Cisco: Another Stagnant Giant

This column was originally published on RealMoney on Sept. 29 at 12:30 p.m. EDT. It's being republished as a bonus for TheStreet.com readers.

The more popular a stock is, the more efficient it is, and therefore the less likely it is to outperform. It's not rocket science, and I'm not the first to say it, but that is market efficiency.

Earlier this month, I spelled out why General Electric(GE Quote) will stagnate despite seemingly strong fundamentals, and today I want to explain why I believe networking-equipment giant Cisco Systems(CSCO Quote), another so-called "best of breed" name, could suffer the same fate.

To start, let's take a quick look at Cisco's stats. The company sports a sparkling balance sheet that shows $16 billion ($2.56 a share) in cash and no debt, and it produced $6.9 billion in free cash flow and $5.7 billion in net income in its most recent fiscal year, ended July 30. The stock is also trading at just 17 times expected 2006 fiscal earnings per share, which seems cheap for a company with such superior fundamentals. With such a cheap valuation, why aren't investors piling into the stock?

The answer is that they're already there and are unlikely to put more money into the company, which increasingly looks like a slow-growing behemoth with little ability to generate excitement. Cisco remains one of the most widely held stocks in America, by both individuals and institutions. As I've said before, when everyone is already at the party, there's no one left to invite.

Consider how closely the networking giant's every move is followed. Thomson shows 35 analysts following the stock -- 26 of whom have buy ratings, plus eight holds and a solitary sell. Normally, a high number of buy ratings indicates very positive sentiment that potentially limits upside, but in Cisco's case I don't really care. Here, it's the sheer number of analysts that concerns me more than their actual ratings. Even more problematic is that the number doesn't even include the thousands of buy-side analysts and the untold numbers of individual investors who track the company closely.