Where Will Cisco Go Next?

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 based networking and other products related to the communications and and provides services associated with these products and their use to information technology industries worldwide. The company provides a line of products for transporting data, voice, and video within buildings, across campuses, and around the world. Its products are designed to transform how people connect, communicate, and collaborate. Cisco operates in five segments: United States and Canada, European Markets, Emerging Markets, Asia Pacific, and Japan. Through its segments and product offerings, Cisco adds massive networking value to consumers and businesses around the world that require improved technology. As long as business and economies are growing, Cisco will continue to be a leading provider of communication products and services across the globe.

T = Technicals on the Stock Chart are Mixed

Cisco stock has been stagnant over the last several years. The stock is currently trading towards the middle of a range extending back to the early 2000s. 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 key averages which signal neutral price action in the near-term.

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.

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Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

Cisco Options

29.37%

53%

50%

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

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 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)

47.50%

18.18%

59.05%

21.21%

Revenue Growth (Y-O-Y)

4.95%

5.51%

4.42%

6.64%

Earnings Reaction

-0.7%

4.8%

9.62%

-10.48%

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

P = Excellent 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

5.04%

-3.24%

42.25%

-16.27%

-2.01%

Cisco has been a relative performance leader, year-to-date.

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Conclusion

Cisco provides valuable networking solutions to companies and consumers around the world. The stock has been part of a range extending back to the early 2000s and does not know any signs of potential drastic moves higher or lower. Earnings and revenue figures have been steadily increasing of the last four quarters, however, investors have had mixed feelings about these recent earnings reports. Relative to its weak peers and sector, Cisco stock has been a strong performer. WAIT AND SEE what Cisco does this coming quarter.

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