Undervalued stock makes Cisco Systems a smart buy

Looking for a good performer for your portfolio? Consider Cisco Systems (Nasdaq: CSCO).

Some think the company is in major trouble. Amid a more competitive landscape, gross profit margins have fallen, as has net income. In switches and routers, generating much of Cisco’s revenues, the company has been losing ground. Cisco has also been too slow to take advantage of other key areas of networking growth such as WAN optimization.

Yes, Cisco took its eye off the ball, delving into consumer markets and letting small upstarts get in the game. But it seems to be acknowledging its mistakes.

In its recent quarterly report, management asserted that it will “divest or exit underperforming operations” – and it has killed its Flip video recorder. Management vowed to refocus on core businesses: routing, switching and other services (cloud, virtualization and mobility solutions).

Meanwhile, the market is pricing Cisco as if it will undergo a total catastrophe. Cisco is still the gold standard and the go-to when it comes to overall enterprise solutions, enjoying massive advantages of scale. And its stock price seems cheap, with a recent price-to-earnings (P/E) ratio near 12 vs. a five-year average of 20. Cisco churns out gobs of free cash flow every year and offers a 1.6 percent dividend yield, as well. (Motley Fool newsletters have recommended buying options and shares of Cisco Systems.)

Ask the Fool

Q: How can I research the risks facing various companies? – R.M., Woodbridge, Va.

A: Companies disclose many risks on their own. Publicly traded American enterprises are required to file annual “10-K” reports with the Securities and Exchange Commission (SEC). Accessible at websites such as finance.yahoo.com and from the companies themselves, they detail a company’s financial and operational progress and also address risks facing the business.

For example, General Electric’s recent 10-K cites many risk factors the company faces: “Significant raw material shortages, supplier capacity constraints, supplier production disruptions, supplier quality issues or price increases could increase our operating costs and adversely impact the competitive positions of our products.”

Other risks include global political or economic volatility that could disrupt business, computer crimes that could threaten company systems, deteriorating conditions in financial markets that could hurt GE Capital, and increases in the cost of pension and health care benefits that could reduce company profitability.

Many companies cite increased regulation worldwide as a risk, which increases their cost of doing business. In developing nations, the lack of relevant laws or the presence of new and untested laws can also be an issue.

Don’t let the risks listed in 10-Ks make you want to avoid investing in any company at all. Every company faces risks. They shouldn’t scare you away, but do consider them. Also, know that companies can manage many of their risks, such as via insurance, or by locking in currency rates or commodity prices via futures contracts.

Q: Where can I learn about insurance? – T.M., Knoxville, Tenn.

A: Check out “Insurance for Dummies” by Jack Hungelmann (For Dummies, $22). Or click over to www.fool.com/insurancecenter, www.bankrate.com, www.iii.org and www.insureuonline.org.

My dumbest investment

I could have lost my shirt, twice. I love my brokerage’s online platform. Type in a ticker symbol, and out spews any information you want: charts, news, analysis and so on. But when you go to place an order and you enter the ticker, you get lots of info, but not the company name.

This shouldn’t be a problem, but twice now, over some seven years, I’ve entered my order and later found out I had transposed letters in ticker symbols. The first time, I found out the day after the order filled, so it cost me $14 in commissions to buy and sell the stock over two days. The other time, I only noticed because the stock suddenly surged 14 percent, and I looked into what my boring old manufacturer could have done to wow the market. Oops. – D.M., Lincoln, Neb.

The Fool responds: This lesson seems trivial, but it’s important. Some companies’ tickers aren’t what you might expect: Intel, for example, is INTC, not INTL. Most brokerages’ trading systems will show you the company name when you enter the ticker, so double-check.