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Top Picks 2020- Cisco Systems CSCO

Known as the worldwide leader in networking equipment, Cisco Systems (CSCO) designs and sells a broad range of technologies that help their customers provide a highly secure and intelligent platform for digital business, notes Zach Jonson, CFA and senior portfolio manager at Stack Financial Management

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Over the last few years, CSCO has set out to reinvent IT architectures to help customers simplify the ever-changing technology landscape.  In doing so, they are focusing on six core elements: applications, data, security, cloud, infrastructure, and teams. 

These six core elements add value as more and more business migrate from an internal network structure to private, hybrid, and even multi-cloud environments. 

While the internal business transition has gone well, CSCO has seen a decline in overall demand due to uncertainty created by global macroeconomic weakness. However, we feel this near-term decline presents an excellent opportunity for investors to own a company that is well positioned for future growth.

As the dominant supplier of routers, switches, and data center products, CSCO maintains a strong core business as a networking vendor. In the meantime, CSCO has shifted their focus towards innovation and becoming a more software-centric firm. 

In fact, the company aims to deliver approximately 50% of sales from software and services by 2020. This shift towards a recurring stream of revenue will help insulate CSCO from changes in the macroeconomic environment.

From a valuation standpoint, CSCO trades at a forward P/E of approximately 14.5 times which is right in line with long-term historical averages. While the communications equipment industry tends to trade at a discount to the broad Information Technology sector, we believe CSCO’s high quality balance sheet and 3% dividend yield justifies a much higher multiple.

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At Stack Financial Management, we analyze stocks using four key factors: Value, Growth, Quality, and Technical. Utilizing these four components, we create a proprietary score which ranks stocks on a relative basis. Cisco's ranks high due to its attractive value characteristics, strong quality score, and forward growth prospects.

While the Technology sector as a whole has been dominated by high growth internet-based names, CSCO represents a true conservative growth opportunity trading at a discount to its intrinsic value. (Disclosure: Clients and individuals associated with Stack Financial Management hold positions in and may, from time to time, make purchases or sales of this security.)

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