Another Path to Profit: Riding Cisco's Coattails

Great stocks with impressive long-term returns can do more than tantalize investors. They might also guide us to the next great stock. For example, networking-solutions giant Cisco Systems (Nasdaq: CSCO  ) has enjoyed a more than 4,200% boost in its share price in the past 15 years. And while investors still debate whether the $182 billion company can grow more quickly than its projected 15% rate and beat the market in the future, we do know that it could lead investors to other, similarly promising stocks today -- provided we know where to look.

Finding the tail on this coat
While Cisco has plenty of competition in the market for networking products and services, the company maintains a dominant position in the area of routing and switching products. As the demand for bandwidth on the Internet and inside corporate networks continues to surge, more demand also arises for Cisco's intelligent products that help manage data flow rather than just direct bits and bytes between points. Telecom networks are expanding furiously as well -- such as Verizon's and AT&T's fiber-optic network rollouts -- to keep up with consumer demand for video content, including more data-intensive high-definition video.

If we can nail down some companies profiting from the burgeoning ecosystem that Cisco is driving, we might find a hidden treasure worthy of investment. With a giant like Cisco, investors typically follow the conventional wisdom in looking only for direct suppliers or partners. Obvious choices include major partners such as EMC (NYSE: EMC  ) and Microsoft, which are working with Cisco on improving secure network architectures for the protection of sensitive data. However, investors who stick to these usual suspects risk missing opportunities less directly linked to Cisco -- other, smaller firms similarly addressing overlooked slices of the networking or communications markets, for example.

Motley Fool CAPS can really help us here. The massive Foolish stock database has lots of tools for finding and researching stocks and the people who pick them.

Tagging along with CAPS
With CAPS, investors can look through Cisco's tag list for other companies sporting similar attributes. For instance, Cisco falls under tags such as "Networking & Communication Devices" and "Voice Over Internet (VoIP)." In addition, the comments that CAPS investors leave regarding rated companies can sometimes lead to similarly attractive investments, even those with little or no direct connection to Cisco.

These CAPS resources could lead investors to companies such as recent IPO Riverbed Technology (Nasdaq: RVBD  ) . The company provides products that improve the efficiency of data transfer across multiple locations, and growth is raging as more and more enterprises, utilities, and government institutions adopt its Steelhead platform. While the firm carries a hefty valuation of 15 times revenue, it has reversed its trend of bottom-line losses and started 2007 with two profitable quarters.

CAPS also turns up another interesting networking play in optical-communications specialist Finisar (Nasdaq: FNSR  ) . The company is a leading provider of optical transceivers -- the lasers and detectors that make high-speed communications possible at the speed of light. As bandwidth continues to increase in networks, many investors see optical-network solutions as the only viable platform to deliver the Internet of the future. While revenue has grown at a spectacular 37% clip over the past two fiscal years, though, there are substantial risks with the company, mainly its late filings with the SEC and its potential delisting from the Nasdaq.

Still looking for more stock ideas? How about Web-solutions provider and Motley Fool Rule Breakers pick Akamai (Nasdaq: AKAM  ) , or network-bandwidth bottleneck buster Radware (Nasdaq: RDWR  ) ? Maybe even fabless network processor designer LanOptics (Nasdaq: LNOP  ) would be an attractive prospect. All of these investment ideas -- and a plethora of investor community analysis -- are easily found within CAPS.

Tail-wagging
Of course, plenty of coattail investments have proved to be mere copycats, ultimately flopping for investors. That's why CAPS is best used as a research tool, not a device to pick stocks for you. Rather than take anyone else's recommendation, investors should always perform their own due diligence. But you can't beat the information and resources for the price -- namely, 100% free.

Is there another stock you know about that has Cisco's wind in its sails? Give your own opinion in Motley Fool CAPS.

Akamai Technologies has returned investors a whopping 137% since it became a Motley Fool Rule Breakers newsletter service recommendation in May 2005. To see what stocks David Gardner is picking to thump the market today, take a free 30-day trial.

Fool contributor Dave Mock has never worn a coat with tails; he prefers the waiter style. He owns no shares of companies mentioned here. Dave is the author of The Qualcomm Equation. Microsoft is an Inside Value pick. The Fool's disclosure policy is often imitated but never duplicated.


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