?
Since my last purchase, Cisco also announced that it will lay off about 6,500 workers around the globe, a number that represents about 9% of its total workforce. It's also selling its set-top box manufacturing plant in Mexico, which should result in another 5,000 workers that Cisco won't have to employ. These moves are in line with Cisco's earlier announcement that it will reduce overhead and expects to see about $1 billion in savings from these maneuvers. According to a Goldman Sachs analyst, these cost-cutting measures could "drive 5% to 10% upside to fiscal-year 2012 EPS estimates."

Although investors everywhere are nervous about high unemployment and the effect that it could have on global spending, it seems as though corporate profits are still raking in huge numbers. In fact, global IT spending has been upwardly revised and is now projected to hit $3.67 trillion in 2011, a 7.1% increase from the $3.42 trillion that was spent in 2010. This bodes well for companies like Cisco that rely almost entirely on businesses that upgrade their IT infrastructure, as opposed to more consumer-facing companies.

Oh, and just to top things off, six executives from rival Juniper have jumped ship and landed at Cisco headquarters. Can't be too bad a thing when high-ranking employees are leaving the competition and coming to your company.

The foolish bottom line
Cisco reports earnings this Wednesday, and analysts are already expecting the company to meet the very low end of its expectations, which leads me to believe that any inkling of good news has the ability to send the share price upward. And with the stock sitting just below $14.00 as of the end of trading Monday (down more than 6%) and sporting a P/E of about 11, I want to make sure I grab shares before the earnings report hits.

What do you think? Would you buy shares today, or would you rather wait for the earnings report? Sound off in the comments section below, or add Cisco to My Watchlist to get our latest commentary when earnings come out on Wednesday!

This article is part of our Rising Star portfolio series, where we give some of our most promising stock analysts cold, hard cash to manage on the Fool's behalf. We'd like you to track our performance and benefit from these real-money, real-time free stock picks. See all of our Rising Star analysts (and their portfolios).

Jordan DiPietro owns none of the stocks mentioned here. The Fool owns shares of and has created a bull call spread position on Cisco Systems. Motley Fool newsletter services have recommended buying shares of Riverbed Technology and Cisco Systems. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (5) | Recommend This Article (16)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 08, 2011, at 8:11 PM, Netteligent09 wrote:

    Great advice and good choice. Congratulation.

  • Report this Comment On August 08, 2011, at 11:51 PM, BradReeseCom wrote:

    Hi Jordan,

    Please show me a reference to investment advice that advocates "averaging down" as a good strategy to increase wealth.


    Brad Reese

  • Report this Comment On August 09, 2011, at 2:43 AM, rahul202 wrote:

    Ya, its a great move not similar to 9/11 but conditions are all same..... after 9/11 all IT stocks were down to near 70% or even some were to 50%...... including google's too.....

    But a clever move that time knowing that company like google cannot vanish...... it vl bounce back... buying the shares of google was a good decision.....

    similar thing applies to cisco also... no matter what.... CISCO is not going to close down... so its just a matter of time that they will jump back.... if have some extra money do put on CISCO.... in near future it vl give large returns :)

  • Report this Comment On August 09, 2011, at 7:51 AM, daboyzz wrote:

    I bought 100 shares of cisco yester day for 14.00 a share, thought after reading all I have read in the last two weeks that buy this on a dip would be the right choice.

  • Report this Comment On August 09, 2011, at 2:57 PM, LHK72 wrote:

    Brad - With respect, this is a common idea on Motley Fool. If a stock is initially purchased based on an overall thorough and positive assessment of the company for long term holding, then purchasing additional shares when the stock price is down due to general market turmoil is a great way to pick up additional shares of a great company cheaply. You could also look at it as a kind of dollar cost averaging which is well documented as an excellent investment tool.

    "One key component to maximizing profits is to include the strategy of buying during a downtrending market, using a scaled formula to buy more as the price falls. Using this strategy, one can profit from the relationship between the value of a currency and a commodity or stock."

    Best wishes in these crazy days, LHK

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