Cisco Stock Has the Defenses to Survive the Trade War

Under ordinary circumstances, most people would likely have a bullish view on Cisco Systems (NASDAQ:CSCO). In its prior life, Cisco stock represented the distortion of unbridled enthusiasm during the tech bubble and subsequent crash. But with key divestments and a laser-focus on relevant technologies, CSCO has transitioned into a reliable dividend-paying entity.

Cisco stock can lever fundamentals to overcome the trade war

There’s just one problem: the U.S.-China trade war. Just a month ago, political experts and economic analysts largely expected that the Trump administration would work out a deal with its Chinese counterpart. Both parties made their points, but both also incurred damage in the tariff tit-for-tat.

Suddenly, though, President Trump did an about-face, accusing China of dirty trade tactics. Ominously, Chinese President Xi Jinping warned of a “Long March” referencing China’s civil war during the 1930s. Obviously, this harsh sentiment bodes poorly for most investments, including CSCO stock.

Diplomacy requires a delicate touch. Since neither side will completely win this zero-sum game, compromise is necessary. Where it gets worrisome for Cisco stock and many other technology-based names is that Trump lacks basic decorum. Having insulted the Chinese, the U.S. should not expect a friendly response, nor a quick resolution.

Specifically for CSCO stock, the underlying company must hope that things don’t get worse from here. Although Asia-Pacific Japan China (APJC) accounted for less than 16% of total revenue for Cisco in fiscal 2018, it’s a viable growth channel that management can’t overlook.

Still, Cisco stock offers a distinctly bullish play here, but with some caveats.

The Cautious Bull Case for Cisco Stock

For starters, let’s quickly talk about the dividend. At its current 2.5% yield, Cisco stock doesn’t offer the most generous payout. However, it is one of the most reliable, especially compared to its tech peers.

Based on what we’re seeing in the geopolitical realm, that reliable dividend may act as a buffer in case of a downturn. Typically, volatility disproportionately impacts equities that are pure growth names as opposed to income generators.

Second, Cisco’s management team smartly anticipated at least some of this trade war’s fallout. The tech firm reduced its manufacturing exposure in China, just in case tensions escalated.

This isn’t just the usual corporate fluff piece. Compared to many names in the broader tech industry, CSCO stock has stayed relatively calm. Year-to-date, shares are up almost 30%. That compares favorably to the sector benchmark Technology Select Sector SPDR Fund (NYSEARCA:XLK), which is up 18% YTD.

As Cisco chairman and CEO Chuck Robbins stated, the current China situation is “relatively immaterial.” It’s also baked into the guidance.

Third and most importantly, Cisco is levered toward the industries and technologies of tomorrow. As I’ve noted in prior write-ups about Verizon (NYSE:VZ) and AT&T (NYSE:T), we’re locked in a digital battle for dominance.

Without question, the U.S. won the 20th century, excelling in manufacturing and other analog technologies. We also dominated the infancy stage of the digitalization of everything movement.

However, other countries desperately want to control the 21st century and beyond. Thus, investments like CSCO stock take on greater importance than they would have in prior generations.

What I’m trying to get at is that Cisco stock is too big to fail. It’s among companies which the federal government considers vital for national security and prosperity.

Wait for the Opportunity

Despite multiple reasons to bet on Cisco stock, I wouldn’t do it at this very moment. Fundamentally, I’m confident that the underlying organization can weather this storm. But right now, the markets are not moving on the fundamentals, but rather emotions.

As such, you’ve got to respect the tape. I don’t like the pensive trading following its recent better-than-expecting earnings report. Clearly, a resistance level exists at the $57 mark. With all the ugly noise surrounding this and other tech names, I anticipate turbulence. It won’t surprise me to see CSCO stock drop below $50.

If that happens, I might jump on board. Most companies do their thing for themselves. But with large-scale tech firms like CSCO, their growth and operations have more significant meaning. During this cloudy season, Cisco offers the luxury of clarity.

As of this writing, Josh Enomoto is long AT&T.

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