Cisco, Growth Funds' Hot Hand, Cools Off

John Chambers probably gave your growth fund a healthy whack on Wednesday, but it could've been worse.

On Wednesday the Cisco Systems (CSCO) chief executive acknowledged that business wasn't great these days. It was a shot heard round the fund world, but not as bad as it could've been. Not yet anyway.

The Cisco File

Operations

Business: Maker of communications network equipment and software.

Fiscal Year 2000 Revenue: $18.9 billion

FY 2000 Earnings Per Share: 52 cents

2001 Estimated Earnings Growth: 52%

Stock Snapshot

52-Week Range: $31.9 - 82

Percentage Change from Jan. 1: -2.9%

Market Cap: $267.2 billion

P/E Multiple on Next Four Qtrs. Earnings: 44.5

U.S. Stock Funds Owning Shares: 1,106/2,886

Sources: Morningstar, Baseline/Thomson Financial, BulldogResearch.com.

"Cisco is one of the most important stocks in growth funds. It's hard to overestimate the significance of Cisco," says Morningstar senior fund analyst Scott Cooley. "I've heard a number of managers say we'll know there's a big spending slowdown if Cisco is affected."

At a Morgan Stanley Dean Witter conference Wednesday, Chambers told investors to prepare for a less predictable growth rate ranging from 30% to 50% in the near term. Shares of Cisco closed down 88 cents, or 2.4%, at $36.25; the stock was down more than 30% in 2001 prior to Wednesday's trading.

Despite its girth, the networking titan, with a $267 billion market cap, had managed to keep increasing its earnings at an enviable clip in recent years, earning a spot in more than 1,100, or some 40%, of U.S. stock funds, according to Morningstar. But on Wednesday it became clear that a slowing economy and dipping corporate tech spending had slowed the company whose shares had become a "must-own" in many stock funds.

The bellwether's news initially led investors to send the stock tumbling 8%, while also hitting the stocks of competitors like Juniper Networks (JNPR) and Foundry Networks(FNDR), but these and other networking stocks ended the day in the black.

Even though today's stock moves ended up fairly benign, if you own shares of a growth fund, you might want to keep your eye on Cisco. Investors, pro and amateur alike, will use the growth prospects of behemoths like Cisco to discern the health of the networking industry, tech sector and the economy.

If you own a growth fund, there's a good chance you're exposed to Cisco. The stock is in more than 80% of big-cap growth funds, the biggest stock fund category with more than $438 billion in assets, according to Lipper. It's also in nearly 70% of technology sector funds, according to Morningstar.

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And thanks to the stock's 2.4% weighting in the S&P 500, it's also represented in S&P 500 Index funds, where more than $232 billion is invested. In sum, the stock is in more than 1,100 U.S. stock funds, more than fellow giants like General Electric(GE), Microsoft(MSFT) and Pfizer(PFE).

It's easy to see why fund managers gobbled up Cisco's shares. The stock gained more than 100% in both 1998 and 1999 and its 57.7% average gain over the last five years beats the S&P 500 by more than 39 percentage points, according to Morningstar.

The Cisco Skid

Source: Morningstar. Annualized performance figures through Jan. 10.

How all those fund managers feel about the stock will play a big role in determining how the stock holds up in the coming months. After all, mutual funds own about 18% of the company, according to Morningstar. The stock's sagging performance and today's indication that the next two quarters might not measure up to the firm's heady reputation could lead some managers to dump some shares. That said, there's reason for them to hang on, too.

"I'm worried about Cisco in the short term, but as long as we don't have an extended recession, I think they should be OK," says Paul Meeks, manager of the (MAGTX)Merrill Lynch Global Technology fund, which has about a 2% Cisco position. "I think if a portfolio manager held it all the way down to 35, I think [he or she] is holding."

Some believe the healthy demand for networking gear, relative to other tech industries that rely more heavily on slowing PC sales, may buoy the company too.

"We saw what happens when a company's growth rate comes to a screeching halt with Microsoft [down 52.6% over the last 12 months]. But the networking business is not nearly as mature as the PC business. Plus, Cisco has such a broad product line that they'll come through this more unscathed than others," says Pat Dorsey, Morningstar's director of stock analysis.

No matter what happens down the road, it's clear that millions of fund investors will be along for the ride. At the end of September, the latest data available, the five funds shops with the biggest firmwide stake in Cisco includes Janus and Fidelity -- the biggest institutional owner of Cisco shares with a 4.6% stake in the company, according to bigdough.com, a Web site that tracks institutional fund ownership.

A list of the 10 stock funds with the biggest bet on CSCO includes the $20.7 billion, broker-sold (MFEGX)MFS Emerging Growth fund and the $24.3 billion, no-load (JAVLX)Janus Twenty fund, which is closed to new investors.

Cisco Lovers Here are the 10 funds with the biggest bets on CSCO's shares
Fund Name	Percentage of Fund Assets in CSCO	Year-to-Date Return
(IINTX)Investec Internet.com Index	14.1	-8.9%
(MFEGX)MFS Emerging Growth	12.2	3
(RYTIX)Rydex Technology Inv	9.5	4.7
(SWTFX)Schwab Technology Focus	9.4	2.2
(PASGX)Phoenix-Engemann Focus Growth A	9.4	-3.5
(CAOVX)Capital Value Inv	9.2	2.2
(ROPPX)Reynolds Opportunity	8.6	-0.3
(ETTIX)E*TRADE Technology Index	8.5	1.7
(JAVLX)Janus Twenty	8.4	-1.3
(EATRX)Eastcliff Total Return	8.4	-7.2
S&P 500	2.4	-1.4
Source: Morningstar. Holdings as of most recent portfolio reports.

Janus has three shuttered funds (Janus Twenty, (JAWWX)Janus Worldwide, and the (JANSX)Janus fund) among the 10 funds that own the most CSCO shares. The list also includes the $89.4 billion (VFINX)Vanguard 500 Index fund.

In the Portfolios of Giants These big funds own the most CSCO shares
Fund Name	Percentage of Fund Assets	Net Assets (billions)
(VFINX)Vanguard 500 Index	2.9%	$89.4
(JAVLX)Janus Twenty	8.4	24.3
(MEGBX)MFS Emerging Growth B	11.7	7.5
(JANSX)Janus	3.4	39.2
(JAWWX)Janus Worldwide	4.1	33.1
(TWCUX)American Century Ultra Inv	3.1	33.7
(VWUSX)Vanguard U.S. Growth	5.7	16.6
(VINIX)Vanguard Institutional Index	3.1	26.6
(APGAX)Alliance Premier Growth A	5.4	5.3
(INNDX)AXP New Dimensions A	3	15.8
S&P 500	2.4	-1.4
Source: Morningstar. Holdings as of most recent portfolio reports.

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