Technology giant Cisco Systems (CSCO) reported its fiscal first-quarter earnings after the market closed on Wednesday. The company came out with earnings per share of 53 cents, beating analyst estimates of 51 cents. While the EPS figure was higher by 10% year-over-year, top line revenue arrived at $12.1 billion — marginally lower than the $12.36 billion expected by the street.
Cisco Chairman and CEO John Chambers said the company continues to see an inconsistent and hard-to-read macro environment, making it difficult for businesses to make purchase decisions. Weak sales to service providers and weak emerging market sales were problem areas for the company.
Cisco’s sales were up 2% compared to the year-ago period, and CSCO also announced it will increase its share buyback program by $15 billion. None of this seemed to matter much to investors, who sold the stock lower by almost 11% on Thursday after the company’s disappointing outlook. Cisco is expecting second-quarter sales to be down by 8%-10% and is looking for EPS of 45 cents to 47 cents — shy of the 52 cents analysts were expecting.
As a result of the weak guidance several analyst downgrades resulted, many of them moving price targets down to the low 20s.
On the charts, Thursday’s sharp drop in CSCO broke a number of key support levels, making this a stock to avoid both in absolute and relative terms. There are plenty of better buys out there.
Through the lens of the multiyear chart, the stock has been stuck in a very wide trading range since the second half of 2008. After CSCO reached the upper end of this range again in August, it began to show relative weakness by gapping lower after its August earnings report. With Thursday’s selloff, the stock gapped below its 200-day simple moving average (red line), which also caused it to break its July 2012 uptrend, all in one shot. This now puts Cisco stock in a weak position technically, and not even one where risk/reward favors trying to catch the proverbial falling knife.
On the daily chart, Thursday’s lows happened right at the 50% retraction mark of the rally from July 2012 to August 2013. If this support does not hold, then the stock has better support near the $20 range, or about 6% below Thursday’s close. Either way, this stock needs to consolidate before anyone should think about buying again.
For now, there plenty of stocks out there that are better than CSCO.
Learn more about the strategies Serge Berger uses to create profits in the market every day. Download his trading plan in the Essence of Swing Trading e-book by clicking here. As of this writing, he did not hold a position in any of the aforementioned securities.