What Do These Factors Suggest About Cisco?

With shares of Cisco (NASDAQ:CSCO) trading around $20, is CSCO an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

Cisco designs, manufactures, and sells internet protocol networking and other products related to the communications and information technology industry and provides services associated with these products and their use. The company also provides a line of products for transporting data, voice, and video within buildings, across campuses, and around the world. It has five segments: United States and Canada, European Markets, Emerging Markets, Asia Pacific, and Japan. Networking across the globe is expanding and Cisco, a global leader, is well-positioned to provide essential products and services.

T = Technicals on the Stock Chart are Mixed

After a huge run during the technology boom, Cisco has been fairly quiet as it has traded in a range for most of the last decade. Currently, Cisco has come off of lows from this range and may be continuing higher. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, Cisco is trading around its rising key averages which signal neutral to bullish price action in the near-term.

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CSCO

(Source: Thinkorswim)

Taking a look at the implied volatility (red) and implied volatility skew levels of Cisco options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

Cisco Options

28.7%

90%

86%

What does this mean? This means that investors or traders are buying a very significant amount of call and put options contracts, as compared to the last 30 and 90 trading days.

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Put IV Skew

Call IV Skew

May Options

Steep

Average

June Options

Steep

Average

As of today, there is an average demand from call buyers or sellers and high demand by put buyers or low demand by put sellers, all neutral to bearish over the next two months. To summarize, investors are buying a very significant amount of call and put option contracts and are leaning neutral to bearish over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion…

E = Earnings Are Increasing Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on Cisco’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for Cisco look like and more importantly, how did the markets like these numbers?

2012 Q4

2012 Q3

2012 Q2

2012 Q1

Earnings Growth (Y-O-Y)

47.5%

18.18%

56.52%

21.21%

Revenue Growth (Y-O-Y)

4.94%

5.51%

4.38%

6.62%

Earnings Reaction

-0.7%

4.8%

9.62%

-10.48%

Cisco has seen increasing earnings and revenue over the last four quarters. From these figures, the markets have had mixed feelings about Cisco’s last four earnings announcements.

P = Average Relative Performance Versus Peers and Sector

How has Cisco stock done relative to its peers, Alcatel-Lucent (NYSE:ALU), Hewlett-Packard (NYSE:HPQ), Juniper Networks (NYSE:JNPR), and sector?

Cisco

Alcatel-Lucent

Hewlett-Packard

Juniper Networks

Sector

Year-to-Date Return

0.74%

-2.14%

45.14%

-14.21%

-4.45%

Cisco has been an average performer year-to-date.

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Conclusion

Cisco is an established company that is a global facilitator of networking solutions. The stock has seen slow movement over the last decade as it still recovers from the massive move it had during the technology boom. Earnings and revenue have been steadily increasing over the last four quarters but the markets have been expecting a little more. Relative to its peers and sector, the stock has been an average relative performer. WAIT AND SEE what Cisco does in the coming quarter.

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