Market Mayhem Makes Cisco A Bargain

Expecting the market to begin 2001 with a clean slate is like expecting your life to change at the stroke of midnight on New Year’s Eve. It just doesn’t work that way – and even if it did, you’d still get a hangover.

It would be nice if Tuesday’s terrifying Nasdaq plunge was merely the “hangover” from last year’s dismal market showing. Unfortunately, the 7.23% drop was triggered by the same catalysts that have plagued the market since last March – fears of a slowing economy, interest rate concerns and a steady stream of earnings warnings – and which show no signs of going away soon.

With investors so jittery, it’s no wonder we’ve seen so many wild swings – mostly down – in the market in recent weeks. The pack is in full flight. The Internet bubble not only has burst, its remnants are being trampled by a fleeing herd of investors.

Naturally, this market behavior creates opportunity for the more level-headed. Cisco Systems , for example, hit a new 52-week low Tuesday because investors are worried that the networking giant will miss its earnings forecasts for the current second quarter, which concludes at the end of this month.

CSCO shares dropped 13% to $33.31, its lowest price since late 1999, in a sell-off that picked up momentum as the day went on. In fact, with 122.2 million shares traded, Cisco was the most-active U.S. stock on the board Tuesday.

Yet Cisco issued no earnings warning, nor did any investment analysts. Instead, Cisco shares were dragged down by the market’s foul mood.

If you’ve been waiting for a good price to buy Cisco, now is the time, for its next quarterly report should allay any fears of slower growth for the company. In November, Cisco increased its sales forecasts for Q2 and fiscal year 2001. If it hits its targets, sequential growth for the current quarter will be in the low double-digits, while sales for the fiscal year will rise 50% to 60%.

Right now, Cisco is trading at 11.1x trailing 12 months revenue of $21.5 billion.

That’s its lowest revenue multiple in years. Even at the end of 1998, when shares were trading at $13.31 – less than half the current price – Cisco was more than 10 times expensive than it is now, based on revenue multiples.

Cisco has consistently met or exceeded its quarterly forecasts in the recent past. There is no reason to think it won’t when the numbers come out in February. And even if there is a slight softening of growth, Cisco still is far and away the most dominant networking/Internet company in the world. If that’s not worth betting on, I don’t know what is.

News Around the Web