The following is a historical analysis of Cisco Systems NASDAQ: The analysis will use a system that I designed that is based on the ratio that Mr. Warren Buffett released to the public in , which he coined the term "Owner Earnings. In analyzing Cisco Systems from to the present, I will also prove using historical data why the markets are inefficient.

In that year most of us got our first look at an enterprising young CEO named John T. Chambers, who at the time began implementing a new game plan for his company. Using what he must have believed was an overvalued stock as currency, he began buying out his competition. Therefore using Cisco Systems overvalued stock certificates as currency, Mr.

Chambers went on a huge shopping spree and bought 62 companies from Here is the list of what he bought: This was during the initial craze of the dot com boom and companies like Microsoft NASDAQ: MSFT , Intel NASDAQ: INTC and General Electric NYSE: GE had their stock prices go to insane heights.

The CEO's who ran those companies all looked like geniuses that could not lose. This created a serious problem on Main Street as Cisco Systems now had to incorporate 62 different corporate cultures and tens of thousand of new employees into one new entity. So much for the efficient market theory! From there it went down If you look at Cisco Systems' stock price today a full decade later , the stock is still trading at around the same price as it was in Why is this so?

Well the answer is an easy one. It has taken Mr. Chambers and his team that long to bring the business on Main Street up to equal its Wall Street price, which was so mis-priced by the inefficient market in that it took some 12 years for things to balance out even after a The same thing happened with Microsoft and I proved this when I wrote an article earlier this month called "Why Microsoft Has Been Dead Money since , and Why That May Soon Change".

Cisco Systems' story is almost exactly the same as Microsoft's and that's why the stock has been dead money since I created that ratio in order to replace book value per share in my work.

What it does is cumulatively add all previous years of owner earnings per share together and then come out with a final dollar figure that you can compare to its stock price. A company that trades at or below its COE is one that is very oversold.

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COE is more powerful than book value per share because with book value one can never really know what the assets on the balance sheet are really worth. John Paulson and Bruce Berkowitz found that out last year when they loaded up on financials.

COE, on the other hand, adds up all the owner earnings that a company made over its history. I have data on COE going back to , but because this information is not readily available and even took me years to gather, I have decided not to include it as part of the system I am using to analyze stocks here at Seeking Alpha.

As you can see from the table above, Mr. Chambers has done an amazing job running Cisco Systems all these years and it's not his fault that the markets are inefficient and gave his shareholders a wild roller coaster ride. In the end, he basically bought 62 companies by simply exchanging an overvalued number of stock certificates for real businesses on Main Street.

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If I had been in his shoes, I would have done the same thing as it was just smart business to do so. It must have been hell getting all those corporate cultures to work together, while at the same time having Wall Street Analysts breathing down your neck every step of the way quarter by quarter.

It took him more than a decade to do so but he did it successfully; the company is now a lean and mean machine. As an added treat, here are the current owner earnings results for Cisco Systems and its industry using my system: Once there, it will then score a "1" and achieve a total score of "3" on my system.

Its cost controls are excellent and as I have proved above, Cisco's CEO is excellent as well.

Just like Apple NASDAQ: AAPL , Cisco Systems management is just sitting on way too much cash. I believe after the rating agencies downgrade Europe and the markets correct, that we may just see some kind of special dividends from Cisco Systems. Chambers should be proud of. I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. Please note, investments involve risk and unless otherwise stated, are not guaranteed.

Past performance cannot be used as an indicator to determine future results. Strategies mentioned may not be suitable for everyone. The information contained in this article represents the opinions of Peter "Mycroft" Psaras, and should not be construed as personalized investment advice. Before acting on any information mentioned, it is recommended to seek advice from a qualified tax or investment adviser to determine whether it is suitable for your specific situation. Long Ideas Short Ideas Cramer's Picks IPOs Quick Picks Sectors Editor's Picks.

A Historical Analysis Of Cisco Systems Using Buffett's Favorite Ratio Jan. Click to enlarge This was during the initial craze of the dot com boom and companies like Microsoft NASDAQ: Want to share your opinion on this article?

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