There are plenty of great articles discussing Cisco Systems in terms of fundamentals, so I thought I would write specifically about how I plan to take advantage of the recent decline in Cisco shares. The high volume sell off in the shares are indicative of a capitulation and the volume is starting to trend down towards more historically average levels. When volume normalizes, it can indicate that the share price has stabilized too. That being said, the sell off in the shares last quarter took many days to put in a bottom, and that is why I would not buy a full position in these shares yet.
I believe the sell off is overdone, and that is providing a good opportunity to buy a brand name, high quality tech stock. The markets almost always go too far in establishing valuations to both the downside and the upside, and I try to take advantage of these extreme swings. It is very possible that Cisco shares will fall further, so it is important to average into this new position. Therefore, I will buy a 1/3 to 1/2 position on Monday, and continue to scale in over the coming days on any further dips. I already bought an initial position in Cisco on Friday at about $18.83. Depending on the price action, I may even somewhat exceed what I consider to be a full 100% position for me in Cisco.
The next part of this plan will involve selling call options once I have built a full position. Before I sell these options, I will wait for the share price to rebound at a level that is above my average cost. Cisco closed at $18.70 on Friday, and I will hopefully have a chance to add more shares on Monday at this price or lower. Overall, my average cost per share should remain under $19, so I will begin selling calls on my position once Cisco is over $19.
Based on the conference call, it appears that Cisco will be reporting results that might keep the stock from moving up much for the next quarter or two. This is one reason why I think selling call options makes sense over the next few months. This could allow me to generate over $1.20 per share in option premiums which will effectively reduce my current cost basis of about $18.83 down to about $17.63 or less. If my shares get called away due to a sharp rise in Cisco shares, I will profit. If shares stay flat I will benefit from collecting the call option premium. Of course, if Cisco shares continue to decline, I will continue to average down.
Long term, I see little risk in starting to accumulate shares at these levels. I also expect the shares to respond favorably in the coming months when Cisco announces their plans to pay a dividend. Cisco has a great balance sheet, brand name, and management team. I am happy to buy these shares when other investors are disappointed and discounting the shares and future outlook.
Disclosure: I am long CSCO.