New Trade CSCO: Fiscal Q4 Miss and Weak Forward Guidance Should = New 52 Week Lows

by Dan August 2, 2012 12:25 pm • Commentary

Technology shares over the last year or so has been a tale of two cities as it relates to performance (think Detroit=CSCO and Beverly Hills=AMZN).  Those with perceived product cycles no matter how expensive have out-performed, and those who rely on legacy stodgy ol’ tech products for most of their sales have gotten drilled no matter how cheap.

Event: CSCO will report their fiscal Q4 on Aug 15th, and while I don’t have any particular insight into the quarter and guidance for fiscal 2013, my sense would be that they will both be less than stellar.  Options market is implying about a 6.5% move vs the historical avg of about 6.5% over the last few yrs.

Bull Case: Bulls will point to the stock’s 2% dividend yield (which should go up soon), solid balance sheet (net cash position of 38% of their market cap), and valuations well below peers and well below the market multiple, oh and massive buy back that is also only likely to increase as the stock goes lower.

Sentiment: In this market that trades within just 5% of the April multi-year highs, winners are being bought up to new highs and losers are being sold to new lows, without care of valuation.  Wall Street analysts still fairly positive on the name with 30 Buys, 16 Holds and only 2 Sells.

Technicals:  The chart has been in a massive downtrend since the late 2007 top, and not likely to be resolved until we get a massive flush to the low end of the channel.

[caption id="attachment_15159" align="aligncenter" width="589" caption="CSCO 5yr chart from Bloomberg"][/caption]

My View: I want to make a low premium, defined risk directional bet that CSCO misses and guides lower and the stock re-tests the 52 week lows.  I want to be clear here, I would not short a cheap stock like this with some of the positives that I mentioned above, But I will allocate some trading capital to the idea. This is not a high conviction trade as I will need a lot of things to go wrong in a short period of time, but I like the risk / reward set up, risking .35 to make 1.65 if the stock matches the 2011 low following what has been a historically volatile event for the company.

Trade: CSCO ($15.76) Bought the Sept 15/13 Put Spread for .35

Bought 1 Sept 15 Put for .45

Sold 1 Sept 13 Put at .10

Break-Even on Sept Expiration:

-Profits btwn 14.65 and 13of up to 1.65, max gain of 1.65 at 13 or below.

-Losses of up to .35 btwn 14.65 and 15, max loss of .35 above 15