Nope. Sometimes stocks fall hard, in far less time than a year. And like a superball dropped from the balcony, the harder they fall, the higher they bounce. Today, we’ll look at a few equities that’ve suffered dramatic drops over the past week. With a little help from the 170,000 members of Motley Fool CAPS, we hope to find an opportunity or two for you:

Five super falls one superball:- Investing in some of the world’s greatest businesses turned out to be a really bad idea last week. China’s move to clamp down on inflation, and raise the cost of lending, did a real number on shares of solar power producer and historical cash-consumer Trina Solar. And it wasn’t alone. The ranks of 10% losers last week were chock-full of Chinese solar names, as Yingli Green Energy and Solarfun Power also shriveled under the heat of investor scrutiny. Nor did the damage end there. Speaking of conflagrations, Boeing investors wrinkled their collective noses and declared “Do you smell smoke?” Micron shareholders got burned on fears of plunging semiconductor prices, and Cisco got shellacked (for no good reason, if you ask me) after warning that its sales might slow in Q4. None of which, however, gives us a clue why the top-ranked stock on this week’s list took a hit.

The bull case for Ebix Inc.:- Ringing up 43% sales growth, and beating earnings estimates by a good $0.09, you might have thought Ebix was in for a good week but the truth was far from it. The up-and-coming insurance industry software supplier signed multiple new clients last quarter, brought in half-again as much cash flow in 2010 as it had by this time last year, and promised to double the size of its sales force to keep the growth coming and then got 14% whacked off its market cap for its trouble.

The incongruous result left CAPS member Speed03 wondering “what did Ebix do to deserve this punishment? I like this long term.” sodapops sees nothing wrong with Ebix’s “solid business plan which is likely to create growth for years to come.” And according to vetrisks, the company’s “high margins [make] this software developer likely to dominate insurance industry software product.”

So, why did the stock fall so hard? Will it make like a superball and bounce right back? It really depends on what numbers you look at. You see, with a P/E of 15, and consensus estimates projecting 10% long-term growth, Ebix actually looks a bit on the overvalued side. Toss in the observation that, with barely $43 million in free cash flow generated over the past 12 months, Ebix isn’t really as profitable as its GAAP “earnings” suggest, and the case for buying Ebix weakens still further.

Wait one cotton-pickin’ minute:- And yet, “10% growth?” Has anybody stopped to ask where Wall Street came up with that number? I mean, this is a company that grew its earnings at better than 65% per year over the last five years. It’s operating in an industry where the average company is expected to post better than 15% growth over the next five years yet somehow, perennial outperformer Ebix is going to suddenly slow down, underperform that average number, and grow at just 10%?

Call me a skeptic, call me a Fool, but that assumption looks just the tiniest bit conservative to me. Conservative like the estimates Wall Street has tossed out and that Ebix beat with a stick in each of the last four quarters.

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Of course, not all buys are equal. According to two decades of research from Dr. H. Nejat Seyhun compiled in his book Investment Intelligence from Insider Trading, buying is most predictive when it (a) comes from the CEO or other top-level executive, and (b) is performed in bulk. Seyhun found buys of between 10,000 and 100,000 shares to be most informative.

How do Rackspace’s managers measure up against Seyhun’s benchmarks over the past year? See for yourself: What we’re tracking here, and why Insider buying data can be confusing. Here, I’m concentrating only on buying and selling conducted in the open market. With most of these transactions, insiders control the timing. Other times they’re buying or selling under the purview of a 10b5-1 plan. Either way, personal holdings are being bought and sold. Those personal holdings matter the most; they’re the shares executives hold for investment, rather than compensation. Employee stock options are different; they’re compensatory in the purest sense. I’ve stripped out options-related buying and selling from the calculations you see above.

The Foolish view: bearish: Want to find a Rackspace skeptic? Go to Wall Street, turn three times, and spit. Chances are you’ll hit an analyst who thinks Rackspace is overpriced. OK, maybe it’s not that bad. But when analysts at Pacific Crest downgrade on the basis of valuation, as they did last month, you know the stock has run far enough, fast enough that some on the Street are getting queasy. The evidence is in the market action. After reporting third-quarter sales and earnings that met expectations last Monday night, the stock fell 7% before leaping 6%. It’s almost as if nervous investors had their fingers poised above the sell button. Something about how the company signed 11,000 new customers in the quarter seems to have calmed these frayed nerves.

