Cisco (NASDAQ:CSCO) reported earnings last night and investors are loving it. It spiked 3% on the headline and as of this writing, it’s up 6% from yesterday’s close. Today’s write up is to share an opportunity to trade Cisco stock up from here — but with a cautionary asterisk. The bottom line is that CSCO has technical and fundamental reasons to set new highs for 2019. This earnings report confirms that management can get the job done.
Let’s first start with the investing environment: it’s been volatile. Monday, equity markets panicked on headlines that China had retaliated against the new U.S. tariffs and the trade talks had completely broke down.
In spite of it, CSCO stock bounced and recovered the dip. It even closed +.8% going into its earnings report. This is a sign of confidence from its investors especially when the rhetoric in the media is full of skepticism. Case in point, year-to-date Cisco stock is up 26% which is 70% better than the S&P 500. In 24 months, the difference is three fold.
Last night, management delivered a report card that justified investors’ confidence. CSCO beat on every metric that matters. They even guided sales above expectations. Cisco left nothing for the bears to sink their claws into. Selling this report makes no sense at this time.
There were a few concern about margins but nothing that is going to last. The data suggest that the transition to cloud services and subscriptions is ongoing and according to plan. Completing this migration could fuel a longer rally to help Cisco stock set new multi-year highs or maybe even re-approach its Dotcom glory.
Next, we examine the fundamentals — and they are solid. CSCO sells at a 20 trailing P/E ratio which is cheap in absolute and relative terms. It is inline with Oracle (NYSE:ORCL) and 30% less expensive than Microsoft (NASDAQ:MSFT). This is not a knock against MSFT’s valuation, however. They have completed their transformation. CSCO is making headway, but still has some time to go. And that’s the opportunity for the long term.
But here is the opportunity for the short term. The CSCO chart technicals suggest that the spike here is the start of another leg higher. This probably won’t be a straight shot to the target. Cisco stock will hit resistance at $54.40 so what happens in the next few days is important.
If I am long the stock, then I stay in it and ignore the small dips in this rally. But if I am looking to start a new bullish position then I can either buy Cisco stock here and accept that I may suffer a few red ticks before gaining. Or, I would set a trigger to buy when it Cisco stock closes above $54.50 per share. If this is a trade not an investment then I should also set a stop loss because below $51 per share would bring momentum sellers to target $48 or lower.
The Bottom Line on Cisco Stock
So to summarize the opportunity today: For the past two weeks, CSCO stock price range tightened into a point and this looks like a breakout from it. CSCO should have legs as long as it holds the support.
While I like the macroeconomic environment, I worry a bit about the geopolitical headline risk. China and the U.S. are in full economic war as they try to come to terms. This is likely to linger for a few months, but I bet we have a reprieve from new news until mid June.
Investors liked hearing from the Cisco CEO Chuck Robbins that the tariffs are no longer a threat. CSCO has shifted operations to avoid the headwinds that those would create. That is the perfect example of a management team that is mature and doesn’t leave many things to chance. Robbins also reiterated his commitment to increasing the percent of business to come from software and subscriptions.
The experts on Wall Streets agree that there is more upside in CSCO stock. Most analysts who cover the stock have a BUY rating on it and it is still trading well below their average price target.
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.