The house rules are simple in this weekly column.
- I bash a stock that I think is heading lower.
- I offset the sting by recommending three stocks as portfolio replacements.
Who gets tossed out this week? Come on down, Cisco Systems
The Cisco kid
It's been three years since I recommended dumping shares of Cisco in this column.
Good call. The meandering maker of networking gear has returned a meager 15% during the mother of all tech rallies. In that time, the Nasdaq Composite has soared 99%, and the average gain of the three stocks I singled out as replacements surged 192%.
It's fashionable to beat up on Cisco now, and I realize that. The shares are a sneeze away from a new 52-week low.
CEO John Chambers all but admitted that his company was broken last week, calling for a commitment to focus. The shares rallied temporarily on the public realization before reality gave it a wedgie. Admitting to failure and having a recipe for success are two entirely different things.
Chambers' first step came with this week's partial retreat out of the consumer market. The Flip is now dead, but Cisco's consumer-facing business has always been merely a sliver of the tech giant's overall revenue mix. Cisco will live and die on the strength of its switches, routers, and other networking gear.
The good news is that networking is as important as ever. We live in amazing connected times. Unfortunately, Cisco's no longer the juggernaut it used to be. Nimble, innovative players have nibbled at Cisco's market share, squeezing margins at Cisco along the way. Juniper
When earnings fell through fiscal 2009, it was easy to pin the blame on the global recession. What's the excuse now? Year-over-year profitability slipped in its latest quarter, and analysts see more of the same in Cisco's next two quarterly reports.
Cisco will never be the undisputed tech champion it used to be. Bulls will argue that Cisco can buy its way out of stagnancy. Its balance sheet is flush with $40.2 billion in greenery, so all it has to do is land a few hits -- and avoid another $590 million Pure Digital mistake -- and it'll be back in business.
Well, it rarely plays out that way. Tech sector consolidation has pushed valuations higher, and Cisco would have to land several winners to move the needle. Besides, it's been a voracious buyer in the past, and look where that left us.
Cisco is a master of connections, but it's time for shareholders to disconnect.
As I do every week, I don't talk down a stock unless I have three alternatives that I believe will outperform the company getting the heave-ho. Let's go over the three fill-ins.
(Nasdaq: RVBD): Riverbed's Steelhead products make networks run more efficiently. Is it a hit with enterprises? You bet. Cisco may have posted lower earnings on a mere 6% top-line uptick during its holiday quarter, but Riverbed posted a 47% surge in revenue as adjusted income soared by 73%. Shares popped 12% higher yesterday after Riverbed's preliminary first-quarter results topped expectations.
Check Point Software
(Nasdaq: CHKP): As one of Cisco's adversaries in network security, it goes without saying that Check Point is growing faster than Cisco. A snail going the wrong way on a moving sidewalk is moving faster than the Cisco kid. Shares of Check Point have more than doubled since being recommended to Motley Fool Rule Breakers newsletter subscribers two years ago, and there's still more room on the upside. Knowing that Cisco will likely try to buy its way out of its languishing, attractively positioned peers, including Check Point in firewall security or Polycom (Nasdaq: PLCM)in videoconferencing, are no-brainer acquisition targets.
(Nasdaq: AAPL): Cisco and Apple aren't natural enemies, though it's hard to think of a bigger reason for Cisco's demise on the consumer end. It's not just that Apple began shoving webcams into iPods, Macs, iPhones, and, as of last month, iPads, all but killing the Flip. Apple's FaceTime was introduced last year, just months before Cisco tried to get families to pay up for costly umi hardware and stiff monthly plans to videochat. Cisco never stood a chance! Apple is also the one company with more cash than Cisco. Despite Apple's sizzle, it's now trading for less than 13 times next year's projected earnings.
I was a router rooter during Cisco's heyday, but it's a different game these days. Please take our Motley Poll, then scroll down and leave a comment explaining your reasoning.