Market Clichés – 1953 vs. Today

Written by GSCR Staff   
Friday, 16 May 2014 08:45

“As GM goes, so goes the nation”. Such was the famous quote uttered by GM (NYSE – GM) CEO Charles Wilson which proved to be a profound and insightful statement in the 1950’s.  Even as President Obama reiterated it while drumming up support for the GM bailout, he most likely knew it was not true in this century.  Whatever your theory is on the decline of the behemoth, we can all probably agree the quote needs a 2014 update.

 

As Apple (NASDAQ – AAPL) goes, so goes the nation?  Probably not true.  A large outsourced workforce and catering to early adopters are just a few reasons.

 

As FedEx (NYSE – FDX) goes, so goes the nation?  This is a very popular ‘insight’ into the economic activity used by many.  While this may be a great metric, it probably is not indicative of the overall state of the average American.

 

As Amazon.com (NASDAQ – AMZN) goes, so goes the nation?  This is another activity metric that may not speak standard of living and other daily economic concerns.

 

The truth is that there is probably not one singular American company that fits the mold GM did in the 1950’s.  It may be a basket of companies instead.  One of those companies would certainly be Cisco Systems, Inc. (NASDAQ – CSCO - $24.18).  Again, this is more metric than just a qualitative story and in this economy, is a great indicator of business activity.

 

CSCO has been the classic cyclical stock oscillating from about $15 to $30 since it peaked around $75 at the height of the dot.com boom in 2000.  On Wednesday, the stock enjoyed nearly a 7% pop after the Company reported very favorable financial results and raised future revenue expectations.  Is this the beginning of a large swing to the upside for CSCO?

 

There are good signs for the stock in terms of simple price-earnings and price-growth metrics.  First, the forward P/E is 11, 4 points under the trailing P/E of 15.  Additionally, the 5-year PEG is a reasonable 1.51.  Both the profit and operating margins look to have hit an inflection point back in the 3Q13 with improved performance to north of 20% for both.  Additionally, the Company has $47 billion of cash and short-term securities on hand. Not too shabby.

 

The big picture is the economy here.  GDP growth under 3% for the foreseeable future is definitely not a bright outlook for cyclical stocks like CSCO.  Additionally, the competition has become fierce, and formidable from firms of all sizes including even ‘Big Blue’ IBM (NYSE – IBM). 

 

We say take the conservative approach here and either buy lightly or look for some inexpensive calls.  The key is to remember sell discipline if the stock breaks through the $30 level and makes a big run.

 

Have a great weekend!

 

Disclosure: Goldman Small Cap Research analysts are neither long nor short these shares but may elect to purchase the stock within the next 48 hours.

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