Markets are on edge. Even though the macro economy is still favorable for bulls, investors are shy about buying stocks up these days. In the past three months, The Nasdaq PowerShares QQQ Trust (NASDAQ:QQQ) is down 11% this on good earnings reports. The lack of buying resulted in an imbalance that favored the sellers who prevailed to launch another correction that has lingered since October. But Cisco (NASDAQ:CSCO) stock has stood strong, while the mighty have fallen — Apple (NASDAQ:AAPL) and Amazon (NADAQ:AMZN) are down 20% in three months. Momentum stocks like Netflix (NASDAQ:NFLX) and Facebook (NASDAQ:FB) fell harder still.
In contrast, CSCO stock is actually flattish for the same period and up 3.5% in a month. Year-to-date, Cisco is still up 20%.
2018 hasn’t been all gloom. We have had new highs in many mega-caps, but most have fallen far from them. Facebook (NASDAQ:FB) is now 35% off its July highs. CSCO on the other hand held on pretty well, only down 6% from the highs that it set in October.
CSCO Stock Has Good and Bad
It hasn’t been all smooth sailing though. The stock price action has been violent but within a range. It has established a 10-month-old period of consolidation. This acts as strong support if the markets get tested again into 2019, so the bulls have a good base from which they can work upwards.
This year, investors have been hostage to headlines about tariff wars between China and the United States. Soon enough and starting at the G20 meetings, we will have the start of a resolution to this conflict. If the rhetoric is favorable or if they kick the can down the road, stocks will have a relief rally and CSCO stock can continue on its way up.
The upside is tempting. The first target would be $48 per share. Then above $49 the bulls can take it to $52 per share or higher in the next few months.
Another reason for the corrections this year has been the fear that the U.S. Federal Reserve will raise rates too fast next year and crimp the economy. They have the opportunity to invert the yield curve which will make it difficult for banks to lend and that will restrict the flow of money in the economy.
The Federal Reserve controls the short-term rates which banks use to borrow money so they can lend long-term. The inverted yield curve will make this a losing proposition for them so they won’t lend.
The outlook for Cisco looks good. So far it has been making the turn into the new technology world with skill. All tech now depends heavily on the cloud, and consensus is that this management team is doing a good job.
Fundamentally CSCO stock is relatively cheap as it sells at a 18 price to earnings ratio. Compare that to Salesforce.com (NYSE:CRM) which sells at 100 P/E. This is not to say that it cannot get cheaper, but at this level Cisco stock has little froth to lose. So even if the markets decide to correct again, it will fall less than frothier stocks like CRM.
I am confident that the leaders of the world will soon come to terms over the current conflicts. Cooler heads will prevail because everybody has too much to lose.
U.S. Federal Reserve chairman Jerome Powell will not be purposeful in ruining the economy that they worked so hard to rescue back in 2008. Likewise presidents Donald Trump and Xi Jinping also have too much to lose, so they will come to terms with a boring deal that allows both sides to save face.
All this can start to happen as early as today. We will hear from Jerome Powell and traders will be glued to his tone. Then the G20 meetings can get stocks a second kick up.
So in theory we should have a relief rally into year-end. Pundits call it a Santa Claus rally. And if so, Cisco stock will be at the head of the pack. If I am long it, I stay long. Otherwise, I could nibble long knowing that it would withstand a fall better than most stocks.
This one fits the bill for fundamental investors. It has proven management in a good macroeconomic environment with solid technical support below. This is a risk profile that fits most portfolios.
There are no guarantees these days because we are trading in headline mode and we are getting sporadic tweets that move markets. There may be a few between now and the G20 meetings, so I’m sure we will have our fair share of surprises. But this thesis for CSCO stock is based on solid fundamentals so it’s a calculated bet inside a binary short-term environment. So there is risk, but it is sane.
Click here for more of my market thesis and get an ongoing free copy of my weekly newsletters. Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on Twitter and Stocktwits.
