3 Reasons to Buy Shares of Cisco, Despite What Goldman Sachs Says

Here is why investors should ignore the investment bank's recent downgrade of the hardware giant's stock.
By Chiradeep BasuMallick ,

Goldman Sachs may have downgraded shares of hardware giant Cisco Systems (CSCO) - Get Report , but it isn't time to throw in the towel on the stock just yet.

Rather, long-term investors should continue to add Cisco shares to their portfolios to get stellar gains for three simple reasons.

1: A diversified business. When Goldman cut its rating last month to neutral from buy and removed Cisco from its Americas Buy list, citing modest downside risks to consensus earnings estimates, the firm said that server market share gains are slowing at the company.

Goldman may have a point, but the Street hasn't exactly sold off Cisco's stock following the downgrade.

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As the Internet of Things industry grows, the demand for networking infrastructure will increase.

The company is the de-facto leader in networking infrastructure and is even collaborating with IBM to offer analytics services for IoT device data. This puts Cisco in an ideal position for gains as spending on this sector shoots higher.

Cisco is also reinventing itself, moving from just networking to including higher-margin collaborations and cybersecurity services, which are growing in the double digits. With a cash hoard of more than $60 billion, Cisco is pursuing the acquisition route to snap up key assets, just as it bought CloudLocklast month.

Even if its server business were to drastically slow, the company is diversified enough to remain a solid player.

2. A cheap stock. Everything boils down to valuation when considering to buy or sell a stock.

Cisco is the cheapest non-financial stock in the Dow 30, less expensive than Coca-ColaNikePfizerProcter & Gamble and even Apple.

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Based on the five-year expected price-earnings-growth ratio, Cisco trades at 1.20, showing that for its expected average annual earnings growth of 10.47% over the next five years, it is pretty cheap.

Although companies such as DuPont and Home Depot are projected to deliver faster earnings growth, they don't come rival Cisco when it comes to valuation.

Cisco is also undervalued among its peers.

HP trades at a PEG ratio of of 7.73. Juniper Networks trades at a PEG ratio of 0.87 but is far less profitable than Cisco and also much smaller in size.

Cisco is the clear winner.

3. A safe option. Events such as the Brexit have shown us how investors chase blue-chip and other safe stocks when the market is gripped by fear and panic.

Cisco fits this bill perfectly.

Its massive cash hoard means that the company is adequately capitalized. It can pay down all its debt in one shot and still be left with tons of dollars.

As investors wait for Cisco's true value to be discovered by others, they can comfortably pocket the 3.5%-plus dividend yields every year, which is a lot of steady income for a stock.

By generating $10 billion to $11 billion in free cash flow every year, Cisco is as good as it gets. If the stock continues to fall, Cisco will simply deploy more cash to buy back shares and offer a platform for the share price to settle.

Those who hold onto their shares could garner solid dividends and a chance to see the stock appreciate.

Despite Goldman's pessimism, Cisco continues to be one of the best and safest stocks.

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This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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