Keep It or Sweep It: Cisco?

The new year is a good time to review holdings and check whether they still fit in your portfolio. There aren't many better candidates for a keep or sweep analysis than Cisco.

The widely held tech powerhouse is one of the 10 most-rated stocks in Motley Fool CAPS and carries a four-star CAPS rating (out of five possible), but it managed the second-worst return for 2010 of any Dow Jones Industrial Average company. The only member of the 30-stock industrials club to have a worse 2010 was fellow tech titan Hewlett-Packard (NYSE: HPQ  ) .

Like many Fools, I hold Cisco to provide growth without a lot of risk. That hasn't been working out so well, but is the future looking brighter? Opinions here at the Fool are mixed. Anand Chokkavelu thinks the stock is a good bargain while Tim Beyers has a bearish outlook along with a way to play the stock. Here's a business snapshot.

Company Name and Ticker

Cisco (Nasdaq: CSCO  )

1-Sentence Statement of Operations

Cisco manufactures and sells networking, communications and information technology equipment, as well as software and services.

Recent Share Price

$20.23

Market Cap

$112 billion

P/E (FY 2011)

12.6

Estimated Annual Earnings Growth (Next 5 Years)

12%

PEG (P/E-to-Growth Ratio)

1.04

Source: Yahoo! Finance.

Cisco's past stock performance is pretty pathetic, but the fall in price over the past quarter makes it look attractive going forward. Let's see how Cisco stacks up against some of its large-cap tech peers.

Company

P/E Ratio
(FY '11)

5-Year Estimated Earnings Growth

PEG

CAPS Rating
(out of 5)

Cisco

12.57

12.03%

1.04

****

Hewlett-Packard

8.05

9.50%

0.85

***

Microsoft (Nasdaq: MSFT  )

11.39

11.26%

1.01

***

IBM (NYSE: IBM  )

11.67

11.28%

1.03

****

Apple (Nasdaq: AAPL  )

16.81

20.00%

0.84

***

Google (Nasdaq: GOOG  )

17.67

18.07%

0.98

***

Source: Yahoo! Finance and The Motley Fool.

Apple and Google trade at a premium to the group, but also have the highest expected growth rates. The key concern is how much longer the strong earnings growth can continue. Based on the three-star ratings, I'd say a sizable group of the CAPS community is also concerned that it will be tough to continue the growth rate of the past few years.

The rest of the group trade at similar valuations and have similar growth projections. Hewlett-Packard has the lowest projected growth along with a new CEO. Microsoft, IBM, and Cisco are all mature tech companies with nearly identical growth estimates and valuations. A kicker for Cisco is its plan to start paying a dividend. That opens the door for funds that can only invest in dividend-paying stocks to join the ranks of shareholders.

Cisco's valuation compares well with its peers and there's a potential bump in buyers when the dividend checks start flowing. In a close call, Cisco rates a "keep it."

You can follow any of the stocks mentioned using our free watchlist service, My Watchlist.

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Related Foolishness:

Fool contributor Russ Krull owns shares in Cisco, but no other company mentioned. Google and Microsoft are Motley Fool Inside Value picks. Google is a Motley Fool Rule Breakers choice. Apple is a Motley Fool Stock Advisor recommendation. The Fool has created a bull call spread position on Cisco Systems. Motley Fool Options has recommended a diagonal call position on Microsoft. The Fool owns shares of Apple, Google, International Business Machines, and Microsoft. Motley Fool Alpha owns shares of Cisco Systems. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.


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