Yet some Fools remain wary of this two-time Motley Fool Rule Breakers recommendation. All-Star CAPS investor epetroel has maintained an underperform call on the stock since April, writing at the time: Rackspace is a good business, but the share price is way out of sync with their earnings. With a P/E pushing 100, I would expect some really fantastic earnings growth, but the numbers just aren’t there. Also, being in a low-margin, highly competitive business, I just can’t see how people would expect their earnings to grow into that inflated share price.With $31.1 million worth of insider selling, you’d think management would hold a similar view. Trouble is, $26.1 million of that total was from sales executed by an investment subsidiary of Wells Fargo that still owns more than 12% of Rackspace’s shares outstanding. Meanwhile, Chairman Graham Weston remains the largest single shareholder with 15.8% of the business. Wake me when either of these two allows its ownership interest to duck into the single digits. Want to learn more about Rackspace? Join us in a live chat with CEO Lanham Napier on Nov. 19 at noon EST. Napier will be taking questions directly from you, our Fool.com readers, so click below to set an email reminder so you don’t miss out on this opportunity!

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Readers of the Income Investor newsletter can certainly appreciate that kind of thinking. Let’s take a closer look at some of the companies that inched their payouts higher this past week.

Let’s start with Sysco. The foodservice giant with its fleet of refrigerated trucks delivering edibles and other essentials to restaurants, schools, and hospitals is also doing a good job of feeding its shareholders.

Sysco’s new quarterly dividend of $0.26 a share may not be much of an improvement over its earlier $0.25 a share rate, but the food giant has now come through with 42 consecutive years of higher disbursements.

Intel bucked the downward trend of tech stocks on Friday, and one of the reasons was its shiny new dividend. The microprocessor behemoth is bumping up its payouts by 14% to $0.18 a share every three months.

Sure, the fact that Intel CEO Paul Otellini announced that his company “remains on track to have our best year ever” was the bigger catalyst of Intel’s rise on Friday, but juicing up its yield is one way for investors to know that the tech bellwether means it.

Automatic Data Processing is another hiker. The business outsourcing pro is increasing its quarterly dividend 6% to $0.36 a share. The market shouldn’t be surprised. ADP has now completed 36 years in a row of chunkier payouts.

Finally we have MDU Resources energizing its quarterly mailings. The energy and transportation specialist is pushing its streak of annual rate increases to 20, improving its distributions by 3% to $0.1625 on a quarterly basis.

It’s encouraging to see companies improving their yields at a time when fixed income investments are on the floor. These companies join medical maven Baxter International, “piece of the rock” insurer Prudential Financial, and postsecondary educator Devry in sending more of their money back to their shareowners in recent days.

Subscribers to the Income Investor newsletter can appreciate the companies sending more and more money to their investors. The newsletter singles out companies that are committed to growing their distributions with market-thumping results.

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And certainly, some companies have benefited greatly from the low-interest rate environment. IBM and Wal-Mart, for instance, were both able to borrow at rates of 1% or less, giving them more cash on their balance sheets without raising their interest expense substantially. But for every borrower who’s getting a great deal on a loan, there’s a lender having to accept a smaller return as a consequence. Insurance companies rank among those hardest-hit by the situation, and some insurers are taking tough steps to try to shore up their profitability against the threat that low rates will last for some time to come.

Why insurance companies hate low rates:- To understand how interest rates affect insurance companies, you have to consider the industry’s business model. Insurance companies accept up-front premium payments in exchange for coverage over a specified period. Often, no loss will occur, and so the insurance companies will be able to count the entire premium as pure profit. Moreover, when an accident or other adverse event does occur, there’s often a significant lag time before the company has to pay out a claim. That gives insurance companies the chance to invest their available reserves, also known asfloat. Berkshire Hathaway and Markel are notorious for aggressively investing their float for the long term, owning a substantial amount of stocks. But many insurance companies prefer to invest in less volatile assets like bonds. When bond rates are low, the income those insurance companies have come to expect dries up, hurting their bottom line. The impact can be significant. Last month, Travelers estimated that if the company reinvests maturing 10-year bonds, it would earn an average of more than $100 million less per year in interest from 2011 to 2013 than it did in 2010. Hartford Financial(NYSE: HIG) predicted that interest would plunge $130 million over the next two years if rates stay constant.

