Here's Why Cisco's Growth Strategy Will Pay Off Big in 2016

Cisco Systems (CSCO) is teed up for market-beating growth, as it signs game-changing partnerships with the biggest names in technology and telecommunications.
By John Persinos ,

As the broader markets seesaw this week, is it time to worry about stocks? Not about the technology sector, which has been on a tear lately. The Technology Select Sector SPDR (XLK) - Get Report is up 5.5% so far this year, compared with a gain of 1.1% for the S&P 500. As we head into 2016, which tech stock is the best to buy?

Here's a choice for value, growth and income investors alike: Networking giant Cisco Systems (CSCO) - Get Report . It shows every sign of outperforming in 2016 and beyond. The stock's dividend yield is robust, and its valuation makes it a bargain. What's more, the company announced a game-changing partnership this week, and after the markets close today it's expected to announce solid earnings growth. Let's take a look at why Cisco belongs in your portfolio.

CSCO data by YCharts

In yet another indication of accelerating consolidation in the telecommunications industry, Cisco and Sweden-based telecom gear manufacturer Ericsson (ERIC) - Get Report this week announced a partnership that's expected to to generate an additional $1 billion in revenue for each company by 2018. Cisco and Ericsson will resell each other's products and jointly create new products for fledgling network equipment markets.

The deal follows a separate partnership forged earlier this fall between Cisco and Apple, whereby Cisco will create networks that facilitate the use of iOS devices.

The Cisco/Ericsson partnership establishes a major competitor to the entity created by the merger announced this year between Nokia and Alcatel Lucent and is a major blow to Cisco rival Juniper Networks, which has been in a slump. The flurry of activity in the tech sector shows why certain technology stocks are poised for enormous growth in 2016.

Cisco plans to report earnings for its first fiscal quarter of 2016 on Thursday. The Wall Street consensus calls for adjusted earnings per share of 53 cents, up from 51 cents in the same period a year earlier. On average, analysts expect revenue of $12.07 billion, up from $11.5 billion a year ago.

The collapse of the technology sector in 2000 still preys on the minds of many investors, leaving them with the perception that all technology stocks are inherently high-risk and volatile. The bursting of the Nasdaq bubble was a trauma that's hard to shake.

But the fact is, the best technol­ogy companies are well positioned to outperform over the long haul. Their muscular financial shape and full prod­uct pipelines will hold them in good stead, as global growth gathers steam.

The tech sector as a whole enjoys strong growth opportunities, as economies strengthen, smartphone use explodes and corporations dig into their large piles of idle cash to make long-deferred IT investments. Major drivers of this growth include cybersecurity, cloud computing, mobile and "metadata" that help organize other data.

Cisco is the Web market leader in routing, tele-presence, wireless LAN, switching, voice and security. The company also is pushing ahead in newer Internet-related growth opportunities, notably cloud computing.

With a market cap of $142.2 billion, Cisco is a mature global company with robust revenue and earnings, but the partnership announced this week with Ericsson is yet another indi­cation that the company continues to pursue an aggressive growth strategy.

Cisco's stock has a trailing-12-month price-to-earnings ratio of 16, compared with 49 for its industry. Not only is the stock an undervalued growth proposition, but the dividend yield of 3.21% should appeal to income investors as well.

Meanwhile, we've found a technology stock trading for less than $8 a share, and its long-term prospects have never been better, making it a great value. We expect this rocket could take off soon, so be sure click here now and learn more.

John Persinos is editorial manager and investment analyst at Investing Daily. At the time of publication, the author held no positions in the stocks mentioned.

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