Sometimes bad things happen to good stocks. Witness the nearly 5% sell-off in Cisco Systems (CSCO) Thursday. The drubbing destroyed $7 billion in shareholder value, and the Dow component weighed on the blue-chip index all day long. Happily, the reasons for the retreat are likely more technical than fundamental, making Cisco look compellingly priced at this level.
Thursday's pounding was so severe you'd be forgiven for thinking Cisco blew its quarterly earnings report -- but that's hardly the case. The company comfortably beat Wall Street estimates on both the top and bottom line. Not that that's anything new. Cisco has a history of giving conservative guidance -- and the Street has a habit of taking the bait. The company's easily exceeded forecasts on both its top- and bottom-lines for at least nine quarters in a row, according to data from Thomson Reuters (TRI).
Rather, traders were spooked by Cisco's failure to lift its guidance above Street expectations. Cisco, you see, was trading like a momentum stock. Investors betting on momentum don't just need a company to eclipse estimates (by a lot) -- they're also counting on management to raise its outlook.
A Bargain Stock?
"Shares may come under moderate pressure near term, as momentum investors vacate in the wake of the first quarter in nearly a year in which core Cisco estimates are likely not to be positively revised in a material way," wrote Paul Mansky, an analyst with Canaccord Genuity, in a Thursday note to clients. "We encourage longer term GARP [growth at a reasonable price] and value investors to capitalize on that opportunity."
The stock's relative valuation sure makes a strong case for buying Cisco on the dip. At just 14.7 times forward earnings, Cisco offers nearly a 15% discount to its own five-year average and more than a 50% discount to peers, according to Thomson Reuters data. Shares look even cheaper on a trailing earnings basis.
Perhaps most interesting is Cisco's price/earnings-to-growth (PEG) ratio, which measure how fast a stock is rising relative to its growth prospects. On that basis Cisco trades at a 7% discount to its own five-year average and about a 25% discount to the S&P 500 ($INX).
Of the 38 analysts surveyed by Thomson Reuters, 31 rate shares a buy, six call it a hold and one has it at under perform (sell, essentially). Meanwhile, their median price target stands at $31 a share, making the implied upside more than 20% in the next 12 months or so. In other, words, Cisco might be a beaten down blue chip today, but it's unlikely to stay that way for very long.
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