Phasing out products:- The low-rate environment is even encouraging some insurers to give up on unprofitable lines of business. MetLife recently announced that it would stop offering long-term care insurance, with low interest rates playing a role in the decision. Even for existing policyholders, low interest rates could force insurance companies to seek higher premiums in the future. In addition, low rates themselves discourage customers from buying some insurance products. AIG said that sales of fixed annuities fell this year, largely because of low interest rates. Until they start moving higher, it may be difficult to raise business.

The silver lining:- Although falling rates make it hard for insurance companies to invest new money, they do make the bonds they already own more valuable. That at least strengthens insurance-company balance sheets, which could use the help after suffering during 2008′s financial crisis. Of course, insurance companies are quite familiar with the interest rate cycle, and understand that weathering periods of low rates is just part of their business. They’re simply concerned that an artificially sustained low-rate environment could put unusual pressure on their financial condition, straining their ability to do business. For shareholders in insurance companies, it’s important to keep an eye on interest rates and to understand how they’ll potentially affect your stock’s profitability. Although measures such as quantitative easing may support most stock prices, don’t be surprised to see your insurance company stocks go the other direction if interest rates stay low for a long time.

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Even great money managers get bit by the selling bug, sacrificing hundreds of millions in profit, even billions, in order to lock in gains. Selling a slow-growing mega cap such as Bank of America or Citigroup is one thing (and may have saved you some heavy losses during the financial crisis), but you could wipe out the next home run stock if you try that trick with a fast-growing small cap.

Do try this at home:- In early March, one of the great small-cap fund managers, John Laporte, retired. Working for the T. Rowe Price New Horizons Fund for 22 years, Laporte turned in an impressive performance. An investor who deposited money when Laporte took over, according to The Wall Street Journal, would now have a return of 7.8 times his money, net of fees. A similar investment in the Russell 2000, an index of small caps, would have grown to just 5.2 times the initial outlay. A key component of Laporte’s success was his ability to hold on to his winners, although admittedly, even he sold some monster gainers way too early. Laporte held his stocks for four years on average. But that figure understates the truth: New Horizons has held two-thirds of its top 20 largest investments for at least five years. On the other hand, the average small-cap fund flipped its portfolio every nine months. The insanity of the average fund’s actions is stark: How could you ever invest in the next household name if you hold a stock for just nine months? Netflix under CEO Reed Hastings has returned more than 1,000%, but it’s taken more than just nine months to get there. The flowering of Amazon.com under CEO Jeff Bezos took a decade. Now, Amazon has a key position in the online marketplace, while Netflix is the go-to website for online movies. Getting a sense of the capability and genius of managers such as Hastings and Bezos takes time. As Laporte confided to the Journal, “It often takes me years to get confident in the business strategy and the management team.”

Two errors of commission:- But despite its emphasis on buy-and-hold investing, New Horizons has two notable sales that cost billions in total. It held a public stake in Starbucks from 1992 until 1994, when Laporte was convinced that a short-term move in coffee prices would hit the brewer’s earnings. The fund manager took a profit on the shares then watched them grow 10 times more. That move cost the fund $200 million and ownership in the most recognizable name in coffee, one that is still growing rapidly and just initiated a nice dividend. Another sale was much more costly. Before Laporte’s time, the New Horizons fund purchased shares of Wal-Mart during its IPO in 1970. As the company outgrew its status as a small cap, the fund sold in 1983. Today its stake would be valued at about $14 billion twice what the fund as a whole is worth. The fund lost out on owning the world’s largest retailer and its dominant competitive advantages, which were such a huge attraction to superinvestor Warren Buffett that he bought shares. That’s the power of buying and holding small caps. In fact, finance gurus Eugene Fama and Kenneth French discovered that 1 in 8 small cap growth stocks become large each year. According to the researchers, these soon to be large companies return up to 62% on average annually. Those are the types of gains that can turn you into an accidental millionaire if you hold on for the ride. Each of these stocks has had a bumpy ride over the last year, but the prospects for each are still very bright. PetMed Express is consolidating the market for animal prescriptions on the web, taking market share from traditional veterinarians. Hibbett continues a solid expansion of its sporting good stores, by focusing on smaller and midsize markets that have less competition. Arbitron estimates the size and composition of media audiences and their media usage. Yongye manufactures an organic fertilizer in China, and its business has been growing like it was sprayed with its own product.

