President Obama is speaking today in Silicon Valley at what is being called the White House Summit on Cybersecurity and Consumer Protection, where he will, or already has signed an executive order designed to strongly encourage U.S. companies to share information about cyber-security threats. This has obviously been a hot-button issue of late with the high-profile hacks at Sony and Anthem, but it has increasingly become a huge matter for our national security.
It seems that with every negative headline shares of internet security vendors FireEye (FEYE) and Palo Alto Networks (PANW) rally a few percent by a sheer reflex. Until we have more clarity about what this executive order means for companies, its hard to chase stocks.
However, despite CSCO’s 9% gains yesterday after a perceived better than expected fiscal Q2 results and forward guidance, the stock could be a stealthy internet security play. In the quarter just reported, security revenues grew only 6% year over year, to $411 million (a very small percentage of their total revenues), but almost as much as the $425 million in sales that FireEye registered in all of last year.
It’s probably a safe bet that CSCO’s networking equipment is already very much embedded into our entire intelligence/ defense infrastructure and most governmental agencies. And CSCO is the sort of company that our government feels comfortable awarding mission critical contracts to.
My VIEW: CSCO is flirting with a massive long term technical breakout, with little to no overhead resistance until $40.
Management’s body language is increasingly bullish (watch CEO Chambers on Mad Money Wednesday here) about the recovery in their core switching and router businesses and strength in Europe, and the potential for a turn in emerging markets. The stock trading well below a market multiple, has a rock solid balance sheet with nearly a 3% dividend yield. If you believe the broad market is about to break-out (SPX made new all time high today) then CSCO will surely participate.
However, I have a hard time chasing it here up 9% from Wednesday’s close. At this point I would prefer long calls, with vol very cheap to long stock, and I would look out to the Fall to catch two more quarterly reports that should show the turn in struggling businesses and geographies and increased momentum in those doing well, and possibly catch an uptick in their security efforts that could include a large acquisition in the space. Not pulling the trigger here, but this is what I would look at on a pullback.
Hypothetical Trade: CSCO ($29.30) Buy October 30 calls for 1.50
Break-Even on Oct expiration:
Profits: 31.50 or higher, up 7.5%
Losses: between 30 and 31.50 lose up to 1.50, below 30 lose full 1.50 or 5% of the underlying stock price.
Rationale: If the stock were to come in maybe back to $28 I would consider a risk reversal, selling the Oct 25 or 26 put to finance the purchase of the 30 strike call. This is exactly the type of stock that could see some positive headlines out of D.C.’s renewed focus on security threats. I’ll be keeping my eye on it and may pull the trigger on a long delta stock alternative like this on a pullback.