Earlier this morning I wrote about the curious hesitance by investors in front of last night’s Q3 earnings report by CSCO (below). While the results, guidance and commentary speak to the possibility of a sustained turnaround for CSCO across multiple product segments and geographies, up almost 13% on the day trading at 2 year highs may be a difficult entry point. Given management’s guarded optimism enterprise spending and further economic growth in the back half of the year, the logical conclusion would be to extrapolate to other large enterprise vendors like ORCL, who have yet to report and have lagged in the recent cyclical rotation into old tech.
ORCL is interesting to me because it has lagged since disappointing across the board on their fiscal Q4 back in mid March. While analysts were pointing to continued weak hardware sales in their Sun Microsystems division run by former HPQ CEO Mark Hurd, the company blamed the short fall largely on miss-execution on the sales front letting some large deals push into the current quarter. Bulls on the stock like to point out that their fiscal Q4 is the period where they try to wrap up as many deals as possible to make the full year look as possible, but in the times where they don’t do so (as happened in March) they usually see a bounce in Q1 and it is a good time to buy.
Much like CSCO heading into last night’s print, ORCL has badly under-performed its large cap tech peers up less than 3.5% on the year. Today stocks like EMC, IBM,JNPR and CIEN are getting a lift in sympathy with CSCO, yet ORCL is up less than 1.5%.
Despite hating the idea of getting long exposure in any stock with the SPX at all time highs, I like the idea of playing for ORCL to fill in their March earnings gap by the time they are set to report fiscal Q1 in mid to late June (date has not been confirmed yet, IR site) and I like the idea of pairing this against my IBM bearish trade for the time being. Here is the 1 year daily chart with the gap fill highlighted in green:
The ideal entry point for this trade is around the 33-33.50 area, where both the 50 and 200 day moving averages should act as support. I will likely look to define my risk with a call or call spread as at the money vol in June and July is marginally above the 30 day realized volatility.
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MorningWord 5/16/13: Last night CSCO reported their fiscal Q3 results that exceeded street expectations on almost every metric while displaying a level of execution, especially relative to its peers that has not been apparent of late. In a quarter that has seen fairly dramatic disappointments by telecom equipment vendors like JNPR, FFIV & ARUN, and high profile misses by enterprise tech behemoths like IBM & ORCL, CSCO’s results and guidance stick out like a sore thumb in an IT spending environment that can be described as tepid at best.
We took a close look at CSCO heading into their print (preview here) as I was long an at the money in straddle playing for a large move one way or the other heading into the report**, but given its lack of movement I made the following conclusion:
CSCO’s lack of participation of late would make me a tad worried if I were long the stock here as a I don’t see a heck of a lot of difference btwn INTC and CSCO from a value investor standpoint or for those looking to pick up laggards. Something has to give here, and frankly I am not exactly sure what that is.
I closed the long straddle yesterday prior to the results (here) as I had no level of conviction that the stock would have an outsized move.
What I find most interesting about CSCO’s 13% pre-market pop this morning is the fact that it was there for the taking, all you had to do yesterday afternoon is do exactly what Fed Chairman Bernanke wanted you to do, reach for yield. For some reason the investment community left this steady grower, strong yielding, cyclical laggard behind as they rushed into names like IBM, INTC & MSFT since their fairly lackluster Q1 results. So in this raging bull market, why were investors so leery of this stock that had been stuck in a 10% range for all of 2013?
For some odd reason, CSCO nearly 3 year perpetual re-structuring has taken its toll on tech investors who are usually fixated on growth. Hindsight is hindsight, and this morning many analyst will be calling for a “re-rating”of the stock’s multiple as they have been able to manage costs, take market-share and continue to grow, despite what CEO John Chambers cited as expected continued weakness in China and Southern Europe.
CSCO just went on most PMs buy-lists, especially those who have been underweight old tech. I am not sure jumping right in at 20 months highs on an earnings gap is the appropriate spot, but I would consider taking a shot that ORCL will fill in their earnings gap from March as CSCO’s commentary about enterprise spending should give some comfort.
With a quick look at the 5 yr chart below of CSCO, $22 will clearly become very staunch support and a level that longs will likely hold near and dear to their hearts for quarters to come.
