Chasing Value: Easy Money with Cisco

Cutting to the chase, there would be nothing wrong with buying the stock at its current level. The company has announced that it will soon be paying a dividend. Even with a modest 2011, I believe the chances of the stock being higher this time next year far outweigh it being lower, with its current P/E ratio, floating around a market beating 11.50, and a PEG ratio begging for attention at 0.98.

If that does not merit your attention, how about $40 billion in cash, or put another way, $7.22 per share of the current market value is cash! I actually think in addition to paying a dividend, they might consider a one-time distribution to shareholders as Microsoft (MSFT) did when it started paying a dividend. Actually from everything I read, a major acquisition is more likely.

In addition to the other notable metrics Cisco is producing a 15% return on equity (ROE), as well as a 15% return on invested capital (ROIC).

So here is where I see an easy 25% return using a strategy that has been working very well for me. For those readers familiar with options, (if you're a serious investor you should be), sell to open April 2011 puts at a strike price of $20.00, paying $1.75 a share, collected today. I believe this is a win-win opportunity. Come the third week in April, you will either make 25.57% ($1.75 / $18.25 x 12 months / 4.5 months) or you will own the stock at the break-even price of $18.25, about a dollar less than it is trading at currently and below its 52-week low.

If you believe there is value at today's price and you are buying, then that's even more reason to do the option because you will reduce your average per-share cost or collect a nice premium, which incidentally you will collect today and can use toward the purchase of the shares you might buy today.

Sheldon Liber is the CEO of a small private investment company and the principal for design and research at an architecture & planning firm. He writes the columns Chasing Value™ and Serious Money. Disclosure: He does not owns shares and/or options in CSCO or MSFT at the time of this story but is an active investor and that could change.