Let’s take a closer look at Yongye. The company is a new entrant to the stock market, and already its numbers are startling. Over the past two years, it has averaged sales growth of 119% annually, and earnings have clocked in 80% higher each year. Of course, that type of growth has to slow. How could it not? But there’s still a lot of opportunity here. The Chinese government is making a huge push (read: special treatment for ag companies) to use organic fertilizers in order to minimize environmental degradation and increase crop yields on its relatively small portion of arable land. Yongye sits right at this nexus of opportunity. The financials at each of these three small caps, as measured by returns on capital and equity, continue to look strong. PetMed Express, Yongye and Hibbett are up in the last three months, a nice gain, but with such strong fundamentals, why should you sell any of these stocks now? “Locking in your gains” in this case could mean you’ll never score a two-bagger , five-bagger, or more.

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Among other things, dividend-paying stocks:- Are less volatile as a group than their non-dividend-paying counterparts. Provide you with a real return right away; with non-dividend-paying stocks, returns aren’t realized until you sell. Allow you to choose what to do with the cash payouts reinvest in the stock, put them into savings, or buy groceries it’s up to you. Offer you an inflation hedge when companies increase their payouts. With this in mind, I’ve set out to find 10 of the most promising dividend-paying stocks for the next decade and beyond. Five of them will be focused on dividend growth, while the other five will be focused on higher dividend yields. You want to have a helping of both types in your portfolio to promote both payout growth and payout stability.

Dividend growth:- High dividend yields are always nice right away, but smart long-term income investors will also plant the seeds for future dividend growth. These stocks may not have the juiciest yields on the market, but they generate more than enough free cash flow to boost their payouts and reinvest in the business for years to come.

High yield:- Super-high dividend yields can be very tempting all a stock yielding 10% has to do is not lose value, and you’ve made 10% in one year. In more cases than not, however, a stratospheric yield is a bad sign for the stock.

Because dividend yields and stock prices move in opposite directions, a high yield usually means a depressed stock price based on market concerns about the underlying business. Remember: Dividends are not guaranteed, so you need to make sure the business is generating enough cash to pay the dividend, or else your investment loses its luster. The yields on the following five stocks are more than double the S&P average yield of 1.8%. They may not grow as fast as the previous five stocks, but they have enough free cash to fully fund their higher yields.

Reach for the sky, but diversify:- With stock prices still down from their 2007 peak and a number of quality companies trading with attractive dividend yields, now is the perfect time to double down on dividends and build a lower-cost, lower-stress stock portfolio worthy of holding for the next decade and beyond. There are plenty of great businesses with rich dividend histories trading with yields we haven’t seen in years, but in addition to owning a few “dividend growth” and “high-yield” stocks, please remember to diversify your picks across various sectors. As we learned with the implosion of the financial sector, no matter how nice the dividends are, you never want to put all your eggs in one basket.

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700 shares of Altria.

Nearly 500 shares of Kraft.

700 shares of Philip Morris International.

Total value? About $72,600. Better yet, you’d have earned a total of $32,600 in dividends as a result of that original $1,000 investment.

What if you had reinvested those dividends? Instead of nearly 1,900 shares across three companies worth a total of $73,670, you’d have more than 7,400 shares of three companies worth a whopping $291,000. That includes more than $91,500 in dividend payments — nearly three times the income received by those who chose not to reinvest dividends.

But here’s the really sweet part. Today, without having to sell a single share, you’d be receiving more than $13,000 in income every year.

Now that’s what I call a wealth machine.

Yeah, right

All right, I know what you’re thinking. “That is such a blatant example of data mining! Nobody did that!” Well, as it happens, my grandmother did. Not with Altria, but with ExxonMobil.

She bought shares of Exxon back in the early 1960s and reinvested her dividends. By the time my grandfather was ready to retire some 30 years later, they were able to buy two lots of land and build their retirement home on one of them — paying cash on the barrelhead just from that one investment.

In other words, Altria is by no means the only example in which reinvesting dividends could have made you rich over the years.

Want further proof?

Professor Jeremy Siegel of the Wharton School of Business has shown that the 100 highest-yielding stocks of the S&P 500 outperformed the overall index by 3 percentage points per year. Now a 3-point advantage may not sound like much, but over 10 years, that meant more than $900 extra received for every $1,000 invested.

