Cisco, Microsoft, & Oracle: Prudent Picks For Tech Investors

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Selloffs, downturns, pullbacks, corrections, and even bear markets are events that equity investors have always had to endure on the way to the best long-term performance of any of the financial asset classes.

So we can hardly be surprised that the recent downturn in stocks has extended to a second week, especially as we are in the seasonally weak September-October time span. Indeed, September and October are the only two months where returns on stocks have been negative dating back to 1927.

Note that the so-called Fed model suggests that the yield on 10-year Treasuries should be similar to the S&P earnings yield, which is the inverse of the P/E ratio. If the 10-year is greater than the S&P earnings yield, a market is overvalued. And if the reverse is true — as we saw on Wednesday — a market is undervalued.

Though many dismiss the Fed model, investing is always a choice of this or that, and we like the recent rich (and rising) earnings yield (3.76% vs. 1.36% on the 10-year) and the S&P 500 dividend yield of 1.34%. Meanwhile, here are updates on some of the technology stocks in our portfolio:

Cisco Systems (CSCO) hosted its annual Investor Day on Sept. 15, which featured CEO Chuck Robbins and included a boost to long-term expectations. The comments spurred several upgrades from analysts as the top-line growth targets were better than expected, but there remained some concern that CSCO may not be able to accomplish the same growth rates for earnings.

We continue to believe IT spending will remain strong, and we think CSCO should benefit as the world slowly recovers from the pandemic. Unfortunately, Cisco is not immune to the pricing and supply chain challenges that are dragging on the industry recently, and the company thinks those headwinds will stick around at least through the end of this calendar year.

While 2020 was a bit of a struggle for CSCO, shares are up nearly 30% this year, which we believe is a result of investor enthusiasm, an inexpensive valuation, and solid post-pandemic earnings growth projections. We continue to find CSCO to be a value-priced stock with decent long-term growth potential. Our Target Price has been bumped to $68.

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