New Trade: CSCO: Play for a Turnaround in the Company and the Stock, With Defined Risk

by Dan August 29, 2011 10:36 am • Commentary

NEW TRADE Aug 29th, 2011: Please look at comments below from earlier in the month… View still stands….I am re-intiating this position….

TRADE-with the stock at 15.60 I bought the CSCO Sept 16 calls for .25…..Break-even on Sept expiration 16.25 up 4%.  

-Sept 13 analyst day should serve as a positive catalyst, and if market still on decent footing, investors and wall street analysts likely to get in front of this…..



2nd Update Aug 17,2011: With the stock at 15.86 I am selling  this spread at 1.17 that I paid .55 for last week, stock cant get through 16 and I will look to re-enter the position at lower levels……if the stock sells off in the coming weeks in front of their analyst meeting on Sept 13 this could set up very well for a trade.  DELL’s guidance while not that meaningful to CSCO definitely should sound a cause for alarm for the lack of visibility that some large tech companies may as they get to the end of Q3.


Update Aug 11, 2011:  CSCO is up 16%  to $16 (far exceeding the 10.5% implied move in the options market) on better than expected earnings and guidance, albeit on dramatically lowered expectations……The company is in the midst of a restructuring and with expectations possibly now low enough going forward they could be set up for a series of beat and raise quarters at a time where they are dramatically cutting costs which would definitely help curb their almost perpetual margin decline.  September 13th the company is holding their annual analyst day and investors will be very keen to here the plans for their restructuring and how CEO John Chambers plans to right the ship.

The OCT 15/18 call spread that I bought for .55 yesterday is now worth 1.25 and I will hold onto to this as I think the stock can rally into next months event…..

Also on quick hits yesterday I stated that I bought the Aug weekly 15 calls for .24, I am closing that position for .95 this morning as that was the much more speculative portion of my trade.

Original Post Aug 10th 2011: CSCO: Play for a Turnaround in the Company and the Stock, With Defined Risk

CSCO: $13.85

Company reports their fiscal Q4 tonight after the bell. The options marker is implying about a 10.5% move following earnings. Stock has sold off on average 11.25% over the last 4 qtrs…..

MY QUICK TAKE:  expectations couldn’t be lower for the stock, and when you throw in the Fed’s recent read on the economy the outlook for multi-nationals like CSCO couldn’t be murkier.

-with the stock down 30% ytd and valuation hitting 10 yr lows one would expect that a lot of bad news is in the stock.  Company has left out there very aggressive long term growth targets that the street just thinks is a joke and fully expecting them to ditch in the near future.

-company is in the midst of a huge restructuring and CEO John Chambers has his back against the wall.  The company is hosting an analyst day in mid September and if investors are expected to be disappointing tonight, they will expect a well articulated plan next month.


-Make no mistake about it, just because the stock looks washed out and sentiment is poor, it can go lower…..SEE RIMM!    [private]


If you have to play from the long side consider buying Calls or Call Spreads…..the AUG12 weekly calls are very active with almost 35k of the 15s trading already and 12k of the 14s….the AUG regulars are also very active with 25k of the 15s, 20k of the 20k of the 16s and 14k of the 17s trading.

I think you should look out to Oct as any turnaround will take some time…..

TRADE: CSCO 13.90 Buy the OCT 15 / 18 Call Spread for .55

-Buy OCT 15 Call for .68

-Sell OCT 18 Call at .13

Break-Even On Oct Exp:

profit: betwn 15.55 and 18 make up to 2.45 above 18 make full 2.45

loses: below 15 lose all .55 premium, btwn 15 and 15.55 lose up to .55



2nd Update July 28th, 2011, 10:15am:  Update: CSCO: Rising Tides Will Lift Most Boats…Buy Aug Calls In Front of Earnings

CSCO getting going here, stock now up over 3%, I sold half my position for a small loss and selling the balance above my avg price, hopefully get out unchanged.

Here is a quick summary from Goldman’s Upgrade note:

We are upgrading Cisco to Buy from Neutral as we believe Street estimates have
finally bottomed after 4 consecutive guide-downs. Moreover, we believe sales
growth will bottom in the current quarter, and gross margins will bottom over
the next 2-3 quarters. Coupled with the announced $1 bn opex cut, we expect
this will drive almost 300bps of operating margin expansion over the next four
quarters, fueling 11% EPS growth on 6% sales growth in CY12. In addition, our
thesis is underpinned by our view that Cisco is not a “broken” franchise, as
evident in recent customer surveys. With the stock trading at 8.3X our CY12
EPS estimate and 6.1X ex-cash, and with estimates likely poised for an upward
revision cycle, we expect Cisco to be a significant outperformer into 2012. We
see 34% upside to our $21 12-month price target.


Update July 28th, 2011: My thesis hasn’t changed here, but JNPR‘s results Tuesday night clearly signal weakness in some of CSCO’s core businesses.  [private] I am going to use the strength on Goldman Sachs‘ upgrade ($16.03) this morning to sell the the Aug 17 calls that I bought on July 7th for .25 now at .22.   Will Update a new longer dated trade as I believe this story may take a little longer to turn itself a round.  Going to take a small loss and look to a more optimal strategy to play CSCO’s turn.

ORIGINAL POST July 7th, 2011:

CSCO ($15.95)  has clearly seen better days, the stock has had 4 consecutive quarters where they have disappointed and lowered the out-quarter guidance.  The company is in the midst of a massive restructuring that was outlined in an open letter from CEO John Chambers to his troops back in early May (read my earlier thoughts here). [private]

-The stock is down 33% in the last year and 21% ytd.

-analyst community is fairly mixed on the name with 20 Buys, 27 holds and 3 Sells.

-when the company reports their fiscal Q4 on Aug 10th, investors will be eagerly awaiting news regarding the restructuring, and any evidence of a business turn.

-for investors who are chasing performance on the long side, names like CSCO could be alluring as it is so close to 52 week and multi-year lows, as opposed to names that have already made match 52 week highs or quickly approaching them…..

-Additionally, with this dramatic turn in the market, analysts who have been right to be cautious on the name could be enticed to do a victory lap and be more constructive and upgrade ahead of the potential turn.

MY VIEW: I would be shocked if the company was not able to finally be slightly more positive than they have been in the past few quarters. And any actual signs of recovery, and upside to guidance this stock will be back above 18 in a quick……

-Current consensus has earnings and sales only growing about 7% for their fiscal 2012….any upside to current estimates could easily call for multiple expansion with the stock currently trading at about 10x next years estimated earnings at the very low end of its historical range.

-Vols look fair with 30 day at the money implieds at about 27.50 vs the 30 and 60 day realized vol at about 25.5 and 23.5 respectively.

-Stock has been a big mover as you would expect the day following the last 4 earnings announcements with an avg move of about 11%.

-If the market continues to rally and make new highs the rally will have to broaden out (they can only buy so much AMZNNFLX and CMG for goodness sakes).   Eventually guys will get to taking a shot on laggards like CSCO.  I think there is a good chance this stock could be back at $17 in this scenario before earnings.

-technically the chart has a lot of room to run with stock currently well below it’s 20o day moving average of ~$19 and just now approaching an important support resistance level dating back to the throes of the financial crisis.

1 Yr CSCO chart provided by


TRADE: CSCO $15.95 Buy the Aug 17 Calls for .25

-Break-even at 17.25 on Aug Expiration, stock btwn 17 and 17.25 lose up to .25 and below lose all .25 (or 1.5% of the underlying).

-If stock rallies into the even I will look to leg into a call spread as we approach Aug 10 and lock in gains, or reduce the chance of loses.