Wealth machines

Now before you can say, “Where am I going to find companies that even come close to what happened way back then?” let’s look at what makes a “wealth machine.”

I call Altria and ExxonMobil wealth machines not because they were great companies (although they were) or because they paid a dividend after all, not every dividend payer can be called a wealth machine but because they consistently raised their dividends. And they were able to do that because they performed consistently well.

What may surprise you is that research by Robert Arnott of Research Affiliates and Clifford Asness of AQR Capital Management has shown that companies with higher dividend payout ratios the amount of the dividend compared to net income tend to have higher real earnings growth in the following 10-year period. In other words, they’re better-run companies. And we already know what earnings growth means for a company as far as price goes.

So that’s what to look for: companies that consistently raise dividends over time. Now let’s look at some numbers.

Would you believe me if I told you that over 20 percent of the companies currently in the S&P 500 have increased their dividend by 10 percent or more per year over the past 10 years? It’s true. In fact, 91 companies have done so.

That list includes such familiar names as Lowe, the home retailer. It raised its dividend an average of 26.9 percent over the past decade. Who knew that boring stuff like light switches and lumber could generate so much cash? Procter & Gamble is also in the list. Not too surprising. The personal and household product company has been a reliable dividend payer for over 30 years.

And of course oil companies make the list, too. ConocoPhillips andAnadarko Petroleum have both raised their dividends by at least 12 percent per year on average for the last decade, returning cash to their shareholders.

These average returns come close to rivaling Warren Buffett’s performance and you don’t even have to be as smart as he is. All you have to be is smart enough to invest in well-run companies with a history of paying dividends and increasing those payments over time.

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A watchlist can help you slow down the process, examine the risks, and essentially take a deep, money protecting breath. The Fool now offers MyWatchlist.com, your customized hub to follow the performance and Fool news and commentary about the companies you’re watching.

But what to put on your watchlist. Today, Motley Fool analyst and resident computer nerd Eric Bleeker shares three companies that have taken up residence on his watchlist and one that has since made the jump to his Rising Stars portfolio.

One to watch
Life in the clouds can be lucrative. With cloud computing picking up steam, the demand for data storage is constantly increasing, which makes life good for the folks at EMC, a storage giant in the field. Unfortunately for us, the market recognizes this, leading to rich valuations for nearly all the significant players here. That also looks to be true for EMC, with a P/E of about 28.

But there’s more to the numbers. EMC owns a massive stake in VMware, a leader in software for virtual computing. EMC bought the company in 2004 and spun it back out in 2007, and EMC still retains an 80% ownership stake in VMware. Strip away that investment, and EMC is suddenly trading at a single digit multiple to free cash flow. Eric is looking deeper into VMware’s valuation, which looks overly rich, and EMC’s ownership, but his interest in the clouds has been piqued.

Two to watch
Citrix Systems also has a tie to cloud computing and is especially well-positioned in its virtual desktop offerings. It’s a rival to VMware, but this company is “the least excessively priced in a very bubbly field,” according to Eric. It’s also worth watching because it’s buyout bait, and talk in the field is that Microsoft would counter any bid to purchase Citrix. As a stand-alone company, it offers a cheaper though hardly cheap way to get into an investment in the virtual office. It is worth watching on share price and on the temperature of the swirling acquisition rumors.

Three to watch
Chip maker Marvell Technology Group was beaten down a bit because it was toiling in an area of computing far less appealing and futuristic than cloud computing: the company had the temerity to work in the arena of hard disk drives. They might as well have focused their efforts on record players and rotary phones. But the company has broadened its focus to hit much cooler and market appreciated areas such as mobile devices and networking.

The result has been a 30 percent climb in share price since Eric put the company on his watchlist. But the semiconductor field is notoriously cyclical what goes up generally will come back down. Eric’s waiting for a pullback on price to make a purchase.

And one he bought
After an extended wait, he found such a pullback on Cirrus Logic, a semiconductor company that became the first purchase in his Rising Stars portfolio. The company targets more customized, complex, high-end audio chips that can offer better audio quality, a smaller size, and superior battery life to the gadgets they’re in.

