Last night, I had a dream. I was standing in my pajamas on the corner of Wall and Broad and a guy came up behind me and put a revolver to my head. He said he would shoot me unless I agreed to put all my savings in one stock for five years. My only choices were
I pleaded for more options. "How about an index fund?"
"What do I look like,
?" he said. (Actually, he looked a lot like
I told him I couldn't invest in individual stocks anyway, because of
strict conflict-of-interest policy. I heard the hammer cock; he wasn't buying it.
Telephone or Cisco? Value or aggressive growth? Man, what a dilemma.
Cisco: Fast Growth, but How Long Can It Last?
Cisco is a well-managed company in a fast-growing business. Earnings are growing at about 30% a year and that's on revenue growing at about 40% a year. A great left-right combination. It consistently beats Wall Street's earnings estimates. Yeah, the accounting is questionable, but the company made a slew of great acquisitions.
And so what if I wouldn't know a router from a switcher? I know the Internet build-out is going to keep on at some rapid rate, and Cisco is the leader is selling hardware and software to help make that happen. And Cisco boss
is said to be the next coming of
. What is that worth? A lot. Most importantly, the stock has been one of the great successes of the past five years. Why shouldn't the stock be a good one over the next five? Yeah, it's Cisco. I gotta go with Cisco.
But wait a minute. Every sell-side analyst has it on his or her "strong buy" list. It's owned by every big institutional account that is going to own it. And it's vulnerable to questionable dot-coms and telcos that may be headed for the scrap heap. And what about the competition?
is a serious rival in the router market.
could compete away Cisco's edge in the optical network arena.
How do I know that Cisco will still be the gorilla of the New Economy in 2005? What happens if it hits a pothole in 2004? With a trailing price-to-earnings ratio of 157, what would happen in case of earnings disappointments? We would be talking a far lower P/E and a big decline in the price of the stock.
AT&T: Stumbles Aplenty, but Plentiful Value, Too
OK, what about AT&T?
The competitive landscape sucks. Consumer long-distance is a dying business. T has done a mediocre job in the business telephony market. Its network is neither young nor low cost -- not good in a commodity business. The company has consistently disappointed on earnings. In April, T was expected to earn $2.08 a share next year, but now only $1.74.
Revenue growth has been pretty darn flat at a time when we are supposed to be surging into the new information economy. What can you say about the corporate culture? Not much good. And management? Well, let's just say CEO
is no John Chambers. And look at the stock. It's been a round trip to nowhere over the past five years. Why should you expect anything better in the next five?
On the other hand, Telephone is
really cheap. The price-to-earnings ratio is a mere 13 times trailing earnings. And the board is clearly going to
split the business up into separate companies to better realize the hidden value of this unmanageable behemoth. (
The Wall Street Journal
just reported that AT&T is about to approve a complicated series of spinoffs and tracking stocks setting the stage for an eventual breakup.) The cable television and wireless businesses are potential jewels. Spin them off via a bit of financial engineering and their natural investment constituencies will find them. They may not be best in show, but they should show decent growth in the next five years.
The network and business customer biz might get its act together and stop letting competitors eat its lunch in what should be a decent market. And in the breakup, the AT&T board could stick all the debt on the positive cash-flow consumer long-distance business, which could then be run as a kind of slow-motion liquidation.
A Sleeping Giant -- or a Dead One?
"Time's up," said the guy with the gun. "T or Cisco? What'll it be?"
Just then, I remembered a story growth stock investment manager Gerry Jordan of
told me in a recent
I saw a friend of mine last June, after the tech debacle and the stocks had come back. He's a retired teacher. College professor, good guy, and he was asking me about the market. I said, "What do you care about the market?" He said, "Well, I'm an investor now." I said, "What do you own?" He said, "My biggest position is Cisco. What do you think?" I said, "I'd sell Cisco." He said, "Sell Cisco? How can you sell Cisco?" I said, "You call your broker, and just tell him to sell it. The problem is, I know Cisco's a great company. You know it's a great growth company. Most everybody else knows it, and it's been a wonderful, wonderful stock. The problem is, everybody owns it." At the time, Cisco was selling at $68, down from $82. I said, "If Cisco grows at 25% a year for the next five years, it's going to become one of the major, major companies in the world. And if at that point in time it sells at 40 times earnings, you know where the stock will be?" He said, "180?" I said, "No, $64, and it's $68 today."
That did it. Jordan has earned a 31.5% average annual rate of return over the past 10 years. If he has such doubts about Cisco, how could I lock myself into Cisco for five years? How could I sleep? I had to go with T by default. Maybe I wouldn't make much, but I probably wouldn't lose too much, either.
Then I woke up. My first thought: Isn't it great that investors have more than two stocks to choose from?
If you had to put all your savings into either AT&T or Cisco for the next five years, which would you pick?
I'd shoot the moon and buy Cisco.
I'd hold my nose and buy AT&T.