Fin - Breakout - US

Cisco Stumbles: Why Now’s the Time to Give It a Look

Jeff Macke

Matt Nesto and I came into Dos Hombres with a full head of steam this morning, talking lagging tech, corporate leadership and why you should care about each.

Matt lead off noting that the S&P 500 continues to wrestle with its 52-week high, reached in February. Despite a spirited comeback from the selling in mid-March, the index that traders watch is marking time around the 1,335 level, some 8 points below the Feb. 18 highs.

A screaming sell signal? Maybe, maybe not -- but certainly a chance to ponder your portfolio and cull some winners, if you're so inclined.

Where might the value players look? Perhaps the beaten down tech hardware space. While energy and industrials have stormed higher, hardware has missed the party entirely, in both the long and short term. Despite Texas Instruments' (TXN) premium-rich purchase of National Semi (NSM), hardware has done less than nothing, falling six of the last seven days and losing 2.5% while the S&P idles.

I picked up Nesto's point in a roundabout way by focusing on what real corporate leadership looks like -- this in a world where the Oracle of Omaha is being handled somewhat gently despite a glaringly obvious leadership problem at Berkshire Hathaway (BRK-B). Warren Buffett's response to what I personally consider per se unethical trading by a top Berkshire exec? Hiding behind legalese and his hard-won and generally well-deserved reputation -- in effect demanding a pass from critics.

Contrast Buffett with the actions of Cisco (CSCO) CEO John Chambers. Cisco recently sent a stunningly candid open letter to shareholders and employees. In it, the formerly exalted exec took responsibility for Cisco's failings over the last decade. As if humility from a billionaire weren't stunning enough, Chambers took pains to outline what he plans to do to atone for his and Cisco's failings.

Let's allow the man to speak for himself:

"We have been slow to make decisions, we have had surprises where we should not, and we have lost the accountability that has been a hallmark of our ability to execute consistently for our customers and our shareholders. That is unacceptable. And it is exactly what we will attack."

Lost accountability. Unacceptable. Attack. These aren't the words of a loser. These are the words of a leader -- specifically a leader who is ticked off and rallying the troops. Leaders don't whine and or point fingers. They outline a plan and yell "Follow me!" to the troops.

Chambers' words echo those of Starbucks (SBUX) CEO Howard Schultz. In 2007, Schultz wrote a memo that was subsequently leaked throughout the Internet. The rest of the Starbucks story is that Schultz came back to fix the company himself at the beginning of 2008. He started his comeback by telling his troops Starbucks leadership had failed his team and vowed to make it up to them. The words, and industries, are different, but the sentiments espoused by Schultz and Chambers are much the same.

Not coincidentally, Starbucks is up 100% since Schultz retook the CEO office and 200% in the last two years.

Will the Schultz strategy work for Cisco? Your guess is as good as mine. Cisco has to prove it to shareholders, and they know it. Acknowledgment isn't a good enough reason to buy it, but it puts Cisco back on my radar after nearly a decade of my paying them little attention on either the long or short side. I'll be watching Cisco carefully over the next few quarters; I'm willing to start rebuilding a relationship with the company. That's a pretty good start from where I'm sitting.

Put our daily rants together and your Dos Hombres theme du jour is this: Investing isn't all about riding the leaders. It's also about protecting your gains and seeking your opportunity. The best place to find the latter is generally in sectors and companies left for dead, but showing signs of life. Food for thought after a two-year market double.

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