“That’s a great position to have leadership in, because if there’s one thing that small and power hungry smartphones crave, it is power savings and smaller chips, he wrote. “Take, for example, Cirrus’ relationship with Apple (Nasdaq AAPL), which has to be considered one of the company’s greatest success stories. Apple’s a company of uncompromising vision and quality when it comes to its products. Cirrus secured a single design win with the company in 2005, but thanks to the audio quality and power improvements that its components offer, Apple has expanded Cirrus products across its whole lineup. That kind of customer consolidation can be scary, but it also speaks to the quality of Cirrus’ designs and expertise.”

By making a purchase after the market looked less than favorably on a recent earnings report, Eric had the opportunity to get into a high-quality business trading on sale.

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But in “This Just In,” we don’t simply tell you what the analysts said. We’ll also show you whether they know what they’re talking about. To help, we’ve enlisted Motley Fool CAPS, our tool for rating stocks and analysts alike. With CAPS, we track the long-term performance of Wall Street’s best and brightest — and its worst and sorriest, too.

Alas, poor Cisco, (we thought we) knew it well
“Better late than never,” goes the old saying. But from an investor’s perspective, I really would have preferred it if all the analysts who turned suddenly cold on Cisco (Nasdaq: CSCO)yesterday … had done so before the company surprised investors to the downside, rather than after the fact.

Ah, well. “If wishes were fishes …” (There’s another old saying for you.) But the damage is done. Now that it’s too late to too anything about it, Wall Street has finally come to agreement that Cisco is no longer worth buying, as first Deutsche Securities, then Lazard, William Blair, and Wunderlich — all lined up and took turns taking potshots at Cisco, disavowing their earlier optimism, and downgrading the shares to “hold” (or its equivalent). One of the few analysts who had shown caution pre-earnings, Barclays, turned even more cautious post-earnings as it lowered earnings estimates going forward.

What’s got ‘em feeling so cynical about Cisco? Take your pick. There’s the impression that among the tech bellwethers, Cisco is starting to look like the odd man out among better-performing peers Intel (Nasdaq: INTC) and IBM (NYSE: IBM). The fact that Cisco admitted to losing set-top box market share to rival Motorola (NYSE: MOT).The strong likelihood thatJuniper (Nasdaq: JNPR) and Hewlett-Packard (NYSE: HPQ) are making inroads in Internet switches, while Riverbed and F5 Networks (Nasdaq; FFIV) nibble away at the networking niche. With the threats to it mounting, it seems the consensus on Wall Street now reads: “Hold Cisco. Don’t buy this stock.”

I disagree. I think now is precisely the right time to buy.

Let’s go to the tape
Yesterday, my Foolish colleague Morgan Housel took issue with the “stupidity” of Wall Street punishing Cisco for beating earnings estimates — but not beating them by a sufficient margin. Me, I’ve got a slightly different perspective. I’m just plain disappointed in the short-sightedness of the analysts making the downgrades today.

Honestly, Fools, these folks should know better. After all, we’re not talking about a bunch of hacks here. With the sole exception of laggard Lazard, the bankers downgrading Cisco this week rank in the top 10% of those we track on CAPS: Barclays leads the pack, placing in the 94% percentile of CAPS members. It’s followed closely by William Blair at 93%, while both Deutsche and Wunderlich sport respectable 90-th percentile ratings.

Two wrongs don’t make a right call on Cisco
Now, it’s certainly understandable that they would be disappointed in Cisco’s promising only low-single-digit revenue growth this quarter, when most people had been expecting 13% growth. Still, given these analysts’ own long-term outperformance, I’d have hoped they’d been able to look past a couple quarters’ weakness at Cisco, and see the long-term promise in this stock. But, since they appear unable to do that, I’ll lay out the case for you myself.

Pre-earnings, Cisco was a $139 billion stock with $28 billion net cash — an enterprise valued at $111 billion. With $9.2 billion in trailing free cash flow, the stock looked almost precisely fairly valued based on consensus estimates of 12.5% long-term earnings growth. It was the very definition, therefore, of the kind of stock you would want to “hold” onto for the long-term, but not “buy.” And yet — that’s just what Wall Street told investors to do: Buy more Cisco stock. Clearly, that was the wrong call to make; there was no upside to be had, absent the kind of massive, estimates-boosting earnings beat that Cisco eventually failed to deliver.

But while Wall Street was wrong to recommend buying Cisco before earnings, they’ve now compounded their error by waving investors away from the bona fide buying opportunity that’s appeared in the wake of Thursday’s sell-off. Because the cold, hard truth of the matter is that, almost nothing has changed about Cisco’s story this week — nothing but the stock price, which has become significantly cheaper.

