Cisco, Apple and Oracle: Strong Cash Positions Indicate Safe Long-Term Returns

2020-04-03

Introduction

During this horrible crisis, I feel very fortunate that “social distancing” is very practical and easy for my family and me.  We are blessed to live in the country on a 20-acre estate with a private lake and a backyard that is steaming with wildlife.  In this time of isolation, we can sit on our screened porch and immerse ourselves in nature as we are entertained by wildlife of all kinds.

During this time a year we are seeing and being entertained by mama Wood Ducks and Mallards raising their newborn babies, and squirrels frolicking in the trees.  We also see otters and cranes of all sorts fishing in the lake.  And occasionally, we will spot deer, raccoons, possums, the occasional coyote and if we are really lucky, we might spot a bobcat drinking from the banks of our lake.  Thankfully, this is helping keep all of us sane as we dutifully follow the federal and our state guidelines by isolating ourselves in order to keep our family and our neighbors safe. 

In addition to the wildlife described above, my family and I also enjoy sharing our home with 4 dogs and 2 cats.  The reason I am sharing all this is because my current investment strategy was inspired by watching my black cat “Blackjack” hunting squirrels in our backyard.  Jack’s squirrel hunting strategy got me to thinking that his hunting tactics are the same that I should use as I attempt to hunt for good stocks during this horrible crisis.

What inspired me most was the incredible amount of patience that Jack displayed.  He simply lay motionless as squirrels frolicked around the base of our trees picking up acorns.  He was in no hurry because he was smart enough to wait patiently until his prey was most vulnerable and ideally susceptible to being pounced upon.  In other words, he never rushed things because his instincts and experience taught him that his best chance for success was to strike when the opportunity best presented itself.  Fortunately for the squirrels, the only thing that saved them was my sweet wife who would chase the squirrels away thus spoiling Jack’s efforts.

Nevertheless, as I sat there watching Jack stalking his prey, it occurred to me that his strategies would appropriately apply to my stock picking needs during this time of crisis.  Therefore, if I were to describe my current investing posture, I would say that it is like the hunting behavior of my cat Jack.  Just as he saw squirrels everywhere, I see attractively valued opportunities everywhere in this aberrant market.  However, Jack taught me that I don’t need to be in any big hurry because just like the abundance of squirrels in my backyard, the opportunities to invest in great companies at great value is everywhere.

On the other hand, just like Jack’s efforts were spoiled by my wife, I must be careful that the market doesn’t chase all these bargains away.  In other words, I must be aware of the risk that the market could possibly be forward-looking and begin rising before the virus is contained or before the economy begins to improve.  Nevertheless, if a few of them do happen to get away, it is very likely that there will still be plenty available.

I’m Sitting, but I’m Not Frozen

just like Jack, I am sitting but I am not frozen.  Even though Jack sits motionless during his hunt, every fiber of his being is prepared to leap.  That is precisely how I feel in today’s current market environment.  I do see it as a long-term buying opportunity, however, what I don’t see is the precise timing or ability to pick the very bottom.  On the other hand, common sense tells me that many of the best-of-breed stocks are on sale today, and therefore attractive as long-term investments.

The primary risk that I see is most likely to only last over the next short to intermediate periods of time.  But unfortunately, I don’t think it’s possible to forecast the exact duration.  Hopefully, it will be shorter rather than longer.  In other words, maybe a few months, a few quarters or perhaps a year or less.  Of course, it is even possible that it could be longer than that, but I doubt it.

So, what is an investor to do?  For me personally, I’m acting like Santa Claus -I’m making my list and checking it twice.  My rational mind says that quality is supreme in this environment, and in that same regard cash is king.  Therefore, I am actively conducting research on the highest quality companies that I can identify and find.  Then I am building lists of high-quality stocks that fit various investment objectives.  For example, I have put together a list of dividend growth stocks as well as a list of pure growth stocks that I believe will not only prevail during this crisis, but perhaps even prosper.

FAST Graphs analyze out loud video: 3 Stocks That Can Be Confidently Bought Today: Cisco (CSCO), Apple (AAPL) and Oracle (ORCL)

In future installments, I plan to cover additional high-quality stocks with strong cash positions and low to moderate debt that I believe will survive the crisis.  In this first installment I will be covering 3 tech stocks that I think are technically buyable today.  For disclosure, I currently have positions in Cisco with an average cost of $27 and Oracle with an average cost of $24 and I plan on adding to those positions soon.  Cisco is cast rich with low debt, and although Oracle does have high debt, they have the cash on the balance sheet to support it.  Simply stated, regardless of what happens over the intermediate term, I consider both of these stocks attractively valued currently.

Regarding Apple, I originally purchased it on September 2010, an average cost of $36 a share.  Primarily due to growth, it became one of my largest positions which I recently sold at $258 per share.  Although I did consider Apple overvalued at the time, that was not my primary motivation for selling it.  Instead, I sold Apple as a strategic move in order to raise cash by selling overvalued positions while holding on to those companies that I felt were undervalued.  I fully intend to repurchase Apple, assuming it comes back into alignment with what I consider fair value to be.  Specifically, I would be very motivated to buy Apple at $205 per share or better.  Therefore, although I consider Apple fully valued to moderately overvalued, I do like the company a lot better today than I did at the beginning of the year.

I will be going over the fundamentals in the valuations in the video below:

Summary and Conclusions

Like most investors, I am grappling with finding the best and hopefully most profitable strategies to take advantage of the long-term opportunities in stocks that the market is currently delivering.  On the other hand, I am realistic enough with my thinking to recognize that it is very unlikely other than by chance that I can find and then implement the perfect investment strategy in this current crisis.  The problem is that there is simply too much uncertainty as to what is ultimately going to happen in our economy, and perhaps more importantly, how long it will last.

Therefore, I am and will be testing various strategies that might make sense considering the horrible mess we currently find ourselves in.  Logically, the flight to quality, if that can be defined correctly, seems to be one way of navigating the current situation.  With this first article, looking for quality, I focused on strong balance sheets, coupled with investment-grade credit ratings and with significant levels of cash.  Additionally, I focused on technology and should be capable of continuing to do business with minimal or moderate levels of interruption as a result of the crisis.

To summarize, I consider all 3 of these selections as great long-term opportunities that are well insulated.  However, only Cisco and Oracle are currently undervalued, and therefore, I believe could be safely purchased immediately.  That is not to say that they might not drop further, but it is to say that if you hold them long enough, their current values should deliver very rewarding long-term investments. 

Although I generally feel the same way about Apple, I am not as sanguine about its valuation and I have short-term concerns regarding the significant importance of China as a market.  For example, Zacks Investment Research summarizes it as follows:

“China is an important market for Apple, given the growing number of middle-class customers. However, the waning macroeconomic environment in China and the intensifying competition have dented shipment growth. Further, uncertainty over the final resolution of the U.S.-China trade war doesn’t bode well for Apple. Moreover, the supply-chain disruption caused by the coronavirus outbreak is expected to hurt iPhone’s demand and supply in China.”

Therefore, considering its moderately high valuation relative to its short to intermediate term growth potential and additional challenges similar to what I discussed above, like my cat Jack, I will be patiently watching for a better entry point.  If it comes I will pounce, if not, so be it.

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Disclosure:  Long CSCO and ORCL.

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