Did Wall Street Totally Overreact on Cisco?

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Mark Hulbert

Nov. 12, 2010, 12:01 a.m. EST

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First Take "º

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By Mark Hulbert, MarketWatch

CHAPEL HILL, N.C. (MarketWatch) "” Closing the barn door after the horses have left?

It certainly looks that way.

/quotes/comstock/15*!csco/quotes/nls/csco CSCO 20.52, -3.97, -16.21%

Cisco reported after the close on Wednesday that it expects sales to grow far more slowly than Wall Street analysts previously had been anticipating. Not surprisingly, its stock plunged during after-hours trading Wednesday night.

How did many Wall Street analysts react the next day? By downgrading their rating of Cisco Systems Inc. /quotes/comstock/15*!csco/quotes/nls/csco (CSCO 20.52, -3.97, -16.21%)  from "buy" to "hold." (Read full story.)

Their behavior brought to mind the classic indictment of Wall Street contained in Peter Lynch's classic book "One Up On Wall Street." Lynch, of course, was the fabulously successful manager of the Fidelity Magellan mutual fund /quotes/comstock/10r!fmagx (FMAGX 69.29, -0.26, -0.37%)   between 1977 and 1990, during which the fund was far and away the top performing domestic equity fund in the U.S.

In his book, Lynch accused Wall Street analysts of having a herd instinct: "Under the current system, a stock isn't truly attractive [to an institutional investor] until a number of large institutions have recognized its suitability and an equal number of respected Wall Street analysts have put it on the recommended list. With so many people waiting for others to make the first move, it's amazing that anything gets bought."

John Buckingham is not joining this herd. Buckingham, of course, is editor of the Prudent Speculator advisory service, which is in first place for performance over the last 15 years among the 69 services tracked over this period by the Hulbert Financial Digest. It was only last Monday that he had bought a position in Cisco in one of his model portfolios.

In an interview Thursday night after the close, Buckingham said that he is maintaining his "buy" rating on the Cisco's stock. It's not that he considers the company's revenue warning to be good news in and of itself, of course. But he thinks that the stock market's reaction to that warning was overblown.

For example, as a result of Cisco's lower growth prospects, at least for the intermediate term, Buckingham has reduced his target price for the stock by 10%. The stock market, in contrast, has reduced the stock's current price by more than 16%.

Relative to its potential, therefore, it's possible to view Cisco's stock as being more undervalued now than earlier this week.

Buckingham emphasized, however, that he nevertheless is not choosing to add any more shares of Cisco to his portfolio above and beyond the position he bought earlier this week. But if you don't already own Cisco stock, he said you definitely should consider it.

Buckingham's approach is a good illustration of the contrarian thinking that is the hallmark of value investing. To quote the famous saying from Nathan Rothschild: The time to buy is when the blood is running in the streets.

And Cisco's blood was definitely running down Wall Street on Thursday.

Mark Hulbert is the founder of Hulbert Financial Digest in Annandale, Va. He has been tracking the advice of more than 160 financial newsletters since 1980.

Add Comment › · Recommend · Post: Alert Email Print More Mark Hulbert Nov. 10, 2010 Year-end strength might begin in November Nov. 9, 2010 Contrarian take on stock market's prospects Nov. 4, 2010 Contrarian analysis of new bull-market high Nov. 2, 2010 A retrospective on the Greek debt crisis Nov. 1, 2010 November by the numbers Explore related topics Computer Hardware Computer Software Cisco Systems Inc Fidelity Magellan Fund Comments Screener About Mark Hulbert

Mark Hulbert is editor of the Hulbert Financial Digest, which since 1980 has been tracking the performance of hundreds of investment advisors. The HFD became a service of MarketWatch in April 2002. In addition to being a Senior Columnist for MarketWatch, Hulbert writes a monthly column for Barron's.com and a column on investment strategies for the Journal of the American Association of Individual Investors. A frequent guest on television and radio shows, you may have seen Hulbert on CNBC, Wall Street Week, or ABC's World News This Morning. Most recently, Dow Jones and MarketWatch launched a new weekly newsletter based on Hulbert's research, entitled Hulbert on Markets: What's Working Now.