Based on yesterday’s results, free cash flow seems to be holding steady at $9.2 billion. Cash levels have dipped a bit, reducing net cash levels to $27 billion — but at the new and improved market cap of $117 billion, that means that the enterprise-known-as-Cisco is now valued at the low, low price of just $90 billion. In other words, what we have here today is:

A company selling for an enterprise value-to-free cash flow ratio of less than 10.

A company that — whatever it does next quarter or the one following — Wall Street stillexpects to grow at better than 12.5% per year over the next five years.

A company whose CEO boasts that he can do even better than that, posting long-term growth rates anywhere from 12% to 17%.

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Alas, Visa’s stock scares me silly. Why? Amid all the happy things you can say about the company, it’s easy to overlook two important points:

Investors are infatuated with this stock. They seem to ignore the considerable uncertainty and risk that lie ahead. Now up more than 30% year to date, Visa’s shares are priced for perfection and nothing else. Visa’s not invulnerable to the dwindling economy. In fact, it’s extremely vulnerable to consumers’ strength or weakness.
Before you send that hate mail, let me explain.

This is pretty serious stuff. On average, it’s an expectation of 17.4% annual growth, based upon predictions that Visa along with rival MasterCard (NYSE: MA) will ride a global shift from paper to plastic commerce. These assumptions are also based on a business model that accepts no credit risk. Unlike American Express (NYSE: AXP) or Discover (NYSE: DFS), Visa simply makes money off transactions an inherently safe and lucrative business model. It’s great work if you can get it.

And investors know this. They’re so confident, in fact, that shares have been bid up to more than 24 times this year’s earnings, and more than 20 times next year’s.

Think about that for a moment, tend to your nosebleed, and acknowledge this point: Yes, earnings are expected to skyrocket, but shares are valued at a level that entirely reflects this. Growth even tremendous growth is already priced in.

Hence, meeting these lofty expectations will likely result in less-than-awesome returns. Here’s a simple example: Say Visa meets 2011 earnings expectations of $3.95 per share, and still commands a multiple of 20 times earnings. Under these assumptions, it’ll reward shareholders with annual returns of less than 8% per year nothing to sneeze at, but nothing to drool over, either. You can pick apart the assumptions all you’d like, but you’ll be hard pressed to come up with anything that’s both rational and spectacular. That’s just the nature of stocks priced for perfection.

Here’s where things get exciting
Now, curious investors will read the above and ask a simple question: What happens if things don’t go as planned? What if growth doesn’t materialize as investors imagine? This is smart thinking. Expectations of assured and unremitting growth are almost invariably wrong. Anyone alive over the past two years can relate. And with Visa, let me be blunt: I think the hype over its supposed explosive growth in the coming years is spectacularly overblown.

Why? Glad you asked.
As we speak, banks like Citigroup (NYSE: C), Bank of America (NYSE: BAC), and JPMorgan Chase (NYSE: JPM) are slashing credit card lines like their lives depend on it. One estimate tags this number at $2.7 trillion by 2010, which equates to the evaporation of 60% of the dollar amount of extended credit. The era of consumers’ attachment to credit cards is simply toast. This point is sometimes pooh-poohed by those who note Visa’s dominance in debit transactions. Debit, they insist, will pick up where credit left off.

This is true to a point. But perspective is in order. While debit gets all the attention, credit is still responsible for around two-thirds of total payment volume. Some might argue that payment volume isn’t the end-all profit driver, and that the number of transactions where debit is still king matters, too. This is true. But this source of revenue, called data processing fees, represents only 33% of total revenue, compared to nearly 50% captured by service fees, which is tied to payment volume.

Credit is still a main factor in Visa’s bottom line, and that division is and will be weighed down by consumers adjusting to frugality and banks pulling credit lines. This point should not be ignored. It’s big. It’s real. And it’s dangerous for investors to overlook. The growth expectations for which this stock is priced seem out of touch with the credit card industry’s ongoing paradigm shift.

Excitement, meet caution
Again, let me reiterate: I think Visa is a top-notch company. It really is. But there seems to be a disconnect between the odds of faltering and the odds of perfection. Even if my fear of credit annihilation is totally misguided, shares are still priced at levels that won’t let investors fully capitalize on Visa success. Any way you spin it, I don’t see how you can be excited about these prices.

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