Must Own, Must Watch: All Fund Eyes Are on Cisco's Earnings

Wake up, fund investors: Networking bellwether Cisco Systems (CSCO - Cramer's Take - Stockpickr) reported its fiscal first quarter 2001 earnings after the market closed.

The Cisco File

Business: Network equipment and software maker

2000 Estimated Revenue Growth: 55% (to $18.9 m)

2000 Estimated Earnings Growth: 36% (to 74 cents)

Stock Snapshot

52-Week Range: 34.9 -- 82

Market Cap: $402.7 billion

P/E Multiple: 104

Funds Owning Shares: 1,160 of 2,129 foreign/U.S. large-cap funds.

Source: Baseline, Morningstar.

Cisco posted earnings of 18 cents a share, exceeding the First Call/Thomson Financial estimate of 17 cents. Year-ago earnings were 11 cents a share. Revenue jumped 66% from a year ago, to $6.52 billion from $3.92 billion.

What does this mean for fund investors? The networking giant's shares are in more than 1,100 stock funds, more than any other stock except chipmaker Intel. It's also in a whopping 84% of large-cap growth funds -- the biggest stock fund category according to Lipper -- and in seven of every 10 tech funds, according to Morningstar. Obviously the stakes are high -- as TheStreet.com reported when Cisco last reported results back in August. But the specters of decreasing spending on telecommunications equipment, a thin-air valuation, and rising market share for rival Juniper Networks(JNPR - Cramer's Take - Stockpickr) raise those stakes even higher for a ton of funds and shareholders like you.

It's hard to blame fund managers and individual investors for jumping onto the Cisco bandwagon with both feet -- Cisco's shares are also among the widely held in Merrill Lynch accounts. The company makes and sells networking equipment and software that are in high demand as the world's communications networks get their much-ballyhooed overhaul.

On top of being in an enviable niche, the company has consistently exceeded Wall Street's expectations. Even as the company has grown into a giant, chief executive John Chambers had kept its growth rate high. And its stock price has followed suit. Over the past five years, the stock has averaged a stunning 63.3% return, beating the S&P 500 by more than 42 percentage points, according to Morningstar.

What's Not to Like? Given Cisco's stunning performance, it's no wonder fund managers are in love.

Source: Morningstar and Baseline. Performance figures through Nov. 6.

That kind of performance has also earned the stock a high-profile in many indices like the S&P 500 and the Nasdaq 100. Since indices like these are the yardstick by which many funds are judged and fund managers are paid, the stock is a must-own for many managers.

At the end of September, Cisco was the No. 2 holding in the S&P 500 with a 3% weighting and the top holding in the tech-laden Nasdaq 100 Index with a 6% weighting, according to Morningstar. Of course, many funds that really like the stock have let it grow into a much bigger position.

Funds With the Biggest Stake in Cisco
Fund	Percentage of Assets in CSCO
(FOCPX - Cramer's Take - Stockpickr)Fidelity OTC	12.6%
(SWTFX - Cramer's Take - Stockpickr)Schwab Technology Focus	10
(PICTX - Cramer's Take - Stockpickr)UAM PIC Twenty Portfolio Inst.	9.8
(RYTIX - Cramer's Take - Stockpickr)Rydex Technology Inv	9.5
(FADTX - Cramer's Take - Stockpickr)Fidelity Adviser Tech A	9.2
(PASGX - Cramer's Take - Stockpickr)Phoenix Engemann Focus Growth	9.1
(GFINX - Cramer's Take - Stockpickr)Guinness Flight Internet.com Index	8.6
Security Technology A	8.5
(EATRX - Cramer's Take - Stockpickr)Eastcliff Total Return	8.4
(ROPPX - Cramer's Take - Stockpickr)Reynolds Opportunity	8.2
Source: Morningstar. Holdings as of most recent portfolio report; performance through Nov 6.

The downside of all the love is a downright scary valuation. The stock's 104 price-to-earnings multiple through the end of its fiscal fourth quarter is nearly four times that of the S&P 500. Even many dyed in the wool growth investors like Jeff Van Harte, manager of the (TEQUX - Cramer's Take - Stockpickr)Transamerica Premier Equity fund, have said Cisco and its competitors appear " priced to perfection." Translation: It won't take much to send them tumbling in a hurry.

And that's happened a bit of late. News of an industry-wide slowdown in spending on networking equipment has been evident from observers' research and companies' dipping results.

In October Cisco competitors like Juniper Networks, JDS Uniphase (JDSU - Cramer's Take - Stockpickr), Nortel Networks (NT - Cramer's Take - Stockpickr) and Lucent Technologies (LU - Cramer's Take - Stockpickr) all posted double-digit losses. Many of these pricey stocks are playing bigger and bigger roles in growth funds, too. Cisco, far and away the industry's bellwether, lost just 2.5% in October and is still in the black for the year, according to Baseline.

That's not to say Cisco is always going to be the sizzling sector's haven. Like most huge companies, Cisco has been somewhat vulnerable to smaller, more nimble competitors like Juniper Networks. The firm might not deserve the "battleship in a bathtub" label some have hung on it, but its earnings growth and Wall Street. fan club are sure to diminish if it continues to be outmaneuvered in the battle for supremacy in the corporate market.

Whatever the outcome -- tonight and down the road -- you might want to keep an eye on the stock and the sector. Right now they could determine whether you make or lose money on your growth funds.