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Technology Stocks : Cisco Systems, Inc. (CSCO) -- Ignore unavailable to you. Want to Upgrade?

To: sepku who wrote (12737)	2/28/1998 12:17:00 AM
From: Gerald Walls	Read Replies (1) \| Respond to of 77400

Providing CSCO retains its dominance for the most part over the next several years, I believe the maximum benefits of the YEELDS (your best-case scenario) would likely be the rewards of this vehicle. Of course, it's probably more likely CSCO common stock performs well in excess of 20% annual returns on its own. Apart from the 5% dividend, I'm not sure I see any advantages over purchasing common stock...only limits on potential. You know, I bet you could come up with a synthetic security involving CSCO stock and options that would give you the exact same risk and payoff characteristics or better. You're still exposed to the downside risk while your upside potential is limited in exchange for a cash stream. Just like a covered call scenario.

To: sepku who wrote (12737)	2/28/1998 10:57:00 AM
From: The Phoenix	Respond to of 77400

Style, Well, glad I can help explain, but remember this is just my understanding. You will probably want to discuss this with your broker to determine if YEELDS are right for you. Give your age - 20's (my only basis for this assumption is your earlier comments about the armed forces, pardon me if I'm way out of line) YEELDS are probably not the vehicle for you. The younger you are the more aggressive your trading should be - right? At first glance I mistakenly thought the potential returns were 150% of capital invested after 3 years -- OOPS. Nope, that's marketing and statistics for you. Best possible return is 66.5% which includes the dividend payouts. You'll have to be a shareholder of record on the day of dividends so no doubt YCS will trade higher than common as it approaches the FIRST payout. Note in the short term (I stress the point SHORT TERM) that many will like the YEELD better than common, so it's very likely it will trade a few dollars higher - as I said until the first payout. I think after that it starts to look a lot less attractive. I'll make these point further down. BTW: I agree with your assessment that CISCO should do well over the next 5 years. I've said myself many times that I believe CSCO will be at 100 by end of this year. If I'm right the YEELD will be topped out by then and be basically worthless - except for the future dividend payouts. (Read - trading lower than common) Thanks for reminding me that YEELDS are transferable.. Heck, why else would they be offered on the exchange. That was a dopey question on my part. So now basically it comes down to the YEELDS being very similar to preferred stock -- there being a dividend payed. So what in the world is the incentive to trade these YEELDS rather than CSCO common stock, apart from the dividend (incentive to hold long-term)? Exercising the YEELDS at maturity is a disadvantage considering the real profit potential is in the appreciation of YCS itself, and selling before expiration, thereby avoiding the ceiling. It's clear that YCS will trade in tandem with CSCO common, since the two are linked. If you purchased YCS @ 65, and sold at 113 in 2 years, you would collect 75% in appreciation PLUS the 5% annual dividends. Ok, I'm totally at a loss here...I'm obviously not catching on to something regarding the YEELDS. On the contrary Style, I think you've summed it up well, with one exception. YCS will NEVER trade much higher than about 105 to 108 depending on how quickly CSCO hits 100. At maturity the underwriter will only pay out a maximum of 100.75 (66.5 x 151.5%) or less if Cisco is trading lower than 100.75. So if Cisco goes to: - 80, YCS will trade at 80+the value of the dividend payouts. - 100, YCS will trade at 100+the value of the dividend payouts. - 120, YCS will trade at 100+the value of the dividend payouts. - 150, YCS will trade at 100+the value of the dividend payouts. Now, the fewer payouts that are left, the less this value, and therefore the lower the premium. Also note another dynamic here. If Cisco hits 100 (or approaches it) sooner rather than later the YEELD will trade below common (I believe) because then the value is becomes the dividend - not the common. That is why hold a YEELD that has a ceiling payment on a stock already trading higher than the ceiling? There is little. Owners will find this a tough sell and prices will likely bleed down to below common (note the seller has already received dividend payments so they are still getting common stock valuations). Like I said, best case scenario if your a buyer of YEELDS is Cisco moves up slow and methodically between now and 2/26/01 and end the period at somewhere between 100 and 105/108. Given that you can trade YEELDS if Cisco doesn't make it to 100 you can hold the YEELD for the three years collect your 5% payments and dump them before maturity. My guess is if this happens YEELDS will again be trading at slight lower than common. Owners are better off due to dividend payments and can absorb a price slightly below common. The last case is Cisco rockets, you collect your payments and as you get to maturity you want to dump the YEELDS, but who's gonna buy em if all the payments are made already? The YEELD will pay the holder 100.75 at maturity but Cisco is trading at perhaps 120? In this case again the YEELD will, without question be trading below common. Gary