It's very hard to hope a company can reverse direction when it appears the whole market is working against you. Cisco (CSCO) on the other hand exceeded earnings expectations as well as painted a brighter future in its forecasts. Is this the beginning of a reversal in the tech sector? It sure would be a nice change of pace.
But here stands Cisco in the midst of pessimistic IT vendors who give bleak weakening outlooks of the future. With its head held high, it preaches a positive outlook on U.S. business pending. So analysts like what they see in Cisco. Here are some outlooks:
- More than 60% of the covering brokers retain buy ratings.
- Oppenheimer maintains at outperform, or buy, rating on Cisco viewing the stock as "undervalued" given its business fundamentals.
- Brent Bracelin of Pacific Crest upgraded Cisco's shares to an outperform rating.
Several analysts pointed to Cisco's low valuation. The stock is trading at about nine times estimated earnings for the next four quarters - nearly 30% below its five-year average multiple of 12.7. The good news from Cisco has spurred the sector with other competitors also on the rise. Companies like Juniper Networks (JNPR) and JDS Uniphase (JDSU) also are riding Cisco's coat tail.
But I ask this question: Should we suddenly turn bullish on Cisco?
The European economy has not yet reached a point where it has recovered and no one can say that it is really even "recovering" at this point. Our domestic market is still facing certain obstacles also. Will the "fiscal cliff" or an alternative to it be a catalyst that contracts our economy in 2013? Can the market sustain the upside that Cisco so positively preached?
How cautious should an investor be?
I would expect Cisco to move up significantly in a reactionary manner following the positive earnings report. But I would ask: Do I think the company can sustain the movement now? Can it buck the continued macro-uncertainties in the global economy right now? My personal opinion is that a lot will depend upon how our government handles the fiscal cliff problem. I do believe Cisco can make a bullish run from January and into April if it is handled properly. But short term, I would not say that the stock is now changing direction.
There is no doubt Cisco is in a strong bearish pattern. We are entering the 6th week of its downward move. The strength of the move can be observed in the Bollinger Bands because the middle band is being used as resistance. This is always a sign of a strong move down. On its recent move, the RSI indicator has hit the "30" mark. Any lower and it will be over sold and we will look for a rebound. This could also point to a move down that will not slope as steeply as it has. The MACD is also supporting a continued strong downward trend. It does not look like this trend is going to end yet. It may not be as step, but it does not look like it is going to end. I do not expect the one strong day to turn the stock around, it least not in the short term.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.