Despite seeing heavy selling in their shares like pretty much every other public company out there during the initial chaos of the coronavirus pandemic and shutdown, Wall Street quickly surmised that Cisco’s (NASDAQ: CSCO) revenue streams and core business were not as vulnerable as initially thought
Their shares still fell 30% in less than a month but in hindsight, it was a gift of a buying opportunity for investors brave enough to step in. Shares have been rallying since the middle of March and while they’re still a few percent off their January levels, have already returned to December’s.
Investors' faith in the company’s sturdiness appears to have been well-founded after Cisco released its fiscal Q3 earnings following the closing bell on Tuesday. EPS and revenue both beat analyst expectations with the latter showing a much smaller contraction (-8% y/y) than previously feared. Non-GAAP EPS actually managed to grow 1% compared to the same quarter last year while net income was only off 2% over the same time period. Service revenue increased 5% year on year which is impressive considering revenue from that segment makes up close to 30% of the company’s total revenue. In addition to that glowing ray of light, gross margins managed to expand as well.
On top of all this, the company was able to return $2.5 billion to shareholders through dividends and share buybacks during the quarter. Despite the company themselves saying the pandemic is worse than both the dot com crash and the 2008 crash, for all wants and purposes, it looks like Cisco has managed to come through the past few months relatively unscathed.
CFO Kelly Kramer said with the results; "we executed well in Q3 in a very challenging environment, delivering strong margins and non-GAAP EPS growth. The resiliency that we have been building into our business model is paying off, with software subscriptions now at 74% of our software revenue, up 9 points year over year. We are focused on driving long-term profitable growth while delivering shareholder value."
Management seems to be on top of their game and had the confidence to issue guidance for the next quarter’s results, at a time when many companies are pulling theirs and refusing to update it in the face of so much uncertainty. To be sure, they forecasted a double digit percentage contraction in next quarter’s revenue compared to the same time last year, but management’s EPS forecast for Q4 actually topped analyst expectations.
In light of the positive numbers from last quarter, it’s easy to see why investors have been piling into the stock and in pre-trading action on Tuesday morning, shares were up over 1%.
Indeed, CFRA Research reiterated their Buy rating and said with the release that “Cisco’s recent acquisitions are serving it well in the coronavirus pandemic, as more people rely on work-from-home and video streaming solutions. We believe the company is well-positioned to benefit from investments in new technology once the downturn is over.”
The fundamental investor out there will be attracted by the fact that the stock trades for less than 14 times its 2020 free cash flow which means there’s a value play to be made on top of the 3.4% dividend yield the stock offers. The technical investor will be attracted by the stock starting to hit pre-crash levels and the rising trend line supporting it.
Higher highs and lower lows have been the order of the day in recent weeks and it looks like that’s set to continue after a better than expected earnings report in the face of huge economic uncertainty.
8 Stocks Under $10 and On Sale Right Now
During times of market volatility, investors are looking to get return anywhere they can. One approach is to find cheap stocks (i.e. stocks that trade for less than $10). It’s not surprising that many of the cheap stocks can be found on Robinhood. This trading app is popular among millennial investors. And those investors are willing to speculate on cheap stocks.
And it’s easy to see why. Buying 100 shares of a stock that is trading for $5 can seem to be a wise investment if the stock moves higher. After all, if the stock price increases just $1, investors can see a 20% gain.
But that is not always the case. In fact, it’s not usually the case. The trap that some investors fall into is believing that these stocks can be the next Amazon or Apple. And while they do offer a potential reward, they also carry significant risk. It’s important to remember that when a stock is selling for less than $10, there’s usually a reason. And in some cases, it means the stock is under selling pressure.
This is one time when it’s important to remember that inexpensive does not necessarily mean the stock is a good value. However, there are some quality stocks that can be found in the bargain bin. And for many of these stocks, the value is found in a solid dividend that can reward income investors.
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