MorningWord 8/14/14: $CSCO Investor’s Chamber of Averse

by Dan August 14, 2014 9:20 am • Commentary

On more than one occasion of late, we have highlighted CSCO’s inability to keep pace with some of its mega-cap peers like INTC, MSFT and ORCL, all which have made new 14 year highs in the last couple months.  Last night CSCO reported its fiscal Q4 results that came in slightly better than expected, and management offered guidance that for the most part underwhelmed the street.  It showed signs of stabilization in the switching business and strength in U.S. enterprise demand, but uncertainty regarding emerging markets.   Management also announced its second restructuring in the last year (announced 6,000 job cuts), which suggests that the company is looking to drastically cut costs as they attempt to prop up their low single digits earnings and sales growth.

Heading into the print, it was our sense that the setup was likely to be just meh for those looking to play for a move in line or greater than the 5% implied move in the options market (from our preview):

I suspect the base case is the inline qtr and guidance and the stock is between $24 and $26 which would mean that structures both bullish and bearish may want to focus on selling the move. But for us, the premiums aren’t enough to be worth the risk reward.

So now what?  The stock is down about 1% in the pre-market reflecting investors’ general indifference to the results and commentary.   As I highlighted on CNBC’s Fast Money Tuesday night, there has been considerable accumulation of the Sept 27 calls, with the strike now the largest line of open interest.  I suspect this is a fairly cheap way (in premium terms) to play for a catch up to some of its large cap peers in the event of any good news, or merely a way for a long holder to lever up:

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With the Q4 news out of the way, I would expect this strike to be aggressively liquidated as few catalysts in the near term remain in the next few weeks that could cause almost a 9% move where these calls would be break-even.

Aside from the fact that there are no catalysts, CSCO has already been a very quiet stock over the past couple of months.  30 day realized volatility hit a 2 year low in July, and hardly bounced even as the broader market saw a brief bout of higher volatility a couple of weeks ago:

30 day implied volatility in CSCO, Courtesy of Bloomberg
30 day implied volatility in CSCO, Courtesy of Bloomberg

If today’s earnings move remains as limited as what we have seen in the post- and pre-market so far, then options traders are going to have little demand for long premium structures, especially with CSCO still more than 10% away from the 5 year high of $27.74.

Of course, 30 day implied volatility is likely to fall back into the low teens, so selling premium to add yield is not an attractive strategy either.  In sum, there are better opportunities in the options market than CSCO, which looks fundamentally and technically neutral with the accompanying low volatility to be expected.