Network Stocks: 4 to Buy, 1 to Sell


With what appears to be a recent uptick in corporate earnings, I’m starting to suspect that not only are enterprise IT expenditures starting to return, but overall capital re-investments may continue to be better than previously anticipated.

It stands to reason that as corporations strive to grow, enterprises must scale accordingly — adding increased pressure on existing infrastructures to support increased network demand.

For this reason (among others), I think it is prudent for investors to start positioning themselves for a prolonged recovery in the tech sector, particularly the networking companies such as routing and switching giants Cisco Systems and Hewlett-Packard.

While these two might be in a better position from the rest of the group, there are also plenty of growth opportunities in F5 Networks and Brocade Communications Systems, which can spell potential hazards for Juniper Networks.

Leading off, it’s getting progressively more difficult not to like Cisco’s current value. As enamored as I might be for the overall sector, the fact of the matter is, there is Cisco and then there is everyone else. This will not change.

There is no other company that dominates corporate backbones in the manner of Cisco gear. Not only does Cisco currently power over half the Internet, but it is yet on the verge of robust growth. Nonetheless, investors continue to ignore the good — particularly from the standpoint of earnings.

In its fiscal fourth quarter, Cisco earned of $1.9 billion, or 36 cents per share — representing an increase of 56 percent from the same period of a year ago. The better-than-expected results were largely attributable to growth in North America, in particular the U.S. as sales grew 7 percent. Yet, it gets beaten up on Wall Street for not providing growth in sufficient quantities.

What’s more, this was the company’s sixth consecutive quarter where it has logged a beat on both top and bottom lines. With the stock now trading at just under $20 per share and a modest price-to-earnings ratio (P/E) of 12, value investors would be wise to jump on Cisco as there may not be a better entry point.

Interestingly, as with Cisco, rival Hewlett-Packard suffers from much of the same lack of growth expectations. But investors need to ask themselves, if not now, when?

Though HP gets chronically punished for being in a leader of a dying PC industry, the punishment grows solely for the fact that it is not Apple. But it doesn't have to be. The company is working hard to discover ways it can be the best HP possible, a model that is more realistic and reflective of what the company already does well.

With the stock trading at $18 with a forward P/E of 4, the market seems to think that HP will never be able to recover from past mistakes. Then again, the market also expected very little from Apple until it reinvented itself and unveiled the iPod. HP, whose slogan is “invent” must figure out a way to do just that. But until then, the shares look very cheap and one has to wonder, since there is very little risk at these levels, the potential reward more than trumps any possible downside.

Another stock within the sector that I like a lot is Brocade . There is a lot to like with the company’s business and, in particular, its management who consistently shows that its main objectives (among other things) include broadening the company and lessening dependency on its storage business.

Brocade’s most recent earnings report not only showed that margins are trending in the right direction, but the company continues to be underestimated when it comes to discussing its preparation for the cloud.

To that end, Brocade has taken a slightly different approach toward organization and deployment. It seems the company understands that networks must be cloud-optimized at every critical point because companies will define not only the application performance but, more importantly, the end-user experience. So far that strategy has been working perfectly — perhaps too perfect as it has now drawn the attention of several rivals.

From an investment standpoint, the stock may not provide the type of premium potential that Cisco and HP may present, but there is still a lot to like. In fact, I still suspect Brocade will be the target of a possible acquisition at some point in the next year six to 12 months. My candidate remains Cisco. With its cloud and networking strategies in alignment, a Brocade acquisition presents excellent synergies, too many to overlook.

This leads us to F5 , a company that consistently appears to have its act together. Within the sector its stock is by far the most expensive when looking at valuation and its P/E ratio. As high as expectations continue to be, F5 has not given investors any reason to think it will not be able to grow into its valuation. This sentiment is also the case for investor belief that the opportunities offered by the cloud can indeed be seized. For F5, its belief is that cloud computing is essentially an exercise in infrastructure integration.

The company’s “F5 application and control planes” allow corporations to extend existing data center control to cloud architectures while consistently enforcing policies that ensure the security, performance as well as reliability of applications and systems.

What’s more, the company understands the type of solutions needed to not only eliminate human error, but also minimize management overhead.

Clearly, management knows what it is doing, current investors remain positive and analysts are growing more confident each quarter. Nonetheless, at $96 per share, the stock is down 30 percent over the past five months after reaching a high of $139. Investors who are willing to take a risk here may not be disappointed if holding for 12 to 24 months. By then the stock will have recovered its ground and then some.

The only “sell” recommendation on our list is Juniper . But that has not always been the case. The company has long been at the center of the debate as to which is better when compared to Cisco. Cisco remains the clear-cut leader as questions regarding Juniper’s overall health remain an issue.

Though the company did a decent job of dispelling these concerns by logging a beat in its second-quarter earnings report, Juniper’s adjusted net income is down 50 percent from the previous year. What’s more, the company disappointed analysts with poor guidance for the third quarter, citing near-term macro uncertainty.

As great as its product portfolio can potentially be, its challenge continues to be trying to find new ways to grow and create the sort of momentum that inspires tech investors to believe.

With increased competition, Juniper may find it progressively more difficult to find growth opportunities. This is a company that is heading in the opposite direction of peers and it would be wise to stay away from the stock until management can show it has a firm grasp of what it is hurting the company, and that it knows how to fix it.

—By Contributor Richard Saintvilus

Additional News: HP Expands Job Cuts by 2,000

Additional Views: Buy Cisco’s Dividend: Pro


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At the time of publication, Richard Saintvilus was long on Apple shares and held no position in any of the other stocks mentioned.