The Money Tree

Safely Generating Income in Retirement

New Position – CSCO

Posted by mounddweller on June 28, 2012

Fellow Traders,

Earlier today I entered a new naked put position in Cisco (CSCO).  Specifically, I sold to open (STO) 5 AUG $15 puts at $0.33.  Net of commissions I will earn a 2.054% ROIC with 53 days to expiration.  So, basically just over 1%/month.  My down-side protection is 7.7% and my net cost if I have CSCO put to me will be $14.67/share.

I want to own CSCO at $15 or less.  Thus, my plan is to continue selling these puts until assigned.  However, given the current market volatility I chose not to initiate a full position in one trade.  I would like to eventually own 1000-1500 shares of CSCO so by just initially selling 5 puts I leave myself with ‘wiggle room’ should the shares continue to decline.  If the market continues to decline by AUG expiration and my CSCO puts are ITM I may choose to roll them down and out and sell another new round of 5 puts at the $14 strike.

Why do I like CSCO at this price?  Well primarily because it is significantly under-valued.  It trades at about 8.5x forward earnings and has over $6/share in net cash on its balance sheet.  That means that net of cash it is trading at 5.2x forward earnings!  That’s dirt cheap for a company that is still growing, and has strong operating margins.  To top it all off, last year it began paying a small dividend which now equates to an annual yield of 1.9%.  The dividend payout ratio is a miniscule 19% so there is plenty of room for that to grow rapidly in the coming years, which is exactly what I expect it to do.

Below is a 5-year chart for CSCO.  You can easily see this is a very good entry point for establishing a long-term position.

Regards,

Troy

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