First Take Wall Street will give Iger a pass

Walt Disney's earnings report interrupts Iger's string of victories

4:59 p.m. Nov. 11, 2010

Most Popular Most readMost commented Gold futures slump as much as $21 Shanghai Composite tumbles 5.2% on rate hike fears Did the market overreact with Cisco? Cisco's bounce off support should be limited "?Big progress' in G-20 talks: Korean president US Stocks Open Significantly Lower, DJIA Down 105, Cisco Weighs U.S. futures drop as Cisco brings out the bears Austerity at our doors. To arms. To arms. Gold futures slump as much as $21 Don't judge a 'book' by its cover Reader Response »

The same thing seems to have happened last quarter when their earnings met expectations rather than beating them in this quarter. Although the reaction of this trend wasn't previously as extreme or abrupt, this stock seems to have a strong support level around $20, this would certainly indicate the likelihood that this stock is probably going to retrace back to the upside in the near future. I..."

- slvrserfr | 12:40 a.m. Today12:40 a.m. Nov. 12, 2010

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"Mark Hulbert: Did the market overreact with Cisco? http://on.mktw.net/atUtsY" 12:16 a.m. EST, Nov. 12, 2010 from MktwHulbert

"Mark Hulbert: Year-end strength might begin in November http://on.mktw.net/b02w0v" 12:36 a.m. EST, Nov. 10, 2010 from MktwHulbert

"Mark Hulbert: Contrarian take on stock market's prospects http://on.mktw.net/aJB3Ce" 3:09 a.m. EST, Nov. 9, 2010 from MktwHulbert

"Mark Hulbert: Contrarian analysis of new bull-market high http://on.mktw.net/8Z9hGJ" 11:28 p.m. EDT, Nov. 4, 2010 from MktwHulbert

"Mark Hulbert: A retrospective on the Greek debt crisis http://on.mktw.net/b0jriR" 11:27 p.m. EDT, Nov. 2, 2010 from MktwHulbert

/quotes/comstock/15*!csco/quotes/nls/csco Cisco Systems Inc (CSCO) /marketstate/country/US The market is open5:29:51 am The market is closed5:29:51 am $ 20.52 Change -3.97 -16.21% Volume 6,800 Real time quotes var embeddedchart1623182370Chart = new EmbeddedChart('#embeddedchart1623182370', NormalChartStyleNoDecimals, 190, 90, '1dy', '5mi', null, null, null, 'US:CSCO'); jQuery.data($('#embeddedchart1623182370').get(0), 'embeddedchart', embeddedchart1623182370Chart); Add to portfolio CSCO Find a Broker Create alert /quotes/comstock/10r!fmagx Fidelity Magellan Fund (FMAGX) /marketstate/country/US The market is open5:29:51 am The market is closed5:29:51 am $ 69.29 Change -0.26 -0.37% Volume 0.00 Real time quotes var embeddedchart1086392795Chart = new EmbeddedChart('#embeddedchart1086392795', NormalChartStyleNoDecimals, 190, 90, '6mo', '1dy', null, null, null, 'US:FMAGX'); jQuery.data($('#embeddedchart1086392795').get(0), 'embeddedchart', embeddedchart1086392795Chart); Add to portfolio FMAGX Find a Broker Create alert Featured Commentary » Next: Robert Powell

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Cisco reported after the close on Wednesday that it expects sales to grow far more slowly than Wall Street analysts previously had been anticipating. Not surprisingly, its stock plunged during after-hours trading Wednesday night.

How did many Wall Street analysts react the next day? By downgrading their rating of Cisco Systems Inc. /quotes/comstock/15*!csco/quotes/nls/csco (CSCO 20.52, -3.97, -16.21%)  from "buy" to "hold." (Read full story.)

Their behavior brought to mind the classic indictment of Wall Street contained in Peter Lynch's classic book "One Up On Wall Street." Lynch, of course, was the fabulously successful manager of the Fidelity Magellan mutual fund /quotes/comstock/10r!fmagx (FMAGX 69.29, -0.26, -0.37%)   between 1977 and 1990, during which the fund was far and away the top performing domestic equity fund in the U.S.

