Last Friday I unveiled my two most compelling stock ideas to the readers of my Money Map VIP trading service. They are the best ways to hop onto an exploding trend that I recently discovered and researched extensively – the exponential explosion in broadband traffic.
To learn more about this broadband explosion – and the two top stock picks I isolated from my research – check out this new report. It's a huge issue – with the potential to cause the kinds of network breakdowns and outright outages that could cost the economy billions of dollars and that could even cost people their lives.
In the course of my research, I discovered a third company that's perfectly positioned to benefit from this broadband paralysis. My conclusion: Cisco Systems Inc. (Nasdaq: CSCO) is going to see a lot of upside from this trend, too.
Almost two years ago – on June 30, 2008 – I recommended Cisco Systems at about $23 per share. The stock preceded to rally quite strongly for a few weeks. But then came the Lehman Brothers Holdings Inc. (OTC: LEHMQ) meltdown. Many of the same long-term fundamentals that I mentioned then are still very well in place: a commanding market share in all the main businesses that it participates in, huge gross profit margins, and a bullet-proof balance sheet that houses a mountain of cash. All of this is possible because of the sustainable long-term competitive advantages Cisco enjoys in its bread-and-butter enterprise-networking business.
In fact, Cisco is so dominant in this space – with a 70% market share – that the company and its products have become the standard of excellence in an industry that faces severe challenges. Just last Friday, in fact, The Wall Street Journal published an article that revealed how hackers in Europe and China successfully broke into computers at nearly 2,500 companies and government agencies over the last 18 months.
If you're the chief information officer (CIO) at a large- or medium-sized company, the thing that you are going to do right now is to open yourself up to internal criticism by switching from a trusted networking vendor such as Cisco in favor of some upstart. The switching costs of such a decision are normally very high, even without the additional risk of exposing your entire network and sensitive corporate information to foreign hackers.
But why am I saying that Cisco is going to do surprisingly well in the near future and continue to strengthen over the years? We are in the Information Age. And as common as such statement can sound, the reality is that there is a data traffic explosion occurring right now, right before our eyes. You can check out my detailed report.
With the advent of smartphones and the explosion of video over I.P. (internet protocol, the Web's standard for data transmission and Cisco's specialty) are combining, like drinking and driving, to cause major accidents on the arteries the travel on.
And Cisco is actually helping to generate its own demand! Its fast-growing teleconferencing-service business, which you can see advertised in appealing ads on TV, is contributing to the massive growth of Web traffic. Services of this type allow a friend of mine to deliver state-of-the art first-response and emergency telemedicine to corporate and individual customers all over the world, eliminating the need for that first, time-consuming, face-to-face doctor visit in most cases.
Voice, video and data networks are converging into Cisco's bread-and-butter dominance of the IP space. This is equivalent to winning the technological lottery on which Cisco has been betting for years. I am sure Cisco's management team can confidently say: "We told you so."
In the case of data networks, Internet everywhere is now the gold standard for consumers and corporate users. And the use of bandwidth-eating applications has crashed both land and wireless-broadband networks. And I suspect that the growth has also crashed more than a few corporate networks – though these incidents have gone unreported by companies that wish to avoid public embarrassment.
This exponential, out-of-control growth in Internet traffic and the presence of great threats to corporate and personal information alone makes a compelling reason for owning Cisco right now. But think that Google Inc. (Nasdaq: GOOG) is shipping some 60,000 Android systems a day. Yes, this is the open-source operating system based on Linux that Google makes available for smartphones. This, plus the Apple Inc. (Nasdaq: AAPL) iPhone and all the iPhone competitors that are appearing right now are going to really tax networks to the point of paralysis in many cases. The growth is out of proportion to anything that I have seen.
To highlight how prevalent this problem is proving to be, AT&T Inc. (NYSE: T), which carries the iPhone exclusively for the time being in the United States, stated in its last earnings conference call that improving its backbone infrastructure for this purposes is their principal investment objective. And if this happens to AT&T, you can safely bet that this is happening with other carriers, too. The reason: For competitive reasons, those other carriers must offer their own Internet-browsing smartphones.
That covers the upside potential in networking equipment. But it's hardly the only growth opportunity available. Broadband Internet access is finally making its way into the rural markets here in the United States and in other countries, as well. In Australia, for example, the government has launched a plan to wire the entire country. Cisco will be taking the orders from telecom players and government contractors for these and similar projects throughout the world.
Cisco closed Friday at $24.36 a share – very near its 52-week high of $25.10. The company's most-recent results and earnings outlook alone would warrant a valuation of $28 to $30 per share. But remember that Cisco has a long track record of giving very conservative guidance. So the 16% to 25% easy upside that is not yet baked in the stock is only the beginning of what should be a long, pronounced virtuous cycle for Cisco's shares. It is not as compelling as my other picks, but solid returns should be very attainable – an especially alluring situation even for conservative, long-term investors.
The stock has been trading in a range since the end of last year and could be ready to break out to the upside. It has bounced off nicely up from its recent test of its 200-day exponential moving average and it is sitting in the middle of the Bollinger bands channel. It has just crossed its 50-day exponential moving average to the upside. All of this confirms short-term and long-term bullish trends for Cisco shares.
On the limiting side, Cisco's stunning 60%-plus gross margins are already very generous and will be difficult to expand from here. And, while the moderate Price/Earnings (P/E) ratio of 23 on current earnings is aligned with the market, its slightly high "PEG" (Price/Earnings to Growth Rate) ratio, in line with its competitors', will limit how high the stock goes from here. But this is a very strong and safe pick on its own.
So with all this upside ahead, some of which Cisco will reveal to us in its May 3rd earnings, we are going to "Buy" Cisco Systems Inc. (Nasdaq: CSCO) at the market.
Recommendation: "Buy" Cisco Systems Inc. (Nasdaq: CSCO) at the market. (**).
(**) Horacio Marquez holds no interest in Cisco Systems Inc.
[Editor's Note: Horacio Marquez knows how to make a market call. It was Marquez who told investors that lithium was going to be big – a year before other "experts" made the same call. Now Marquez has isolated the major profit opportunities. being created by the possible broadband breakdown – a situation that the news media is only just now starting to understand. To find out all about those top profit opportunities, check out this new report.]
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