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Cisco A Solid Growth Play


Despite a cautious outlook, the stock is still best in tech.

Cisco (CSCO) reported last night, and after an early sell-off, the stock has rallied back to the green. Lets go through the Good, the Bad and the Ugly... in reverse.

The Ugly: Guidance

No sugar coating it, guidance came in below expectations. Although I am still wondering why analysts had the guidance at 15% in the quarter where CSCO can experience a seasonal decline after strong end of year selling. I was at around 13% revenue growth for the next quarter.

The Bad: Lost Confidence

We are now in 'show me' mode for CSCO. Also there is fear that this muted growth could continue or worsen, rather than what Chambers called a short term effect.

The Good: Valuation

At some point the recession/depression or slowdown will either be priced into stocks or overly priced into stocks. Based on today's action versus the severe after hours panic reaction last night, I would say much of this news was priced into CSCO at the $23 level.

I've received some good questions on CSCO and why I want to own shares into this decline. The answer is simple: I think the enterprise value of CSCO far exceeds the level it's currently trading at. I will seldom sell a stock out of my core holdings just because the market is taking it lower short term. If I like the business and feel the company is executing well, gaining share and creating products that will produce a solid future, I will not let the market panic me out of a name. Especially if I feel the fair value is well above current trading levels.

CSCO exhibits all of the above. It's a very cheap growth stock. Its growth is not in a straight line, but is still very strong given the size of its revenue base. The company's EPS production today versus years ago is night and day different and hugely improved.

I was actually hoping for an 18 handle today so I could have gotten aggressively long and just waited to sell part of those shares at a 50% gain and the rest later at a 100% gain. I have a $35 fair value number on CSCO and yesterday's results don't change that view. In fact, any re-acceleration in CSCO's growth -- which I expect the quarter after this next quarter -- will have me raising my fair value number on CSCO.

Meanwhile Microsoft (MSFT) has been taken down 15% since the Yahoo (YHOO) bid. I think current levels represent a stunning amount of upside longer term on MSFT. My fair value number on MSFT is actually higher than my number for CSCO and it would increase on the completion of the YHOO merger.

This morning and last night after hours were a excellent times to buy stocks trading down in sympathy with CSCO and there are still a few sympathy deals.

I used the sympathy weakness to add or add to F5 Networks (FFIV), Juniper Networks (JNPR) and Infinera (INFN). I'm also very tempted to meaningfully increase my position in MSFT at current levels, and may do so depending on how the current lift plays out.

I still feel this is an excellent time to initiate or add to well valued growth stocks and feel given the ECB's position to hold rates steady we could see material out-performance of U.S. growth stocks versus Euro-based growth stocks over the coming weeks, months and maybe longer.
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