In his book, Lynch accused Wall Street analysts of having a herd instinct: "Under the current system, a stock isn't truly attractive [to an institutional investor] until a number of large institutions have recognized its suitability and an equal number of respected Wall Street analysts have put it on the recommended list. With so many people waiting for others to make the first move, it's amazing that anything gets bought."

John Buckingham is not joining this herd. Buckingham, of course, is editor of the Prudent Speculator advisory service, which is in first place for performance over the last 15 years among the 69 services tracked over this period by the Hulbert Financial Digest. It was only last Monday that he had bought a position in Cisco in one of his model portfolios.

In an interview Thursday night after the close, Buckingham said that he is maintaining his "buy" rating on the Cisco's stock. It's not that he considers the company's revenue warning to be good news in and of itself, of course. But he thinks that the stock market's reaction to that warning was overblown.

For example, as a result of Cisco's lower growth prospects, at least for the intermediate term, Buckingham has reduced his target price for the stock by 10%. The stock market, in contrast, has reduced the stock's current price by more than 16%.

Relative to its potential, therefore, it's possible to view Cisco's stock as being more undervalued now than earlier this week.

Buckingham emphasized, however, that he nevertheless is not choosing to add any more shares of Cisco to his portfolio above and beyond the position he bought earlier this week. But if you don't already own Cisco stock, he said you definitely should consider it.

Buckingham's approach is a good illustration of the contrarian thinking that is the hallmark of value investing. To quote the famous saying from Nathan Rothschild: The time to buy is when the blood is running in the streets.

And Cisco's blood was definitely running down Wall Street on Thursday.

Mark Hulbert is the founder of Hulbert Financial Digest in Annandale, Va. He has been tracking the advice of more than 160 financial newsletters since 1980.

Mark Hulbert is editor of the Hulbert Financial Digest, which since 1980 has been tracking the performance of hundreds of investment advisors. The HFD became a service of MarketWatch in April 2002. In addition to being a Senior Columnist for MarketWatch, Hulbert writes a monthly column for Barron's.com and a column on investment strategies for the Journal of the American Association of Individual Investors. A frequent guest on television and radio shows, you may have seen Hulbert on CNBC, Wall Street Week, or ABC's World News This Morning. Most recently, Dow Jones and MarketWatch launched a new weekly newsletter based on Hulbert's research, entitled Hulbert on Markets: What's Working Now.

Walt Disney's earnings report interrupts Iger's string of victories

4:59 p.m. Nov. 11, 2010

The same thing seems to have happened last quarter when their earnings met expectations rather than beating them in this quarter. Although the reaction of this trend wasn't previously as extreme or abrupt, this stock seems to have a strong support level around $20, this would certainly indicate the likelihood that this stock is probably going to retrace back to the upside in the near future. I..."

- slvrserfr | 12:40 a.m. Today12:40 a.m. Nov. 12, 2010

"Mark Hulbert: Did the market overreact with Cisco? http://on.mktw.net/atUtsY" 12:16 a.m. EST, Nov. 12, 2010 from MktwHulbert

"Mark Hulbert: Year-end strength might begin in November http://on.mktw.net/b02w0v" 12:36 a.m. EST, Nov. 10, 2010 from MktwHulbert

"Mark Hulbert: Contrarian take on stock market's prospects http://on.mktw.net/aJB3Ce" 3:09 a.m. EST, Nov. 9, 2010 from MktwHulbert

"Mark Hulbert: Contrarian analysis of new bull-market high http://on.mktw.net/8Z9hGJ" 11:28 p.m. EDT, Nov. 4, 2010 from MktwHulbert

"Mark Hulbert: A retrospective on the Greek debt crisis http://on.mktw.net/b0jriR" 11:27 p.m. EDT, Nov. 2, 2010 from MktwHulbert

Robert Powell

On Retirement

Cut Social Security benefits? Yes

Mark Hulbert

On the Markets

Cisco's blood is running in the streets

Jon Friedman

Media Web

Piers Morgan: CNN's new anti-Larry King

Tomi Kilgore

Cisco's investors know "?air pockets' well

Nick Godt

Market Medics

Mad gold pitch is a sign of the times

Rex Nutting

Read Full Article »