The summer of 2019 wasn’t necessarily great for tech stocks generally. However, there was one that broke away from the pack: Cisco (NASDAQ:CSCO) stock, which managed to reclaim price levels not seen since the year 2000. Fast-forward to the end of 2019 and the scenario was reversed, with Cisco floundering while other tech stocks enjoyed a memorable Santa Claus rally.
The first couple of weeks in 2020 haven’t favored Cisco stock either, as the share price has struggled even while the broader market has maintained its decidedly risk-on outlook. Adding insult to injury, an analyst from a very well-known bank has recently slashed his rating and price target on CSCO stock. Does this, then, mean it’s time for shareholders to abandon ship?
Analyst Sees No Catalyst for CSCO Stock
Like it or not, prominent analysts have the ability to move individual stock prices. It might seem irrational for a heavily traded, well-established stock to lose value just because of one person’s negative opinion. But that’s how the market works and it can even create opportunities sometimes.
A textbook example of this phenomenon is when Bank of America Merrill Lynch analyst Tal Liani recently published his negative outlook on Cisco stock. Upon learning of Liani’s opinion, the market quickly shaved 1.1% off the CSCO stock price, leaving shareholders disappointed as the Nasdaq had posted impressive gains that day.
Specifically, Liani cut his rating on Cisco stock from “buy” to “neutral”; he also slashed his price target from $56 to $52. Speaking on behalf of the firm he represents, Liani opined, “We do not see a major catalyst for the stock in the coming quarters.”
With all due respect, I’m just not on board with Liani’s reasoning. I tend to believe that markets are efficient. So, if there were a known future catalyst for CSCO stock, it would have been priced into the shares already. To me, it doesn’t make sense to look for a catalyst over the next year and feel disappointed because you’re not seeing one.
Staying in the Value Zone
Liani also cited “reduced share repurchase activity,” which I actually consider a good thing, not a reason to initiate a downgrade on Cisco stock. Corporate share buybacks have propped up stock prices for a while now to the point where it has largely replaced improved fundamentals as a driver of higher stock prices. If Cisco has opted to forgo the buyback bubble and allow the CSCO share price to sink or swim on the company’s own merits, good for them, I say.
In other words, Cisco is keeping its share price in the value zone, with lower prices today so that there’s room to grow later. Appreciating this requires patience and a longer-term perspective, which too many financial gurus and social-media armchair quarterbacks have lost sight of in the quest for short-term gains.
In looking CSCO stock’s performance, I don’t view 2019’s second half as a “rug pull” but as an alignment of the company’s intrinsic value with the stock’s trading price. The Cisco stock price made impressive gains in the first half of the year and perhaps got ahead of itself somewhat; a retracement was consequently in order and I see this as a natural part of the journey toward more sustainable higher prices.
I only wish that more tech stocks had pulled back to their respective value zones in 2019. But evidently, investors aren’t prepared to take profits just yet. With a very reasonable trailing 12-month price-earnings ratio of 18.75, CSCO stock remains a rare value play amid today’s richly valued tech sector. A forward dividend yield of nearly 3%, moreover, makes it hard to resist accumulating shares while the price is still reasonable.
The Takeaway on Cisco Stock
When a big-bank analyst weighs in on a company’s growth prospects, informed investors need to take any downgrades at face value and with a healthy dose of skepticism.
Concerning Mr. Liani’s pessimistic outlook, my dissent is fundamentally an indictment of how “experts” sometimes justify their proclamations — and how investors are so quick to abandon companies based on their recommendations. To Liani and pundits worldwide, then, I offer an optimistic perspective on CSCO stock that goes deeply against the grain: no catalysts, no buybacks, no problem.
As of this writing, David Moadel did not hold a position in any of the aforementioned securities.
