Wide-Moat Tech Stock with Hefty Expected Returns
Plus, another new 5-star name.
Plus, another new 5-star name.
Following is a sampling of stocks that recently jumped to 5 stars. By way of background, we award a stock 5 stars when it trades at a suitably large discount--i.e., a margin of safety--to our fair value estimate. Thus, when a stock hits 5-star territory, we consider it an especially compelling value.
To get a complete tally of stocks that have recently jumped to 5 stars--as well as our full list of 5-star stocks--including our consider buying and selling prices, risk ratings, and moat ratings--simply take Morningstar Premium Membership for a test spin. Click here to sign up for a free trial.
Cisco Systems
Moat: Wide | Risk: Avg | Price/Fair Value Ratio*: 0.76 | Three-Year Expected Annual Return*: 18.6%
What It Does: Cisco Systems (CSCO) is the world's leading supplier of data networking equipment and software. Its products include routers, switches, access equipment, and network-management software that allow data communication among dispersed computer networks. The firm has also entered newer markets, such as home networking, security devices, storage technology, and Internet-based telephony. Services account for about 16% of sales.
What Gives It an Edge: Despite an already-dominant position in the networking space, Cisco never stops reinventing itself. This continuous zeal for innovation has allowed the company to become the number one or number two player in virtually all product categories where it participates. The ability of Cisco's customers to capitalize on rapid Internet application growth with seamless interoperability from the core to the edge of the network has led us to confer a wide-moat rating on Cisco--it's one of the few wide-moat networking stocks in Morningstar's coverage universe. According to Morningstar analyst Jordan Zounis, the company's wide-moat status will be further solidified going forward, as Cisco looks to become one of the dominant equipment and application providers for video--the Internet's voracious bandwidth hog.
What the Risks Are: Equipment demand is volatile and difficult to forecast. More recently, industry sales in more mature markets, such as Japan and the United States, have been muted with the current wave of telecom carrier consolidation crimping growth prospects. Finally, new competitors in low-cost manufacturing regions, such as China, could spur increased discounting to maintain sales.
What the Market Is Missing: Although the company put up record numbers on last quarter's earnings call, Cisco shares have fallen recently due to comments surrounding weakness in the firm's U.S. financial vertical. While Zounis concedes that the financial sector is not an insignificant area for Cisco (at 8% of overall sales), he reminds investors that several of Cisco's emerging-markets operations are growing well north of 20% annually and should continue to see robust growth going forward. Much of this emerging-markets growth relates to green field infrastructure spending that should continue exclusive of any weakness in domestic markets.
Another New 5-Star Tech Stock
QLogic
* Price/fair value ratios and expected returns calculated using fair value estimates, closing prices, and cost of equity estimates as of Friday, Nov. 30, 2007.
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