Great Call on Xerox! What's Next?

It was readily apparent Monday that investors disliked something about Xerox's (NYSE:XRX) $6 billion deal (as announced) to buy Affiliated Computer Services (NYSE:ACS). Maybe it was the premium that Xerox was offering to pay for Affiliated's shares, or perhaps a lack of faith in the deal's strategic value for the copy machine pioneer. Either way, Xerox's stock was down 14% at the end of the day.

The move will have Xerox following in the footsteps of both Dell and Hewlett-Packard, which recently bought services businesses in hopes of kickstarting their underlying hardware businesses. But will Xerox's copycat move pay off?

For some help on that question, we can turn to the collective opinions of the Motley Fool CAPS community. As of yesterday, Xerox had a three-star rating (out of a possible five), suggesting that the community needed to see something more convincing out of Xerox's business or stock to get more interested in taking the plunge. We can see in the coming weeks whether the Affiliated deal bumps Xerox's stock into the upper echelons of the CAPS ratings.

Even with the current lackluster rating, there are CAPS members who have scored big points by betting on Xerox. Member istilldontcare gave Xerox the nod back in March, and has racked up 35 points on the stock as it gained more than 70% versus the S&P's 36% run.

istilldontcare is one of CAPS' All-Stars -- players with a rating of 80 or greater -- and has managed an impressive stock-picking accuracy of 63% while racking up more than 1,500 points. Xerox isn't this player's only great call. Here's a look at a few of the other prescient picks:

Data from CAPS.

So what has this investor been looking at more recently? Here are a few of the most recent calls on CAPS:

Data from CAPS.

While not all of these picks may pan out, they could be a good place to start further research. I decided to take a closer look at Cisco.

Finding a router to great returns
Cisco's stock jumped more than 4% Monday as Barclay's analyst Jeff Kvaal upgraded the stock to "overweight" and bumped his price target to $28. That's 18% above yesterday's closing price. Kvaal noted that an increase in demand from telecom providers would boost Cisco's near-term results, and he raised his profit expectations for Cisco's upcoming quarterly report from $0.30 per share to $0.32. But I say, "Who cares?"

There are definitely folks who care about this sort of thing (otherwise Kvaal wouldn't have a job). That is, some investors hang their hopes on the outlook for a company's next couple of quarters, and the potential for a quick increase in the stock price. But if you're reading The Motley Fool, chances are that you may agree that how a company will perform over the next five or 10 years, and whether its stock is priced attractively today, are far more important.

Switching from a microscope to a telescope, Cisco comes out looking pretty spiffy. The company is a world leader in communications hardware. Though the name "Cisco" is practically synonymous with routers, today the company offers everything from "big iron" VoIP equipment to paperback-novel-sized home networking gear. Continued growth in data communications, which drives the need for ever-more-sophisticated equipment, should provide a healthy tailwind for Cisco in the years to come.

Cisco's stock price today does leave a bit to be desired. At roughly 17 times its trailing earnings, the stock is hardly cheap. For those willing to dig a little deeper, though, there's more than meets the eye with Cisco's profits, since the company routinely generates a good deal more cash flow than it does accounting profit. And with little capital spending required to keep the company in tip-top shape, there is plenty of cash left over to do things like buy back shares or (hint, hint, Cisco management) pay a dividend.

But here's the important question: What's your take on it? Will Cisco's stranglehold on communications gear make investors smile for years to come? Get in the action by clicking over to CAPS. It's absolutely free and already has more than 140,000 stock pickers chipping in to find the best stocks out there.

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