Cisco Shows Strength in a Time of Weakness

Worker productivity was better than expected, coming in at an increase of 2.2% on an annual basis vs. an expected 1.5% gain. That sounds good, but it came about more because of a reduction in payrolls and/or hours worked. You would love to see an increase in productivity, but not with a decline in hours worked. Call it a wash at best.

An old favorite, Transocean (RIG - commentary - Cramer's Take), reported a better-than-expected quarter, with earnings coming in at $3.80 vs. expectations of $3.33. RIG specializes in deep-water drilling and its most sophisticated rigs can operate in up to 10,000 feet of water and drill 25,000 feet into the earth's surface. Revenues were better, and costs were lower. It's the best of all worlds. Look for estimates to go up. While the stock has been on a tear, doubling in the past year and is due for some consolidation, rising estimates usually move a stock higher.

Cisco (CSCO - commentary - Cramer's Take) had a solid quarter, and CEO John Chambers continued to sound somewhat cautious for the quarter ahead.

I mentioned a few days ago that there have been signs of weakness in IT and infrastructure spending, but consider the following: CSCO bought back $2 billion in stock this past quarter, making it $9 billion it has bought this fiscal year. The company generated $3 billion in free cash flow and has $18 billion in cash (vs. no debt) on its balance sheet now. They still expect to resume 12% revenue growth before too long. If this can be done during a period of industry weakness, I think CSCO could be a core holding in a portfolio.

The London Times reports that Iran could be seeing a decline of up to 10% a year in its oil output due to lack of investment. I don't think anyone is going to trip over themselves to get to have the privilege of investing in Iran, so more bad news for the oil situation.

Long: RIG, CSCO

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Vincent Farrell Jr. is a principal of Scotsman Capital Management. Prior to joining Scotsman in April 2005, Farrell was chairman of Victory Capital Management of Cleveland and chairman of Victory SBSF Capital Management in New York. He was a founding partner of Spears Benzak Salomon & Farrell, which was acquired by KeyCorp in 1995. Vince held a variety of positions in his 23 years at SBSF, including chief investment officer, and he served as the portfolio manager on a number of the firm's largest client relationships. He is a regular guest on CNBC as well as other national print and broadcast media.

Prior to joining SBSF, Vince spent nine years at Smith Barney as a vice president, sales.

Vince graduated from Princeton University in 1969 and received his MBA from the Iona College Graduate School of Business in 1972.